From products rotting away at the back of your warehouse – slowly becoming obsolete for no better reason than the fact that no-one in your organisation even knows they’re there – to the frustration potential customers feel when they inquire after an item, only to be told that it’s no longer in stock, a wide range of issues can stem from ineffective inventory management.
Helping to ensure that your business doesn’t experience chronic issues with replenishment and fulfilment, an effective inventory management system can be the difference in a post-Amazon Prime world where customers expect their orders to arrive within one or two days. But what is inventory management? Find out everything you need to know, right here.
What is inventory management?
Essentially, inventory management is the process of sourcing, storing, and using your business’s inventory. It includes a broad range of activities, including the management of raw materials, tracking inventory, warehousing, and so on. Ultimately, however, inventory management comes down to one basic principle – ensuring that you’ve got the right stock, in the right place, at the right time, at the right quantity.
As you may expect, inventory management is much more difficult for firms with complex global supply chains to manage. As such, there are two main inventory management systems: materials requirement planning (MRP) and just-in-time (JIT):
MRP – Materials requirement planning utilises sales forecasts for inventory management. For example, if a tennis racquet manufacturer is using an MRP system, they’ll look at their forecasted orders to determine the appropriate amount of graphite, nylon, and rubber to keep in stock. So, if a manufacturer isn’t able to forecast their sales accurately, they won’t be able to fulfil those orders and the business could suffer as a result.
JIT – First used in Japan in the 1960s, just-in-time inventory management allows companies to save money by only keeping the inventory necessary to make or sell products. This reduces insurance costs, storage costs, and the cost of liquidating your business’s excess inventory. There is a downside, however; if demand for a certain product increases unexpectedly, your business may not be able to source the inventory it needs to fulfil those demands. Plus, even the smallest delays can cause serious bottlenecks within your supply chain.
Beyond these two inventory management systems there are many other potential options, including perpetual inventory management, economic order quantity (EOQ), bulk shipments, dropshipping, and so on. Now that you understand the meaning behind inventory management, let’s take a look at the impact of inventory management systems in greater detail.
Understanding the impact of inventory management
The impact of inventory management on your business’s operational effectiveness can’t be underestimated. If you don’t have an effective inventory management system, you could experience issues with inventory shrinkage, poor customer service, and waste in your supply chain (i.e. wasted employee time dealing with organisational inefficiencies, obsolete inventory, etc.). In other words, inventory management plays a key role in your business’s ability to operate efficiently, helping to reduce the likelihood of error (mispicks, unaligned sales/marketing strategy, etc.) and provide your customers with a far more enjoyable purchasing experience.
Of course, the impact of inventory management also extends to your organisation’s bottom line. Placing the right products in the right location at the right time ensures that you’re minimising wastage in your supply chain, thereby reducing write-offs and stock-outs. For context, stock-outs, overstocks, and returns are reported to cost retailers a staggering $1.75 trillion per year (an issue that’s likely to become even more pronounced in the wake of the coronavirus pandemic). Furthermore, issues with inventory management are likely to lead to customer frustration, which could cause problems with retention and have a negative effect on your renewal rates.
5 inventory management strategies
Clearly, the impact of inventory management is deeply felt across numerous areas of business. So, how can you ensure that you’re managing the inventory management lifecycle to the best of your ability? Check out some of our best inventory management strategies:
Use inventory management software – When you consider the complexity of your supply chain and the volume of goods moving in and out of your warehouses, it simply isn’t possible to manage your inventory manually. Fortunately, there are many inventory management software packages that you can use to automate inventory management and streamline your warehousing and shipping processes.
Perform regular audits – Having a basic understanding of how much stock you have in place is a key element of inventory management, but it’s something that a surprisingly large number of businesses struggle with. Audit your warehouses on a consistent basis to ensure that the number of lost, damaged, or stolen items is as low as possible.
Use item-level tagging to track inventory – There are lots of different tools you can use to improve your inventory management system. Item-level tagging (RFID) can help you determine, quickly and cost-efficiently, how much inventory you have on the floor, how much is available for re-stocking purposes, and which categories need to be restocked. That way, your staff aren’t wasting their time sorting through piles of inventory but can locate the stock that needs to be replenished with far greater accuracy and speed.
Don’t forget about returns – Another important element of inventory management centres around the way that you handle returns. Poor inventory management can lead to a frustrating returns experience for customers and may mean that product returns simply have to be written-off, as placing them back into stock becomes too time and cost-effective. Inventory management software can help you to manage the returns process in a simpler and more agile way. Of course, the optimal strategy is to eliminate, as far as possible, returns and chargebacks.
Analyse customer behaviour – After you put your inventory management system in place, you should start gaining access to valuable information about how often you’re restocking certain items, which you can use to stay ahead of dry spells and sudden spikes in demand.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.