Inventory management exists to optimize the flow of goods from procurement to sales, ensuring the right amount of stock is available at the right time and place. This also includes inventory asset management, tracking the lifecycle of enterprise assets and other support technology.
For many businesses, inventory is the critical link between production and customer satisfaction. Distributors, wholesalers, manufacturers, retailers—for each, the ability to have the right inventory on hand is a prerequisite to meeting the needs and demands of their customers and clients. Unfortunately, there is more to inventory than just having enough stock; ensuring that the stock aligns with the shifting preferences and requirements of the market is just as essential.
Inventory management is a strategic process that goes well beyond stock taking. It is a dedicated approach to balancing supply with demand, ensuring that businesses have the right products, in the right quantities, at the right time, and in the right place. By adeptly tracking and controlling inventory from procurement to sale, inventory management not only prevents stockouts and overstocking but also optimizes storage costs and improves customer satisfaction. Inventory management also goes further, beyond customer-facing products and supplies, to assist in the management of essential business technologies.
This strategic process ensures that vital resources, from office essentials like laptops and monitors to critical operational equipment in sectors like telecommunications, mining, and utilities, are available when needed. By tracking these items and assets from procurement to disposal, companies can effectively adjust their inventory and asset base in response to internal demands and technological advancements, ensuring operational continuity and efficiency. This strategic process ensures that vital resources, from office essentials like laptops and monitors to critical operational equipment in sectors like telecommunications, mining, utilities, etc. are available when needed.
Through the effective implementation of inventory management techniques, businesses can achieve a competitive edge, adapting swiftly to market changes while maintaining optimal stock levels to meet customer needs.
At its most rudimentary, inventory management is essentially a
strategy for tracking products and components as they move through
production, suppliers, stock on hand, sales, etc. Many organizations
choose to incorporate increased analysis or forecasting into their
approach, but the heart and focus of inventory management is always
going to be the inventory itself.
How inventory management works is largely dependent on the size of the business and the type of product being managed. For example, organizations that deal in non-perishable products that are also unlikely to become obsolete can simply store their goods for long periods of time to wait out periods of low demand. However, for most businesses, sitting on inventory is not an option; foods, fashions, electronic devices, and more, each have an anticipated shelf life, after which the value of the item drops significantly.
Inventory management works by cataloging and streamlining the purchase or production of said products. It helps organizations better calculate the optimal inventory size, as well as determine what stock should be at what location at any given time. Inventory management also helps manage any goods held in storage, and controls the amount of the product for sale, pulling goods to fulfill orders, and ensuring that customer shipments are handled correctly.
While closely related to other inventory-relevant processes, inventory management has distinct functions and objectives. Understanding how it differs from these related processes can help clarify its role and importance within the broader operational context:
Inventory control is a subset of inventory management focused specifically on the management and regulation of stock within the warehouse. It involves activities such as stock monitoring, maintaining system accuracy, and the physical management of goods. While inventory management encompasses these activities, it also includes broader tasks—planning, forecasting, and strategy development across the entire supply chain.
Inventory optimization is the process of using inventory as efficiently as possible to minimize costs while meeting demand. It involves strategies for reducing holding costs, optimizing stock levels across multiple locations, and ensuring inventory availability to fulfill customer orders with minimal excess stock. Inventory management includes optimization but also covers the acquisition, storage, and sale of goods in a more general sense.
Order management focuses on the customer-facing aspects of operations, from order entry through delivery and post-sale service. Inventory management interacts with order management by ensuring that inventory levels are sufficient to fulfill orders, but it also deals with the procurement, storage, and overall management of stock, independent of specific customer orders.
Supply chain management is a broad process that includes managing all the activities involved in sourcing, procuring, producing, and delivering products to the end customer. Inventory management is a critical component of supply chain management, focusing specifically on the control and oversight of inventory as it moves through the supply chain. It deals more directly with the stock itself, whereas supply chain management encompasses a wider range of activities, including relationships with suppliers and customers, logistics, and overall strategy.
