What Is Inventory Management?
Inventory management is a system of overseeing the steady flow of all parts and processes needed to effectively stock and supply units of an organization’s product(s). This includes all aspects of inventory - physical parts and space, ordering, storage, production, and distribution - from the beginning to end of the cycle. Because most products are continually manufactured, an inventory management system must be cyclical, responsive, and tightly engineered so that there are no gaps in production. Businesses of all types - from manufacturers and wholesale distributors to service providers and government agencies - can benefit from an efficient inventory management solution.
Inventory management is often thought of as a part of supply chain. However, it is more accurate to say that the way you manage inventory has a direct effect on supply chain, because inventory delays (or any unscheduled activity) can alter the pace of production. Since supply chain success is a key determiner of product delivery and therefore, product success at market, there are even greater incentives to implement an effective inventory management system.
There are three main components to any inventory management system:
- Time: This includes the length of time for delivery, transfer (raw units hitting the production line), production, packaging, and distribution. These lead times will give you key information for calculating when, how often, and how many units of material you need to order.
- Buffer Stock: The “emergency” stock that most companies keep for unexpected circumstances (i.e. a large, new customer order or delays in shipment). You must factor buffer stock into your inventory calculations; to do this, you’ll first need to establish a solid tracking system for your in-progress goods.
- Accurate records: This may be the most important part of any inventory management system. To keep track of all the moving pieces, you must implement a dynamic, meticulously-kept recording system for all aspects of production, newly completed shipments, and buyer rates over time.
The effects of a mismanaged inventory are huge. Miscalculations can lead to an inefficient supply chain, or over/under-production. Additionally, delays can result in unhappy customers - over time, this will create a negative reputation for your company. This is not to mention the potentially catastrophic financial losses, since inventory is a large asset and investment of any big production company.
Luckily, strategic inventory management not only saves you these potential losses, but actually insures you against them. This is because an effective inventory management system is also aimed at controlling inventory costs - especially by making conscious transportation and distribution decisions where tax regulation could significantly raise costs. Ultimately, an inventory management system seeks to organize, record, and standardize both the materials themselves and the mechanisms by which a company moves through the production cycle.
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Inventory Management Strategies
There are several different styles of inventory management. Before choosing a tool to help implement the system, it’s important to understand the most common strategies and what type(s) of businesses they work for. Below is a list of the most common frameworks:
- Just in Time (JIT): In this method, organizations operate on a “receive-as-needed” basis. This can help limit overproduction and reduce waste, and is a good option for companies with a smaller backend budget. However, this management style relies on calculations, and since inventory demand is dynamic, this can demand a lot of time from team members. Additionally, with JIT you run the risk of not having buffer stock, so any unexpected orders could result in a delayed delivery.
- Materials Requiring Planning (MRP): This method is based on sales forecasts - teams will order inventory to meet expected demand. Like JIT, this requires accurate and detailed record-keeping. However, MRP’s major risk is over-inventory (rather than under), which can lead to product waste and financial losses. Many companies try to implement a mix of JIT and MRP to achieve a happy medium.
- Perpetual Inventory systems record every unit sold with a point of sale (POS) system. This offers highly detailed and immediate reporting, and does require any manual adjustment (except for unexpected losses like theft, natural disasters, or breakage). Companies with high-value products that can’t afford the risk of mis-recording often use a perpetual inventory system.
- Periodic Inventory is in contrast with perpetual inventory. This is a “check-in” style where human workers periodically record inventory levels (and track against selling numbers) to plan for the upcoming months or years. This works well for companies with a smaller budget or volume of produced units, or those who lack the tools to perform continual inventory.
In addition to selecting a strategy for keeping inventory, you’ll need to perform inventory analysis. It is not enough to simply count units and monitor the influx/outflux of material. Instead, analyzing your inventory trends and taking note of unexpected changes is key for creating a comprehensive management system. Analysis should be continual and detail-oriented, so that you make decisions based on what is happening, rather than on loose projections.
This, of course, is easier said than done. An organization may not have the resources to dedicate to perpetual analysis, and manual analysis is time consuming and error-prone. Because of this, there has been an emerging need for automated systems not only to count, track, and manage inventory, but also to provide data-driven analysis for companies to base their ordering practices. Later in this article, we’ll trace the evolution of inventory management systems - from pen-and-paper tallies to automated software solutions - so you can choose a tool that’s right for your business.
Challenges and Best Practices of Inventory Management
As you’ve probably noted, there are several challenges to managing inventory. Below are some of the key difficulties to keep in mind as you transition to a solution:
- Hitting a moving target. Predicting inventory demand is a dynamic (and to some extent, unpredictable) science. Internal changes (reorganization, production delays, new products) and external forces (market demand, the buying economy) all reflexively impact inventory, but the inventory management team has to be one step ahead and meet these demands correctly and on time.
- Constant calculation: Even if you don’t choose the perpetual inventory method, effective inventory management requires consistent data analysis. In addition to a fast pace, the calculations must be precise - any incorrect data can have an effect on the entire supply chain. Tracking and planning for inventory is labor intensive, so make sure you have adequate resources to dedicate to this effort.
