Inventory Management Process - The 2023 Guide


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For any organization that deals with tangible goods, effective inventory management is crucial. Businesses can reduce expenses, boost productivity, and enhance customer happiness by effectively managing their inventory. Nonetheless, inventory management can be a challenging task that demands careful planning and successful execution. There are several things to think about while managing inventory, from choosing the best inventory levels to putting in place a system for tracking inventory.

In this in-depth guide, we will cover everything that you need to know about inventory management, including best practices, challenges, and effective solutions. Whether you're a small business owner or an experienced logistics specialist, this guide will give you the information and resources needed to manage your inventory and increase your bottom line efficiently.

What Is Inventory Management?

Inventory management involves effectively monitoring and regulating the movement of products into and out of a company. It entails controlling every step of the inventory management process, from purchasing goods from suppliers to storing, selling, and delivering them. This also includes managing inventory for goods that are needed for a company’s daily operations, like hardware, stationery, and software. By ensuring that a company has the proper amount of inventory at the right time, effective inventory management helps reduce the expenses related to excess inventory or stockout and also ensures the company’s smooth functioning.

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Example of Inventory Management

An example of Inventory management includes a retail establishment that uses an inventory management system to keep track of its stock levels. By tracking the movement of inventory in and out of the store via barcode scanning, the system can notify the store management when inventory levels drop below a certain threshold.

In order to make sure that the store always has enough inventory on hand to satisfy consumer demand, the store manager can reorder more goods when inventory drops a below a set threshold.

How Does Inventory Management Work?

Effective inventory management is a process that involves carefully tracking, managing, and delivering the products. Businesses can effectively and efficiently manage their inventory by following these steps, ensuring that they have the proper amount of inventory at the proper time to meet customer demands.

Inventory Management Process

Inventory Management requires a number of steps that work together to guarantee successful and efficient inventory management. The Inventory Management Process includes the following steps:

1. Demand Forecasting

Predicting demand is the first stage in inventory management. Based on historical data and present purchasing trends, companies can calculate how much inventory will be required in the future. By anticipating demand, firms can minimize stockouts and overstocking.

2. Establishing Reorder Points

Based on historical data, the company can decide the minimum stock levels to be maintained at all times to satisfy customer demands. This is called the reorder point. Establishing the reorder point guarantees prompt inventory replenishment, preventing stockouts.

3. Inventory Tracking

This entails keeping an eye on stock levels in real-time using barcoding, RFID, or manual tracking techniques. Businesses need accurate tracking to have a clear picture of their inventory levels and be able to decide when to place new orders.

4. Reorder and Restocking

As inventory levels hit the reorder point, businesses must place new orders and replenish their inventories. Orders must be placed with suppliers, and delivery or pickup arrangements must be made. The key to ensuring that inventory is refilled on schedule is through effective contact with suppliers.

5. Quality Control

Inventory must go through quality control inspections before being put in storage or made available for purchase. By doing this, it is made sure that the inventory satisfies quality requirements and is damage and defect-free.

6. Storage of Inventory

Following receipt and inspection, inventory is kept in a specific location. Proper planning must go into inventory storage to make sure that inventory is accessible, arranged, and stored in a way that minimizes damage.

Inventory analysis is the last phase in the inventory management process. An Inventory Management system can provide statistics and reports like Category reports, Inventory availability by location reports, and more to help companies pinpoint areas where inventory management can be strengthened. This enhances profitability for firms by allowing them to optimize their inventory levels and cut waste.

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What Are the Different Types of Inventory Management?


Businesses can optimize their inventory levels, eliminate waste, and boost profitability by selecting the right type of inventory management system. The secret is to choose a system that fits the specific requirements and objectives of the company. Businesses can track and manage their inventory using a variety of inventory management systems, including a perpetual inventory system that tracks inventory in real-time, a periodic inventory system that tracks inventory in periods, and a manual inventory system that is an old-school pen-and-paper method of tracking. The most common inventory management types include:

1. Just In Time (JIT)

JIT inventory management is an inventory management system in which inventory is delivered to the company as needed rather than being stored on-site. This contributes to waste reduction and inventory level optimization, but it necessitates careful supplier cooperation.

For example, instead of ordering vast quantities of supplies and storing them on-site, a retail store using JIT inventory management would just order enough perishable items to meet the upcoming demand. This ensures that such perishable items are sold before their expiry and helps prevent waste.

2. Economic Order Quantity (EOQ)

Based on variables including demand, ordering expenses, and carrying costs, EOQ inventory management determines the ideal quantity of inventory to order by continuously monitoring the inventory levels. By doing this, firms can reduce the expenses of keeping extra goods on hand or placing regular orders.

The ideal quantity of inventory to order is determined by factors like demand, ordering expenses, and carrying costs by a company that implements EOQ inventory management.

For example, companies could use EOQ to make sure that their IT supplies are in optimum numbers to reduce expenses. This will guarantee that they always have enough inventory on hand to satisfy client demand.

EOQ Formula
Using EOQ, you can determine the quantity of your inventory that you must have on hand to avoid stockouts and storage costs. EOQ is calculated using the following formula: EOQ = √(2DS/H)

where D is the annual demand, S is the ordering cost, and H is the carrying cost of inventory.