Warehouse management pertains to the organization and operation of a warehouse, including the physical arrangement of goods, warehouse layout optimization, and the management of warehouse staff. It is a part of inventory control, which in turn is a subset of inventory management. Inventory management involves overseeing stock within warehouses and strategizing inventory levels, turnover rates, and fulfillment across a company’s storage locations.
Logistics involves the detailed coordination of complex operations related to the movement, storage, and handling of goods. It includes transportation management, warehousing, and the flow of goods from point of origin to point of consumption. Inventory management is a crucial element within logistics that focuses on maintaining optimal stock levels, ensuring goods are available for fulfillment and distribution as needed.
ERP systems are comprehensive software platforms that manage a wide range of business processes, including accounting, HR, procurement, and supply chain operations. Inventory management is a component of ERP systems, providing detailed insights into stock levels, inventory in transit, and the status of items within the supply chain. While ERP encompasses a broad spectrum of business activities, inventory management within an ERP context is focused on optimizing stock visibility and control across the organization.
A range of techniques exist to help organizations better manage their stock. These include the following:
- ABC inventory analysis
Classify goods into different tiers, based upon which products are providing the greatest return in terms of profit. - Backordering
Allow customers to place orders for not-yet-available stock. - Bulk shipments
Provide large amounts of an item at a discounted price. - Consignment
Carry goods without purchasing them from a provider; only pay for said goods once they sell. - Cross-docking
Reduce the need for long-term storage; products are delivered to a warehouse and then immediately prepared for shipment to a sales location. - Cycle counting
Regularly count small amounts of inventory without performing a complete stocktake. - Dropshipping
Outsource stock management to a third-party. - Just-in-time (JIT) inventory
Hold as little stock on hand as possible to avoid the dangers of overstock. Economic order quantity (EOQ)
Calculate the optimal order quantity to minimize the total costs of inventory, including holding, ordering, and shortage costs.Batch tracking
Track products in batches through their production and sale to improve traceability and manage recalls more effectively.Demand forecasting
Predict future customer or business demands using historical data and market analysis to optimize inventory levels.FIFO/LIFO
Implement 'First In, First Out' (FIFO) or 'Last In, First Out' (LIFO) accounting methods to manage the flow of inventory costs.Lean manufacturing
Reduce waste within manufacturing processes by optimizing production to demand, thereby minimizing excess inventory.Materials requirements planning (MRP)
Plan production and purchasing by calculating the materials needed to meet customer demand.Minimum order quantity
Set the lowest quantity of a product that a customer can order, balancing inventory costs with production and shipping efficiencies.Reorder point formula
Determine the level at which new inventory should be ordered based on lead times and demand forecasts.Perpetual inventory management
Continuously track inventory levels with real-time updates, ensuring accuracy and visibility.Safety stock
Maintain a buffer stock to prevent stockouts caused by unforeseen fluctuations in demand or supply delays.Six Sigma
Utilize this methodology to improve business processes by reducing the probability of errors or defects, including in inventory management.Lean Six Sigma
Combine lean manufacturing principles with Six Sigma methodologies to eliminate waste and reduce variability in inventory processes.
Inventory management is an effective answer to many of the inventory-related issues that plague modern organizations. However, businesses should also be aware of potential challenges when managing both product inventories and hardware resources that support business processes. Here are some key obstacles to consider when implementing an inventory management solution:
Inefficient organization of warehouse space can lead to wasted time and resources during stock retrieval. Adopt warehouse management systems (WMS) that optimize product placement based on frequency of access and size. Implementing efficient storage solutions, like vertical storage and modular shelving, can also maximize space utilization and improve staff efficiency.
Outdated or manual inventory processes are error-prone and can slow down operations. Implement an inventory management software system that automates various tasks, from order processing to stock level tracking. This reduces errors, saves time, and increases operational efficiency.
Customer preferences can change rapidly, making it difficult to predict demand accurately. Leverage advanced analytics and trend analysis tools within inventory management systems to identify changing patterns in customer behavior. This enables businesses to adapt inventory strategies proactively and meet evolving customer needs.
