What is Inventory Management? Examples

Inventory management is defined as the process of ordering, storing, using, and selling a company's inventories. The "Inventory" of a company includes all the raw materials, components, and finished products.

Construction inventory management is a means by which construction companies and suppliers can keep track of materials, workforce, equipment, and plant.

Irrespective of the type of business, inventory management is paramount for maintaining profitable, organized, and productive businesses mostly in inventory-intensive sectors. A shortage of inventory, when it is utmost necessary, is detrimental to the whole project. This is when the inventory management system takes the role.

In this article, you will learn about inventory management and its related insights with detailed examples.

What is Meant by Inventory Management?

The American Production and Inventory Society (APICS) defines Inventory Management as, " the branch of business management concerned with planning and controlling inventories". 

The inventory management process involves managing inventories from raw materials to finished products. It is a management technique that helps to efficiently streamline inventories to avoid both gluts and shortages. 

Inventory can be a simple bottle of paint used as part of a building's custodial program or as complex as a mix of raw materials and sub-assemblies used for manufacturing. Therefore, inventories vary based on the type of organization and the service they provide. 

What is the Main Purpose of Inventory Management?

As explained before, the primary purpose of inventory management is to help the company efficiently manage the inventory by ordering, stocking, storing, and using inventory. When the inventory is managed efficiently, one will know what items are in stock, how many of them, and where they are located. It helps to limit the risk of stockouts and inaccurate records. 

In addition to managing the required inventories, the materials or stock that are not important and are just wasting space can be removed. A large inventory carries the risk of spoilage, theft, damage, or shifts in demand. The inventory of a business must be insured and if it is not sold in time, it must be disposed of at a clearance price or simply destroyed. This practice is inventory control.

Inventory control is therefore defined as a balancing act of always having enough stock to meet demands and spending less on ordering & carrying inventory.

What is Inventory Management Software?

Inventory management is essential for any inventory-intensive business of any size. For efficient inventory control, companies employ inventory management software. This software is used to track the list of stocks, their restock details, costs when to sell and at what price, etc. 

Small businesses use spreadsheet (Excel) formulas to keep track of stocks manually and determine the reorder points accordingly. Large businesses use specialized enterprise resource planning (ERP) software. Massive corporations use customized software as a service (SaaS) application. 

What is Accounting for Inventory?

Inventory is physically measured before it is recorded or put on a balance sheet. Inventory can be basically divided into raw materials, finished products, work-in-progress (WIP), and merchandise. While considering the functional standpoint, inventory can be classified as consumables, service, and repair (S&R) items, buffer/safety inventory, anticipation stock, and transit inventory.

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Every inventory has a number of costs which includes, 

• The actual cost in dollars
• The space for storing the inventory.
• The labor to receive, quality check, put away, retrieve, select, pack, ship, and account for the item(s).
• The cost of deterioration, damage, or obsolescence
• Theft

In general inventory, costs can be ordering costs and holding costs. Ordering or acquisition costs is the cost incurred to create and process an order of an inventory regardless of its actual value. While holding costs is the costs associated with storing inventory that remains unsold. 

What is the Process of Inventory Management?

In order to develop an efficient inventory management plan, one must acquire a proper understanding of each step involved in the inventory management process. This facilitates the reduction of errors and helps choose the most effective inventory management software for the business. 

The main processes performed during inventory management are:

1. Delivering inventory or goods to the facility: This is when the raw materials and related sub-components for the manufacturer or manufacturing reach the warehouse.

2. Inspect, sort, and store goods: This is when the inventory is reviewed, sorted, and stored in respective inventory areas.

3. Monitoring the inventory: This process monitors the inventory in terms of counts to help minimize the chances of errors.

4. Placing the stock order: Placing the orders either on the website or in-store.

5. Approving the stock order: This is when the order passes to the supplier or is automated through the POS system. 

Note: A point of sale (POS) is a system for making sales in person. POS is a device or software that one uses to access transactions and accept payment, most likely from your retail store. 

6. Taking goods from stocks: The goods are taken from stock and shipped to the manufacturer or customer.

7. Updating inventory levels: Inventory levels can be updated and shared with necessary stakeholders. Mostly perpetual inventory systems are used to automatically update inventory levels.

8. Low stock levels trigger purchasing or reordering: Based on low stock levels, the inventory is restocked as per required.

Consider the following Business Process Design (BPD)of an inventory management system. The model here explains the process before the final good reaches the construction site. The input inventory of this example model is raw materials that are used to produce finished goods for construction works. 

BPD of Inventory Management Process

In the above figure, the total inventory within the system will be the raw materials, the work-in-process (happening within the temporary fabrication shop), and assembled products that are queued for transportation to the construction site. 

Now, we will analyze this inventory management example one by one. 

1. The raw material becomes an inventory when it has been delivered to the temporary fabrication shop by a manufacturer and it is queued by the shop to process the raw materials. Here, the raw material needs to be secured up to a certain level in advance and hence maintain an optimum level of raw material (inventory) based on a make-to-stock (MTS) basis. [ MTS method is a way for a business to prepare for increases and decreases in demand].
2. Similarly, the assembled products that need to be taken to the construction site are prepared only in accordance with the work schedules and shop drawings from the construction site. Therefore, the production of assembled products is performed based on a make-to-order (MTO) basis.

Here the primary factor to be considered is when to start the assembly work. Starting early results in stocking up more inventory of assembled products. Starting lately, may cause a lack of inventory and stop the site works. Hence an optimal time lag must be elicited for the assembling job while reducing the piling up of inventory at the site.

 

What are the Types of Inventory Management Techniques?

Based on the type of business and its complexity, several inventory management, and control techniques are used.

1. Just-in-Time Management (JIT)
2. Economic Order Quantity (EOQ)
3. Days Sales of Inventory (DSI)
4. Minimum Order Quantity (MOQ)
5. ABC Analysis
6. Safety Stock Inventory
7. FIFO and LIFO
8. Reorder Point Formula
9. Batch Tracking
10. Demand Forecasting
11. Cross-docking
12. Six Sigma
13. Lean Six Sigma
14. Lean Manufacturing

Whether you are an e-commerce, retailer, or contractor, the need and efficiency of inventory management are crucial for fighting serious competition and achieving better customer experience.

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