Learn everything you need to know about inventory management with our free series of comprehensive guides. Starting at the very beginning: What is inventory management?
What is inventory management?
Inventory management is how you track and control your business’ inventory as it is bought, manufactured, stored, and used. It governs the entire flow of goods — from purchasing right through to sale — ensuring that you always have the right quantities of the right item in the right location at the right time.
What is inventory?
Inventory is the goods that your company handles with the intention of selling. It might be raw materials that you buy and turn into something entirely new, or it might be a bulk product that you break down into its constituent parts and sell separately. It could even be something completely intangible: software, for instance.
Types of inventory
There are lots of different types of inventory, and which ones you’ll deal with depends on the goods you sell. Here’s an overview of some of the types you’re more likely to encounter:
- Finished goods/for-sale goods: The products you sell to your customers
- Raw materials: The inventory you use to make your finished goods
- Work-in-progress: Essentially, unfinished goods — inventory that is part-way through the manufacturing process
- MRO goods: MRO stands for maintenance, repair and operating. This is the inventory you use to support the manufacturing process
- Safety stock: The additional inventory you keep in store to deal with supplier shortages or surges in demand
Every venture that handles inventory will need inventory management of some form. Let’s take a simple business as an example.
Inventory management example
Sam decides to set up a business selling her handcrafted dining chairs. Each chair she makes requires 6 different sizes of wood, plus a cushion. She goes to her supplier and buys 10 planks of each size of wood she needs, plus 10 cushions. These are all now included in her business’ inventory.
As she turns raw materials into chairs, then sells them, Sam’s inventory levels will change. She’ll need to keep track how much of each material she has at any one time, how many chairs she can make, how fast she can make them, where her materials are, how many chairs she is selling and much more. This is all inventory management.
Don’t worry if that seems daunting — inventory management is much easier to digest once you break it down into the 5 key stages that your goods will go through.
Inventory management process:
5 key stages
Inventory management is a process which involves tracking and controlling stock as it moves from your suppliers to your warehouse to your customers. There are five main stages to follow:
- Purchasing: This can mean buying raw materials to turn into products, or buying products to sell on with no assembly required
- Production: Making your finished product from its constituent parts. Not every business will get involved in manufacturing — wholesalers, for instance, might skip this step entirely
- Holding stock: Storing your raw materials before they’re manufactured (if required), and your finished goods before they’re sold
- Sales: Getting your stock into customers’ hands, and taking payment
- Reporting: Every business needs to know how much it is selling, and how much money it makes on each sale
Inventory management vs. inventory control
While they may sound similar, inventory management and inventory control shouldn’t be confused — inventory control is a key part of inventory management, but it isn’t the same thing.
That’s because inventory control only looks at the stock that is currently in storage, whereas inventory management takes the supply chain, manufacturing or reporting into account.
Learn more about inventory control.
Why is inventory management important?
Inventory management dictates how you run your business, serve your customers and grow sales. As long as your business is based around selling products, you’ll need to manage inventory efficiently.
Run your business smoothly
If your business doesn’t manage its inventory properly, it will quickly fall apart.
Sam, for instance, needs to match her supply of materials and production to customer demand. If she makes more chairs than she can sell, she’ll need to find somewhere to store the excess: which could end up cutting into her margin. On the other hand, if she runs out of any one of her raw materials, production will cease entirely until she restocks.
Find out more:
Matching product supply to demand
Inventory management and quality control
The effects of stockouts on a business
Three signs that it’s time to rethink your stock control
Keep customers happy
Inventory management dictates:
- How quickly you can get your products to your customers
- How reliably you can fulfil orders
- How much visibility you can give your customers
Customers will confidently buy from you, knowing you have the inventory to meet their needs. This is especially true when it comes to business-to-business transactions.
Find out more:
Three measures of customer satisfaction
Why NPS is important
Improving customer satisfaction
Five ways that inventory management improves customer satisfaction
Grow your business
As your business grows in complexity, its inventory management needs will get more complex as well. When Sam adds new product lines, hires staff, opens new production facilities and grows his customer base, keeping track of her materials and stock will get harder.
That makes it important to get control over your inventory early if you plan on scaling: the later you leave it, the harder it will be.
Find out more:
Five hurdles to business growth
The five stages of SME growth
How to scale sustainably
How inventory management can encourage growth
Overcoming growing pains
But these aren’t the only advantages of inventory management
. It can also bring several direct benefits to your business’ bottom line:
- Make it easy to add new products and channels, analyse performance and empower salespeople with up-to-date product information, so you can grow sales revenue
- Eliminate the inefficiencies that lead to lost stock, overstocking, and stockouts — reducing holding costs and growing margins
- Reduce the time and manpower spent on inventory admin, saving on staff costs
Here are 3 tips to help you start improving your inventory management today.
How to improve inventory management
1. Focus on your needs
A warehouse full of inventory can be a daunting task. One way of making managing it all easier is to identify the items that are the most important and focus on them first. It’s highly unlikely that every item in your warehouse will have the same demand from customers. Keep the top-selling items in stock, and you’ll have made a great start at keeping your customers happy.
2. Engage with suppliers
In any stock-based business, it is crucial to manage supplier relationships well. Developing constructive relationships with your business’ key suppliers is important to secure reliable supply, unlock competitive pricing and to understand emerging trends that may impact on your business.
3. Develop an inventory management system
Managing your inventory on an ad-hoc basis will only ever get you so far. To really keep on top of your stock, you’ll need an inventory management system.
Every company will have its own unique inventory management needs, so picking a system that matches your business is important. In the early days of his business, for example, Sam might be able to manage her inventory using spreadsheets. But a global stock-based business like Amazon requires a bespoke, multifaceted solution that caters to the huge number of orders processed every single day.
Inventory management techniques
No matter the size of your business, employing some inventory management techniques can be a great way to take control of your stock. Here are a few to consider:
- Just-in-time (JIT) inventory. JIT involves holding as little stock as possible, negating the costs and risks involved with keeping a large amount of stock on hand
- ABC inventory analysis. This technique aims to identify the inventory that is earning you profit, by classifying goods into different tiers
- Dropshipping. Businesses that use dropshipping essentially outsource their inventory management — with several benefits but a few key drawbacks
Learn more about all these inventory management techniques
Deciding when you might need dedicated inventory management software is a key step in the growth of your business. To find out more about how to manage your inventory better, take a look at our guide to inventory management systems
.Or if you’d like more information on the fundamentals of stock, read our inventory management basics