Without accurate stock details, businesses cannot make informed decisions about restocking or understand which products, assets, or equipment are performing well. Utilize barcode or RFID technology to automate stock tracking. This technology improves inventory accuracy, provides real-time data, and facilitates better decision-making regarding stock levels.
Hardware and technology resources can rapidly become obsolete or deteriorate in performance, complicating inventory management for business-critical assets. Implement asset management solutions that monitor the health and lifecycle of each asset, scheduling timely upgrades or replacements based on predictive maintenance data. This approach minimizes downtime and ensures that all operational resources are up-to-date and functioning optimally.
Managing hardware and technology resources brings inherent security risks—particularly when it comes to data breaches or unauthorized access to sensitive equipment. Employ up-to-date security protocols, including encryption and access controls, integrated within your inventory management systems. Additionally, regularly update security measures in line with the latest threats and ensure comprehensive auditing and tracking of access logs to mitigate risks effectively.
Just as there are many different kinds of inventory, there are also many different ways to improve inventory management across an organization. The following are commonly-utilized best practices for inventory management:
Ideally, every product should be managed to ensure optimal efficiency and accuracy. However, as organizations start implementing inventory management, it may be beneficial to focus their efforts on the highest-demand goods first. With top-selling items all accounted for, organizations can then focus on less-important inventory.
Effective inventory management depends on data that is accurate and up-to-date. Inventory management software solutions are capable of constantly updating, providing real-time insight into inventory. Maintain this information in a single, cloud-based location so that it remains consistent throughout the organization. Perpetual data aggregation also allows for improved inventory analytics.
Another benefit made possible by inventory management software is the ability to automate part—or even all—of a supply chain. Automated inventory management improves data accuracy and frees up employees to focus on other tasks. Additionally, automated analysis helps improve demand forecasting, allowing organizations to better predict how much inventory they will need at any given time.
FIFO stands for first in, first out, and ensures that the oldest items are delivered and sold before newer items. LIFO means last in, first out, and instead prioritizes newer items over older ones. Perishable items will naturally need to follow a FIFO approach so that older items may be sold before they are no longer viable. However, sellers of non-perishable items should consider LIFO, to minimize the cost of constantly rearranging products kept in storage.
A barcode inventory system can make inventorying a simpler, faster process. Mobile solutions take this further, not only allowing warehouse employees to scan and upload inventory amounts to a central database, but also providing essential data to salespeople and management personnel from anywhere in the world.
Effective inventory management depends heavily on reliable suppliers. At the same time, suppliers can be a good source of data on emergent trends. Finally, friendly suppliers may also be more willing to offer better pricing options for the organizations that carry and sell their products. In each case, a strong supplier relationship is essential.
Safety stock refers to goods that are kept on hand to be used in the event of a production shortage. When demand increases but supply cannot, safety stock can help businesses fulfill orders that might otherwise fall through.
Product bundling (also called inventory kitting) describes grouping individual items to be sold together. Bundling can help eliminate problems associated with old or unwanted inventory, simplify stock tracking and management, and increase the overall value of orders while also reducing shipping costs.
Without accurate digital inventory management solutions, organizations run the risk of human error creating major problems. Reliable inventory management platforms help ensure data accuracy and real-time analysis.
This allows organizations to spend less of their time and efforts on tracking goods and assets, and instead focus on connecting with customers and creating better experiences for its employees.
There is a lot more that goes into inventory management than just getting goods or assets from one location to another. To ensure optimal availability at the correct costs, organizations depend on essential tools, machines, and hardware. ServiceNow Hardware Asset Management (HAM) and Enterprise Asset Management (EAM) automates lifecycle processes for these assets using cross-functional workflows. Track and manage vital assets and hardware, refresh or retire older resources, and ensure that in-use equipment and machinery are kept in optimal condition, so that your business services can continue to flow smoothly. HAM and EAM provide visibility and support, so you can provide your employees with the assets and technology they need.