What Is Inventory Management? How to Manage and Improve Stock Flow

Hi. today we are going to speak about inventory management. Studio Brandt will tell you what is it and how to do it well.

Inventory management is the process of organizing and managing stock throughout the supply chain. 

The goal of inventory management is to minimize the cost of holding inventory, while keeping stock levels consistent and getting products into customers’ hands, faster. It’s the heart of a successful retail business. 

Not sure where to get started with inventory management? This guide will walk you through the leading inventory management techniques, formulas, and tips for managing stock and keeping your customers happy. 

What is inventory management?

Inventory management is the system you build to organize inventory through the supply chain. It covers all steps, from raw goods to finished goods, storing, and selling. It also tracks your company’s stocked goods and monitors their weight, dimensions, amounts, and location. 

The goal of inventory management is to minimize the cost of holding inventory by helping you know when it’s time to replenish products or buy more materials to manufacture them. This helps you maintain optimal inventory levels and minimize costs. 

Inventory control can be used interchangeably with inventory management. Essentially, it refers to when you have control over your stock, typically due to effective inventory management processes. It’s much easier to maintain control of your inventory with centralized inventory management.

Why is inventory management important?

Effective inventory management is essential for ensuring a business has enough stock on hand to meet customer demand. If inventory management is not handled properly it can result in a business either losing money on potential sales that can’t be filled or wasting money by stocking too much inventory. 

Whether you’re a small business or company using enterprise resource planning (ERP), inventory management helps your business do a number of important things:

1. Avoid spoilage

If you’re selling a product that has an expiry date, like food or makeup, there’s a very real chance it will go bad if you don’t sell it in time. Managing inventory effectively helps you avoid unnecessary spoilage.

2. Avoid dead stock

Dead stock is stock that can no longer be sold but not necessarily because it expired—it could have gone out of season, out of style, or otherwise become irrelevant. By adopting a diligent strategy, you can address this costly inventory mistake.

3. Save on storage costs

Warehousing is often a variable cost, meaning it fluctuates based on how much product you’re storing. When you store too much product at once or end up with a product that’s difficult to sell, your storage costs will go up. Avoiding this will save you money.

4. Improve cash flow

Not only is good inventory management more cost efficient, it improves cash flow in other ways too. Remember, inventory is product you’ve likely already paid for with cash (checks and electronic transfers included), and you’re going to sell it for cash, but while it’s sitting in your warehouse, it’s definitely not cash. Try paying your landlord in dog collars or phone cases.

This is why it’s important to factor inventory into your cash flow management. Inventory directly affects sales (by dictating how much you can sell) and expenses (by dictating what you have to buy). Both of these elements factor heavily into how much cash you have on hand. In short, better inventory management leads to better cash flow management.

When you have a solid inventory system you’ll know exactly how much product you have in real time, and based on sales you can project when you’ll run out so you can replace it before then. Not only does this help ensure you don’t lose sales (critical for cash flow), it also lets you plan ahead for buying more by ensuring you have enough cash set aside.

Money spent on inventory is money that is not spent on growth. Manage it wisely.

5. Optimize fulfillment

Good inventory management helps improve order fulfillment for your business. You can use tactics like inventory distribution, which refers to using fulfillment centers closer to your customers. So if they order a product online, the order is shipped and sent faster, saving you time and shipping costs. 

Types of inventory

So now that we know what inventory management is, let’s look at the common types of inventory you’ll be tracking: 

• Raw goods
• Work-in-progress (WIP)
• Finished goods
• Maintenance, repair, and operations goods (MRO)

Raw goods

Raw goods are materials or substances used in the early production or manufacturing of goods. Raw materials can include wood, metals, plastics, or fabrics used in the creation of finished goods. A business owner or manufacturer acquires these materials from one or more suppliers or producers. 

You can divide raw materials into two groups: 

• Direct materials, which are used in the final product. For example, the fabric you use to make clothing. 

• Indirect materials, which are used throughout production, but are not included in the final product. For example, the oil you use to maintain a machine.

Raw materials represent an asset on your company’s balance sheet. You pull raw materials over time and use them to produce finished goods. 

Work-in-progress

When you use direct and indirect materials in production, you must recognize the move of materials into works-in-progress (WIP). WIP describes a partially finished product awaiting completion. 

On a balance sheet, WIP represents all production costs: labor, machinery, raw materials, and other equipment. It reflects only the value of products in this production stage. Costs are then transferred to the finished goods account and attributed to the cost of sales.

Finished goods

Finished goods inventory refers to the number of products in stock available for customers to buy. Once a WIP is complete, it becomes part of the finished goods inventory. 

Finished goods undergo a markup, which means the price they’re sold at is higher than the items cost you.

Markup amounts differ, but the average markup is around 50%, according to data from Freshbooks.

Maintenance, repair, and operations goods (MRO)

MRO inventory refers to maintenance, repair, and operation supplies. These are materials and equipment used in the production process, but are not a part of the final product.

MRO inventory items include:

• Personal protective equipment like face masks, gloves, and safety glasses
• Clearing supplies such as disinfectants, brooms, and buckets 
• Office supplies like notebooks, pens, and tape 
• Tech equipment like laptops, printers, scanners, and more 
• Lab equipment for any testing and research to create products
• Repair tools 
  
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