Inventory Management

Inventory management is a critical piece of a business’s profitability, but not all sellers practice efficient management regarding the items they sell.

Some hold too little inventory and are unable to meet customers’ demands. Others overstock too much and suffer from high storage costs and tight cash flow.

Effective inventory management lies somewhere between these two extremes.

 

What is inventory management?

Inventory management is the process of ordering, storing, and selling your company’s inventory – both raw materials and finished products. In other words, it’s always aiming to order the correct quantity of products to meet your customer demand and minimize its holding costs.

 

Why is inventory management critical?

There are several reasons why inventory management is essential for your retail business’s success and profitability:

 

Controls your inventory costs

Stock costs money until it sells – think about storage handling and transportation fees, insurance, and employee salaries. Stock management helps you better understand which products are selling well and just gather dust on your warehouse shelf. This knowledge will also allow you to negotiate better prices and terms with suppliers.

 

Improves your cash flow

Purchasing too much inventory at once means that you have less cash on hand to spend on things like marketing to accelerate your business growth. Having reasonable control of your stock levels is the key to maintaining a good cash flow.

 

Keeps your customers happy

Poor inventory management can lead to out-of-stock situations that will result in overselling and missed delivery deadlines. Having your orders delivered later than promised would significantly reduce your customer satisfaction and result in bad reviews affecting your brand reputation.

Inventory management can protect you from stock mismanagement and also enables you to increase customer satisfaction through speedy delivery.

 

Types of Inventory

Before tackling effective inventory management, you need to understand from what the inventory is made. These are five fundamental types of stock:

Raw materials:

1. Raw materials are items that will be used to make finished products. The business can produce these by itself or source them from a supplier. An example of raw materials would be rubber and cotton used to make a finished product – shoes.
2. Work-in-progress inventory.
3. Work-in-progress, or WIP, is an item that is currently being made but is not yet ready to be sold. WIP inventory varies depending on the business. If you run a hair salon, shampoo would be considered a WIP inventory as it is part of the finished hairstyle.

 

Finished goods:

1. Finished goods are completed products that are ready for sale. Let’s take the same shampoo example – for a cosmetics shop. The shampoo will be a finished product sold to the customer.

 

Maintenance, repair & operations (MRO) goods

MRO items are products and materials used to support and facilitate the production of finished goods, but they don’t make up any part of a finished product. MRO inventory is usually regularly replenished because it keeps the business operations running. MRO goods may include uniforms, gloves, production & repair tools, cleaning, and office supplies.

Packing materials:

Packing materials inventory includes any items your business uses to protect stock in the warehouse and ship items to customers. This includes boxes, bubble wrap, bags, and packing chips.

To manage, plan, and budget for the stock in the future, it’s essential to consider all five inventory types and include them in overall inventory reporting and accounting.