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Inventory Management 101: Everything You Need to Know

Looking to streamline your inventory process? Here’s a guide to everything you need to know about inventory management!

Inventory management is a fundamental function in the retail and manufacturing industries. It helps business owners identify which products have been sold, which ones have been ordered, and which items have been received in the warehouse. This ensures there’s always enough supply to meet the demand and that the company uses its assets efficiently.

If you’re feeling lost when it comes to keeping track of your inventory, let this article serve as a refresher course to acquaint you with the fundamentals of inventory management.

What is inventory management?

Inventory management is the process of tracking stock delivered in and out of the warehouse. It is one of the main components of supply chain management with a focus on supervising the flow of goods from the manufacturers to warehouses and from these facilities to retail stores.

The goal of inventory management is to keep a detailed record of stock levels and the stock’s location in the warehouse. Its key functions also include tracking each new or returned product as it enters or leaves a warehouse or store. 

Both small and large businesses should have a solid inventory management system in place to track the flow of their products, allowing them to stabilize the number of goods coming in and going out of their establishments. The better an organization controls its inventory, the more efficiently it can use its assets. Ultimately, an inventory management system can help reduce instances of understocking and overstocking, resulting in optimal efficiency and profitability.

Why Inventory Management Is Important

Companies can benefit from inventory management in many ways. Here are the top ones.

1. Improves cash flow

Your cash flow improves because of the balance between supply and demand. Inventory management gives you the means to monitor your stocks on hand, preventing you from missing selling opportunities due to stock-outs or production delays due to the unavailability of crucial parts. Moreover, it prevents your operating capital from being tied up in excess inventory, which allows you to use your assets more wisely.

2. Prevents manufacturing delays

Inventory management helps you avoid incurring supply shortages because you can promptly track the movement of goods. As such, you can reduce lead times and improve manufacturing productivity time while decreasing operating costs.  

3. Minimizes overstocking and understocking

One of the biggest benefits of inventory management is it helps ensure the balance between your stock and customer orders. When you invest in more inventory than you can sell, the overstock creates a budget deficit. On the other hand, inventory shortage can negatively impact customer experience. By ensuring your supply keeps up with the demand, you’ll always have the right amount of supplies at hand to meet customer demand and prevent excess inventory from taking up space in your warehouse.

4. Allows for accurate forecasting

With up-to-date inventory records on hand, you can compare current and past data to predict future demand. This can help you make informed decisions as you derive insights from the report. These insights can be used for accurate ordering of parts to keep up with customer demand while preventing seasonal shortages due to parts not being available.

What are the types of inventory?

Inventory types refer to which stage of production the stocks are in.

Raw Materials

Raw materials are components or commodities that have not yet been processed to be incorporated into the final product. It can also refer to materials that are not part of the finished product but are indirectly consumed during the production process like cleaning supplies and lubricants used to run the machines.

Work-in-Progress (WIP)

Work-in-progress inventory refers to partially finished goods awaiting completion. It includes items that are to be assembled before being fully manufactured. For instance, if you sell coffee powder, your WIP inventory would include coffee beans, bags, labels, and shipping boxes.

Finished Goods and Merchandise

Finished goods and merchandise are items that have been completed during the manufacturing process. While they may seem similar, the concepts of finished goods and merchandise are not the same. 

Finished goods are the final products from the manufacturer, while merchandise refers to items that retailers purchase from suppliers or manufacturers that they can then sell to customers.

The 4 Types of Inventory Management Systems

1. Periodic inventory management

periodic inventory system tracks inventory either daily, weekly, monthly, quarterly, or annually. This method does not require any inventory management software. Instead, it’s the personnel who perform a physical count of all inventory items at set intervals and manually record the entries in either a spreadsheet or electronic database.

This is usually done in small businesses with small stock-keeping unit (SKU) counts or low inventory turnover rates. Think ingredient monitoring in restaurants or stock monitoring in niche stores.

2. Perpetual inventory management system

The perpetual inventory management system is a sophisticated system that delivers real-time data. It tracks inventory continually, instantly updating the central database as soon as new items are received. Purchases and returns are also automatically recorded in the inventory accounts. Since the system relies on an automated process, it usually entails the use of certain software.

3. Barcode inventory system

The barcode inventory system works like the perpetual inventory management system. When a product is sold or moved, its barcode is scanned to automatically update the inventory levels in the database. The barcode can represent information about the item such as its location, weight, and amount, including its supplier and manufacturer.

4. Radiofrequency identification (RFID) system

Radiofrequency identification (RFID) systems take barcode systems one step further, employing specialized tags that can be read simultaneously without the need for line of sight. The technology is capable of reading tags up to 40 feet away, making the process quicker while securing inventory data. 

Since RFID systems use radio waves to transfer information from a product to the database, they are ideal for distribution centers that utilize multi-level storage and warehouses with large amounts of stock.

Choose an Inventory Management Platform Integrated into a Cloud-based ERP

Having an inventory management system in place has various business benefits. For one thing, it allows for an improved cash flow. It can also help prevent manufacturing delays and reduce instances of shortage and overstocking. 

While having a stand-alone inventory management platform streamlines the supply chain, integrating it into an enterprise resource planning (ERP) system can provide optimized results. If you’re looking for an inventory management system integrated into a cloud ERP, check out Yondu’s solutions!

Yondu is Acumatica’s partner in the Philippines, and we offer the Acumatica ERP system that uses a CRM module fully integrated within the system. However, you should also consider that pre-built software solutions may not be apt for the type of business that you run. That is why the expert team of Yondu can also develop a customized inventory system for your company to fit your business model and processes..

Schedule a consultation with Yondu’s ERP experts today to learn more about how we can optimize your inventory management system!