Inventory management is the ability to oversee the ordering and storing of supplies for a business. It is the responsibility of inventory management to order supplies that a company needs, as well as house the supplies and finished products of the business. When it is summarized in an overview, inventory management sounds simple. Ordering supplies and placing them in a warehouse sounds relatively easy, doesn’t it? However, inventory management must keep track of all supplies so a company can quickly identify when they need to reorder specific items. The amount of supplies that a company needs to order is solely dependent on the demand for the end products of the company.
How inventory management works?
Two ways of looking at the demand for end products are independent demand and dependent demand. Firstly, independent demand is when the amount required does not depend on another supply. These are often the finished goods that are sold to customers. In inventory management, independent demand is derived from purchased orders, forecasts, educated estimates and previous sales data history.
Conversely, dependent demand is categorised as the amount needed when it depends on another supply. Raw materials fall under dependent demand with these supplies allowing for the production of the finished goods or end products.
For example, a bicycle production company would have their inventory in both of these categories. The finished good, or the bicycle in this case, would be considered the independent demand. On the other hand, the raw materials such as wheels, pedals and brakes would be categorised as dependent demand. Those components, alongside many more, are what make up the assembly of a bicycle and are seen as dependent demand.
Sales forecasts help with inventory management. They provide information relevant for ordering supplies and identify sales patterns that help guide what amount of stock should be ordered in the upcoming shipments. If the independent demand is for 90 bicycles in the next month, then everything in the dependent demand category required for the bicycles also needs to be ordered. It needs to be ordered in time to produce all 90 bicycles as well. However, this is a simplified equation. It is very rare that a company produces just one item. If the company produced bicycles, pumps, helmets, clothing and shoes, there would be many more components in the dependent demand category. These components would also need to be ordered to meet each sales forecasted item.
Once the items have been purchased and delivered, the items need to be stored and organized in a warehouse in an effective manner. Inventory management then allows for the tracking of each item once it arrives in the warehouse. It confirms updated stock quantities and sends alerts when stock is getting low. Once an end product is completed, inventory management is responsible for storing and tracking that product until is it sold. Once it is sold, the item’s status is updated in the inventory management system. When the system marks an end product as sold, it allows the company to save that data for future sales forecasts. Say perhaps there was a high demand for bicycles and helmets in summer for the past two years, then a sales forecast would recognize this trend and allow a company to identify this for future inventory purchases.
Inventory management is a complex part of a business. It can be streamlined through many processes and systems, and is best managed through dedicated inventory management software. Depending on the size of a business and the expanse of their inventory, different management systems work better for different companies. Either way, it is important to have the most effective system to manage your biggest asset, inventory.
Want to learn more? Read our Inventory Management Guide