October 7, 2015      3 min read

Inventory management is an important aspect of any successful business.

It is the process of overseeing and controlling the flow of inventory units a business uses in the production or manufacture of goods for sale or distribution.

In this introduction to inventory management, you will find out:

Why is inventory management important?

Inventories are usually made up of a combination of goods, raw materials and finished products, and effective management of these items is essential to ensure optimal stock levels and to maximize the earning potential of the company. It also allows a business to prevent or mitigate any inventory-associated losses.

Effective inventory management is important as not only is inventory one of the most valuable assets to a business; there is a direct link between inventory levels and company profits. Inventory represents an investment that is tied up until either the item is sold, or it is used in the production of another item that is sold. Businesses are reliant on having items in stock; otherwise customers will simply go to a competitor who can provide what they want.

What must be considered

Holding inventory in stock is not without costs – storage, insurance and maintenance all must be considered. When it comes to replenishing stock levels, most management plans seek to strike a balance between having enough units when required, and ensuring supplies are not overstocked. This is why having an inventory management system can be advantageous.

Why do businesses use inventory management systems?

Inventory management systems are used by businesses for various reasons: it can track the costs of inventory throughout the manufacture and sales process, tell businesses when to replenish stock, and allow them to track profits. It can also be used to forecast inventory levels and prices, as well as expected product demand.

An inventory management system monitors all aspects of a company’s inventory as items move through the production and sales process. The process involves tracking customer orders, shipping, costs, stock and sales.

What every inventory system needs to function efficiently

Whether or not a business has some form of inventory software in place, there are some critical elements every system needs in order to function efficiently. This includes well-organised location names, easy to read and unambiguous location labels, unique item numbers, units of measure, a good starting count, good policies and – most importantly – people who know and can follow those policies.

On top of all these things, a system that tracks all inventory activity should be used, as keeping track of inventory data by hand or in a spreadsheet just doesn’t cut it.

Good inventory management software can make it easier to track stock and provide different people with access to the data, as well as offer a detailed insight into the inventory activity of a business. It also provides an accurate historical record of inventory movements and sales.

All of the factors mentioned above will help businesses to keep costs in check, allowing them to maintain a suitable amount of stock, set targets and monitor profits efficiently.

As inventory is one of the most important assets a business has in its arsenal, a functional inventory management system will help a business to track those assets and control them efficiently.

Take your inventory management knowledge further

Read our comprehensive guide