- Incompatible units of measurement. Because you’ll be measuring discrete units (often based on size, weight, or number) as well distance, time, rate, etc., there is no easy way to perform manual calculations.
To combat these challenges, we’ve identified two main best practices to ease the transition to using an inventory management system?
- Make inventory management a principle function of your business. Rather than trying to fit a new management system into an existing one (that might be cumbersome or inefficient), prioritize inventory management and build other, more cohesive practices off of it. Dedicate the needed time, money, and energy into developing and using an inventory management system that solves problems - so that it doesn’t end up creating problems down the line.
- One size does not fit all. Understanding that inventory is dynamic before you begin managing it will ease the stress of constant monitoring. While it is still important to analyze sales trends and develop an understanding of your business needs, remain flexible to month-to-month fluctuations to maintain control throughout the process.
These challenges can also be met with one of many emerging software tools - many of them automated - to lessen the resource drain that traditional, manual inventory management may take on your company. In the next section, we discuss how inventory management systems have evolved over time so you can find a solution that works for you.
The Evolution of Inventory Management Software
“Inventory management” does not just refer to today’s power systems that streamline and simplify the process. Rather, the concept of inventory management has been around for decades - albeit much less efficient.
The first credited inventory management “system” was the cardex system (sometimes called card system). In this system, each item had its own card that listed the current quantity. When inventory was purchased or sold, employees manually updated the quantity on the card for other employees to refer too. Many companies also kept notebooks as a backup record. While this system created a culture of recordkeeping, it was time consuming and lacked flexibility. Additionally, there was no easy way to analyze inventory data to plan for future cycles.
To replace this by-hand system, many organizations turned to digital records. In some cases, these records were a digital replica of accounting books and included the costs associated with each unit of inventory, as well as the amounts. In other cases, teams used static spreadsheets. (In fact, many teams still use Excel spreadsheets to manage their inventories. You can learn about and download free inventory templates here.) These systems were a step up from the physical cards, but still lacked the trend-spotting and automation functions that make today’s inventory management systems so powerful.
In recent years, however, software capabilities have mounted. Today, the top-of-the-line inventory management systems offer formulas, functions, visualization, and analysis capabilities to give you a more comprehensive look into your inventory cycle. But the single most important (and most differentiating) feature of modern inventory management systems is automation.
Automated platforms give teams access to many things: real-time updates, alerts and reminders, multiple locations, and heightened control over their processes. With automated software programs, businesses can tailor timelines to their specific needs, and trust that all dates, times, and specifications will be met. The increased accuracy and real-time benefits of automation solutions have enabled teams to save time, decrease human error, and gain control and specificity over their work.
Cloud-based software solutions complement automation features by giving teams more flexibility for when and how they complete their work. Rather than an on-premises or on-devices system, a cloud-based platform ensures that team members can record and update data anytime, anywhere. Additionally, cloud-hosted systems allow teams to collaborate in real time, rather than waiting for the latest version to be sent out. Finally, find increased accuracy with cloud programs and ensure that there is only one record of the truth.
Managing inventory has never been easier than with today’s many powerful and customizable options. In the next section, we’ll take a look at specific functionality you should consider when choosing a tool, and highlight some of today’s most popular options.
What to Look For When Choosing an Automated Solution
Automated and cloud-based systems have revitalized the inventory management space. However, these two features alone will not necessarily solve all your inventory hurdles. Instead, you should select a tool with the specific functionality to meet your needs, and one that will fit in well with your existing processes and systems. This way, you can ensure that adding a new process (the inventory management system) will be smooth and won’t disrupt other production cycles.
Here are a list of features to consider when selecting an inventory management software:
- Customization: You should be able to tailor the software to fit your needs. This could be anything from colors and symbols to interface pivots (like multiple views or the ability to rearrange data without changing it). Additionally, customization options will grant you the flexibility to adjust your process in the event of change.
- Integrations: You should choose software that integrates seamlessly with your organization’s existing applications. This way, information can flow directly from one app to another, and nothing will be disrupted with the addition of this automated tool. This is one of the most important features to consider when selecting a product.
- Scalability: Select a tool that can grow as your business does. Otherwise, you’ll soon find yourself stuck in outdated, cumbersome processes and be in the market for a new solution.
- Forecasting capabilities: Analysis is a key component of inventory management, so look for a platform that offers a wide range of built-in formulas and functions to help you make sales and demand predictions.
- Location organization: Many large companies who need an inventory management system have factories, plants, and outlets in multiple locations - this adds another variable to the already complex equation of inventory tracking. Therefore, look for a tool that not only supports multiple use locations (cloud-based), but that allows you to categorize and sort by location, so you can choose to only view pertinent data.
- Barcode scanning & tracking: Several companies still use physical barcode scanners to keep track of their units. This can be helpful (especially if the scanners link directly to the software) because you can eliminate redundant data entry and constantly monitor the whereabouts of each unit.
- Ease of use: Ultimately, you want a tool that works for you. If it’s difficult to learn and use, your employees won’t use it. Therefore, find a solution with simple UX, and always run trials of the programs before buying or committing to a subscription.
Below is a list of some of the most popular automated software solutions:
Plex Inventory Management
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