What is inventory management?

Inventory management describes all the processes and tools for sourcing, storing, and using a company’s inventory, including raw materials and goods.

Simply put, inventory management exists to ensure that a company always has the right items, at the right locations, in the right quantities, at the right time, and at the right cost and price.

Inventory control is a subset of inventory management, focused specifically on managing stock that is currently being held in storage. Inventory control is designed to ensure efficient storage and organization of said stock, reducing the time and cost investment associated with controlling inventory.

Inventory management comes long before inventory control, incorporating every aspect of inventory, including manufacturing, supply chains, fulfillment, sales, and reporting. As such, having reliable inventory management in place is essentially a prerequisite for effective inventory control.

  • Finished and for-sale goods
    Products that are ready to be sold to customers.
  • MRO goods
    Maintenance, repair, and operating goods—Inventory that is not for sale, but that supports the manufacturing process.
  • Raw materials
    Essential inventory from which finished goods are made.
  • Safety stock
    Additional finished inventory kept on hand to accommodate supplier shortages or unexpected increases in demand.
  • Work-in-progress
    Not-yet-finished products—for-sale goods that have not completed the manufacturing process.

In many cases, an organization’s inventory is its identity. More than just being a valuable asset, inventory may be the primary connection a business has with its customers. If inventory isn’t available when and where it is needed, customers can easily become dissatisfied. At the same time, overstocks and returns result in a massive drain on business resources. And that’s only the very tip of the iceberg.

Streamlines business

Meeting customer demand for inventory without exceeding it is an extremely fine line. On the one hand, businesses that have too little inventory risk alienating their customers, but there are dangers in keeping too much stock, as well. Those organizations that find themselves with significantly more inventory than they need will likely have to pay to store the excess, severely discount the inventory to encourage customers to buy more, or even destroy unwanted inventory as a total loss.

Inventory is a complex animal, one that requires close observation, analysis, and adaptability. With effective inventory management, organizations can reduce costs and improve important processes, streamlining the business and allowing for increased returns.

Increases customer satisfaction

An organization’s capacity to fulfill orders and get products to customers has a major impact on its overall success. This goes beyond single purchases and on-time orders. When a business fails to deliver, delivers the wrong products, or is unable to deliver on time, customer expectations drop. Disappointed customers are less likely to bother with that organization in the future, whether or not the company takes steps to resolve the issues.

And while inventory management is important in B2C industries, it may be even more essential for B2B. Businesses have their own deadlines and goals to manage, and if the inventory they depend on isn’t available when they need it, then they could end up losing out in terms of sales, profits, and productivity.

Grows organizations

Small businesses with only a single backroom of inventory are more likely to be able to manage their goods and components by hand. But as that business grows, so too does the size and complexity of the inventory. A growing customer base may necessitate new production lines, which in turn demand new production facilities, and so on.

Instituting an effective inventory management system early, before the business begins to expand, can help eliminate many of the inventory-related growing pains that come from rapid scaling. As a company grows, it can continue to effectively manage its inventory to meet customer needs.

The truth is that how a business manages its inventory has the capacity to affect many different aspects of business, from warehousing and planning, to customer experience, to security and compliance, to that all-important bottom line.

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.

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.
  • JIT inventory
    Hold as little stock on hand as possible to avoid the dangers of overstock.

Tracking and controlling stock as it moves from production and suppliers, through storage, and finally into the hands of customers, follows five essential stages:

Purchasing

The purchasing stage describes the steps associated with purchasing either completed products from manufacturers for sale to customers, or purchasing the raw materials used in constructing products.

Production

This step only applies to those businesses that produce their own goods; production manages the manufacturing of products from raw materials.

Holding Stock

Raw materials and pre-sold goods need to be stored effectively. Holding stock manages storage and ensures accurate inventory.

Sales

The sales step references the process of exchanging goods and products to customers in return for payment.

Reporting

Finally, reporting is an essential step in determining how much inventory is selling, how much profit the inventory is generating, and where processes may be improved.

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:

Prioritize inventory based on demand

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.

Create a single source of real-time data

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.

Apply automation wherever possible

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.

Use FIFO or LIFO

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.

Rely on mobile solutions

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.

Build the supplier relationship

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.

Keep some safety stock

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.

Bundle and kit

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.

Invest in inventory management

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 instead focus on connecting with customers.

There’s a lot more that goes into inventory management than just getting goods 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) 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 provides visibility and support, so you can provide your employees with the goods and products they need.

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