Inventory Management

Inventory management – What is it?

Process of ordering, storing, using, and selling a company’s inventory. This includes the management of raw materials, components, and finished products, as well as warehousing and processing of such items. It’s a critical element of the supply chain, ensuring that the right products are in the right place at the right time.

Proper Inventory management – Why is Important?

A company’s inventory is one of its most valuable assets. In retail, manufacturing, food services, and other inventory-intensive sectors, a company’s inputs and finished products are the core of its business.

A shortage of inventory when and where it’s needed can be detrimental, while excess inventory carries risks of spoilage, theft, damage, or shifts in demand.

Proper inventory management is crucial for businesses of any size.

Methods and Techniques – There are several inventory management methods, each with pros and cons:

1. Just-in-Time (JIT) Management: Aims to minimize inventory by ordering only when needed.
2. Materials Requirement Planning (MRP): Uses demand forecasts to plan production and procurement.
3. Economic Order Quantity (EOQ): Determines the optimal order quantity to minimize costs.
4. Days Sales of Inventory (DSI): Measures how long inventory sits before being sold.

Definitions

• Stock – Goods you sell to customers.
• Inventory – Includes the products you sell, as well as the materials and equipment needed to make them.

Although the definition of stock is concise, there are four main types of inventory: raw materials, work in progress, MRO supplies, and finished goods.

• SKU – A stock-keeping unit (SKU) is a unique identifier used to track and manage inventory in retail and other business settings. Each product or service offered by a company is assigned a distinct SKU, which helps streamline inventory management, sales tracking, and order fulfillment.
• Bin Location – smallest addressable unit of space within a warehouse or storage facility where goods are stored. It is essentially a designated spot where items are placed for organization and easy retrieval. Bin locations are commonly used in inventory management systems to keep track of stock levels and facilitate efficient order fulfillment.
• Demand – in the context of supply chain management refers to the anticipated need or requirement for products/services. It is calculated based on:
  • History of Sales/Usage
  • Orders Received from Customers
  • Forecast provided by the sales team
• MOQ – A minimum order quantity is the fewest number of units required to be purchased at one time. It is most often used by a manufacturer or supplier in the context of a production run, though a merchant can put MOQs in place for different types of orders. For instance, a company may decide that they won’t sell less than 1,000 units of a particular product. This becomes their minimum order quantity, as any order below 1,000 units may result in a loss for the vendor.
• Lead Time – Period between the start of a process and the completion of a process. An example of lead time is the period between an order placement and its fulfillment.
• Credit Terms – agreement between a seller and a buyer that outlines the timing and amount of payments the buyer will make in the future. In other words, credit terms describe the specific details of the seller’s payment requirements that the buyer must meet in order to purchase goods on account. These terms are essential for facilitating commerce and allowing customers to buy items before having the funds to do so.
• Stock Level – Is an indispensable part of inventory management that refers to the optimal quantity of raw materials or goods an organization needs to maintain at a given time to confirm a smooth flow of business operations. Different stock levels indicate the requirement of a specific action.
• Safety stock – Is an additional quantity of an item held in the inventory to reduce the risk that the item will be out of stock. It acts as a buffer stock in case sales are greater than planned and/or the supplier is unable to deliver the additional units at the expected time. Essentially, safety stock serves as a cushion to account for uncertainties such as:
  • Excess demand: Unexpected spikes in customer orders or sudden shifts in trends.
  • Supplier delays: When suppliers are unable to deliver on time due to various reasons.
  • Inaccurate demand or inventory forecasts: Miscalculations in predicting future demand.
  • Failure to place timely reorders: Sometimes businesses miss reordering deadlines.
  • Financial constraints: Having extra stock ensures continuity even during cash flow challenges
• Minimum stock level – Indicates the point of inventory consumption at which goods need to be replenished, just before the safety stock is used.
• Maximum stock level – Determined by the warehouse’s storage capacity and the procurement policy (MOQ, Lead Time, etc).
• Reorder point – Method which triggers replenishment when the quantity of an inventory item falls to a specific threshold. It normally matches the minimum stock level.
• Order quantity – Calculated considering Lead Time and MOQ and based on the demand until the next order is received.
• Stock take – refers to the process of counting and verifying the goods and materials owned by a company or available for sale in a store at a specific point in time. It helps businesses maintain accurate inventory records and assess their stock levels.

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