Inventory management, in simple terms, is the process of tracking the stock of various products. This may include finished products manufactured by your company or even the raw material which may be required for production on finished goods.
Inventory management is an extremely critical function for smooth fulfillment of orders received by the company. In this post, we will understand the objectives of inventory management in depth.
Let us first understand how is inventory management done in both large as well as small organizations.
How is Inventory Management done?
Inventory management is typically done with the use of an Inventory Management System. Earlier, in the absence of software, the inventory management was typically done with pen & paper- the data was entered in sheets having various items listed and the quantity of those items was indicated against the same.
Since it was a manual physical system involving a lot of human efforts, it was bound to be prone to errors and also analyzing the data was a mammoth task. However, in today’s world, almost all companies use inventory management software.
There are hundreds of such software available starting from very economical prices. You can also get a custom inventory management software made specifically to your requirements. Smaller companies with limited inventory can be managed can use a program like Excel.
However, using a good inventory management software is any day preferred.
Objectives of Inventory Management
Below are some of the major objectives of inventory management.
1) Smooth fulfillment of orders
This is one of the most important objectives of inventory management. A situation where you have an order for your finished products in hand but you cannot fulfill the order due to the shortage of inventory is not ideal. It not just puts the fulfillment of the order at risk but also harms the reputation of your company due to delay in committed fulfillment timelines.
To make sure such a situation doesn’t occur, inventory needs to be properly maintained at all times, and an inventory management system helps in doing the same. Let us understand this better with the help of an example. Suppose you are a book publisher.
You have an order in hand of supplying 100 books to a retailer in the city. When the sales representative takes the order from the retailer, he doesn’t know about the inventory available. He just takes the order and passes it to the warehouse for fulfillment.
At the warehouse, you realize that there are only 50 titles available against an order for 100. This will impact no just this single order but also your future business relationship with that retailer.
Such issues can be solved by using an inventory management system where there are multiple users with different roles assigned to each of them- working on the same system.
2) Reduce losses due to theft, wastage, etc.
This is another major objective of inventory management. In most organizations, the amount of inventory that is being managed in huge- right from procured raw material to the finished goods. All this inventory needs to be managed extra carefully so that there is minimal loss due to theft, wastage, etc.
If the inventory is not handled properly, incidents of theft and other undesired events will not come to anyone’s notice. Let us take an example. You run an eCommerce business of selling mobile accessories having an inventory of 1000+ unique SKU’s.
Also, at any given point of time, there are hundreds of products dispatched from your warehouse to the customers via courier. At the same time, there are many packages which are coming back to your warehouse as returns, undelivered shipments, etc. There has to be a proper inventory management system tracking all of them. In its absence, even if any warehouse staff member doesn’t mark an inward entry in the system for a shipment received back from the customer and just steals it, it may be a loss to the company due to theft.
2) Know when to scale or shrink the production of goods
If you are a manufacturer of products, you would be already knowing that there times when you just need to scale the production to meet the market demand and reduce the production especially when the peak season ends. Inventory management can help you know exactly when to scale up or down your production as you get a precise picture of how many products are currently lying in your inventory at any point in time.
To illustrate this better, let us consider an example. You have a small business of manufacturing umbrellas. You cannot just keep producing umbrellas at full swing whole year round since the demand for umbrellas in only during certain months of the year.
Having an inventory tracking system in place tells you exactly how many manufactured umbrellas are available with you at any point of time on a real-time basis. This helps you take a call on scaling up the production or shrink it towards the end of the season.
3) Keep investment in inventory at minimum possible levels
Businesses, especially small businesses need adequate working capital for their day to day functioning. No business can afford to keep producing goods without having buyers for them and keep the working capital tied up in the stocks.
Inventory management helps you address this pain point & keep your investment in inventory at a minimum possible level. For this, you can use inventory management software to track the inventory levels at any given point of time. You can decide and keep a threshold for every product, like say ten units.
When the inventory count falls below this quantity, only then you take up the production activity for that product. This helps you keep your investments in inventory at minimum possible levels without hurting your top line.
4) Clear off the slow-moving goods
In many cases, not all the goods produced by you would be flying off the shelf. There would be quite a few goods which are slow moving in the market, but you already have lots of these in your inventory. Any kind of business cannot just keep their working capital blocked in such type of goods.
Clearing off such slow-moving goods is another objective of inventory management. Let us consider that you are a manufacturer of garments. You got a manufactured around 100 different styles as a part of your summer collection. As the season ends, you realize that around 10 of these styles have failed to get a response in the market and are not moving off the shelves.
Since you do not want to keep your investment in these items, you take a call to mark down the prices by 50% to sell them on no profit no loss basis. Taking such an informed decision is possible only when you have a proper inventory management system in place which analyzes sales patterns and tells you which are your slow-moving goods.
5) Analyze product sales patterns
This can be one of the secondary objectives of inventory management. Analyzing product sales patterns is important so that you can make future sales assumptions and also see which are the fast and the slow moving goods. Inventory management helps you significantly in this since you exactly know the flow of products in and out of your warehouse.
You can even export data as per your requirements for any given timeframe. In fact, most of the modern inventory management already have the functionality of analyzing product sales patterns. All you need to do is only select the product category or individual products along with the time frame and generate reports at a click on the button.
We have all the major as well as minor objectives of inventory management in depth in this article. You would have understood by now how crucial is inventory management for any business and what are the effects it can cause in case inventory management is not done properly. Make sure you use a good inventory management software for the same and provide proper training to your staff members so that the whole inventory management activity can be done seamlessly in your organization.