4. ABC Analysis

ABC analysis is a method for ranking inventory items according to their importance to the company. More focus is placed on high-value products than low-value products, enabling organizations to direct their resources where they are most needed.

For example, a hardware store would prioritize high-value items like power tools and hardware over low-value things like screws and nails if it used ABC analysis inventory management. For the purpose of ensuring that high-value items are always in stock and accessible to customers, the business would devote greater resources to controlling them.

4. Cycle Counting

Cycle counting is a process that counts inventory in periodic, smaller batches as opposed to all at once. This aids companies in real-time inventory discrepancy detection and correction, enhancing inventory accuracy and lowering the possibility of stockouts or overstocking.

Therefore, instead of performing a full inventory count all at once, companies that use cycle counting inventory management would count a percentage of their inventory every day or week. This lowers the possibility of stockouts or overstocking by assisting in the real-time identification and correction of inventory discrepancies.

Why Is Inventory Management Important?

The importance of inventory management to any type of company is undeniable. Effective inventory management may help your company in a number of ways, including by preventing spoilage, dead stock, and excessive storage expenses, as well as by enhancing cash flow and maximizing satisfaction. This is how:

1. Decrease Costs

Inventory management aids companies in reducing the expenses related to maintaining and keeping goods. Businesses can save storage costs, labor costs, and other expenditures by optimizing inventory levels and cutting waste.

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2. Prevent Spoilage

Deadstock costs your company money because it takes up precious storage space while producing no profit. Using a careful inventory management plan will enable you to keep an eye on sales trends, change inventory levels to prevent dead stock, stay competitive, and cut costs.

3. Prevent Dead Stock

Deadstock costs your company money because it takes up precious storage space while producing no profit. Using a careful inventory management plan will enable you to keep an eye on sales trends, change inventory levels to prevent dead stock, stay competitive, and cut costs.

4. Manage Risk

By spotting potential inventory shortages or surpluses, inventory management can assist firms in managing risk. Businesses can lower the risk of stockouts and overstocking, lowering the financial effect of inventory-related concerns, by anticipating demand and arranging inventory levels accordingly.

Read: How to Develop a Strategy for Risk Management in Procurement?

5. Improve Cash Flow

Businesses can free up capital that can be reinvested in other areas of the business by optimizing inventory levels and lowering inventory holding expenses. Reduced storage times are another benefit of effective inventory management, which can boost sales and enhance cash flow.

Furthermore, effective inventory management can aid companies in preventing stockouts, resulting in lost sales and diminished income. Businesses can prevent missing out on possible sales opportunities by keeping the appropriate amount of inventory on hand to fulfill client demand.

5. Increase Customer Satisfaction

Effective inventory management also helps in better order fulfillment. To make sure your products are close to your clients, you can employ strategies like inventory distribution and seamless returns process, which entails keeping inventory in a number of fulfillment centers. This shortens the delivery time and lowers shipping costs, all of which keep customers satisfied and helps you fulfill your order.

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Inventory Management Challenges


For organizations, managing inventories effectively can be difficult because of the variety of potential challenges that can arise. Phantom inventory, shifting demand, supply chain concerns, complicated counting procedures, and unorganized stockrooms are some of the most typical inventory management challenges. Let’s discuss them in detail below:

1. Changing Demands and Customer Preferences

Demand for some products may rise or fall as consumer preferences and market trends change. Businesses may need help to precisely estimate demand and manage inventory levels as a result. In the event that a company orders excessive inventory in expectation of demand that never materializes, they may be stuck with extra inventory that eats up space and locks up funds.

2. Phantom Inventory

Phantom inventory is a term used to describe items that are genuinely missing or misplaced but are reported as being in stock. This may happen as a result of theft, misplacement, or faults in the inventory management system. Phantom inventory can be especially difficult since it can result in erroneous inventory levels and stockouts, both of which affect sales and revenue.

3. Counting Processes

Complicated counting processes can also be difficult for corporations to manage. Manual inventory counting can be error-prone and time-consuming. This can also lead to increased labor costs and an inability to meet deadlines due to discrepancies in inventory levels. As a result, the inventory management system becomes inaccurate, ultimately affecting sales and revenue.

4. Disorganized Storerooms

Businesses find it challenging to handle inventory properly when stockrooms are cluttered. It might be challenging to find and manage products if inventory is not stored in a systematic and effective way. This can result in errors in the inventory management system and make it challenging to successfully monitor inventory levels.

4. Supply Chain Disruptions

The availability of inventory for a company can be impacted by a supply chain interruption, which could result in stockouts or delays in processing customer orders. This could cost the company money and sales, as well as harm its reputation. Additionally, a supply chain d can disruption make it difficult for firms to efficiently manage their inventory and plan for future demand by causing uncertainty about inventory levels.

Take Control of Your Inventory Using Kissflow Procurement Cloud

Kissflow Procurement Cloud offers an all-in-one solution for managing your inventory, procurement, and supply chain activities. It provides a complete solution for all of your inventory management requirements, including demand forecasting, order fulfillment, and reporting. You can take control of your inventory and streamline your business processes with its user-friendly interface, automated workflows, and real-time data tracking.

A power inventory management system like Kissflow Procurement Cloud can positively impact your business to help you achieve long-term success. Book a free demo of Kissflow Procurement Cloud now to take control of your inventories.