Hello, in this blog, we will discuss the following points on how to set up an inventory system and tips to manage.
- What is inventory management?
- Types of inventory
- Benefits of Inventory Management
- Features to look out in Inventory management software
- How to set up an Inventory System?
- How to Manage an Inventory System?
- Tips to manage inventory in stock
A retail store is the life of an area/place, but sometimes it gets stuck in a place because of improper inventory management. Generally, we all know that the inventory is an asset, but when you fail to manage it will be considered as a liability too.
So, it is necessary for a business to implement a well-integrated inventory management system that will help to sell on time, save your product from wastage, and you will be in profit.
What is inventory management?
Inventory management is the process of overseeing and controlling the storage, ordering, and usage of goods within a business. It involves maintaining the right balance of stock to meet customer demand while avoiding overstocking or stock outs. Effective inventory management is crucial for businesses to optimize their operations, reduce carrying costs, and enhance overall efficiency.
Efficient inventory management helps businesses avoid overstocking, which ties up capital and storage space, or stockouts, which can lead to lost sales and customer dissatisfaction.
Types of inventory
Inventory types are classified based on different criteria, such as their purpose, stage in the production process, and value. Here are some common types of inventory:
Buffer inventory –
It is known as Contingency Stock. It refers to the excess that a company, organisation, or retail store keeps in reserve to save against uncertain conditions in the future and make sure that there should be no disturbance in the production of supply and demand or lead time.
Transportation refers to the products that are not yet received from wholesalers to retailers. It is also called as Transit Inventory.
Seasonal inventory refers to the products that are in high demand at a particular time, season, or any occasion. For example, umbrella and raincoats are in high demand during the rainy season and sweaters and jackets are more demanded in winter season.
Anticipatory Inventory –
Anticipatory or hedge inventory refers to the stock of goods that are built up in anticipation of expected future events or demand such as seasonal peaks, promotions, or other planned changes in market conditions .
Cycle inventory –
Cycle inventory is the portion of inventory that varies as a result of the production cycle. It includes raw materials, work-in-progress, and finished goods.
Production Inventory/ Raw Material –
Production inventory refers to basic materials or components used in the manufacturing process before they undergo any transformation. Examples include raw metals, wood, or chemicals.
Work-in-Progress (WIP) –
WIP inventory consists of partially completed goods that are in the process of being manufactured but are not yet finished. This inventory type represents the value of the materials and labor invested in the production process.
Finished goods –
Finished goods refer to fully manufactured and ready-to-sell products. These are the final products that are stored before being shipped to customers or retailers.
Maintenance, Repair, and Operations (MRO) –
MRO inventory includes items necessary for the day-to-day operations of a business but are not directly used in the production of goods. Examples include office supplies, cleaning materials, and spare parts.
Safety Stock –
Safety stock is an extra quantity of inventory that a company holds to mitigate the risk of stock-outs due to unexpected fluctuations in demand, supply chain disruptions, or other uncertainties.
Consignation Inventory –
Consignment inventory is stock that is still owned by the supplier but is held at the customer’s location until it is used. The customer only pays for the goods when they are used or sold.
Miscellaneous inventory refers to the purchased items by the sellers from the person with whom the seller is not a party to a franchise contract.
Benefits of Inventory Management
Effective inventory management is crucial for businesses, as it directly contributes to success and profitability of the business, regardless of their size or industry. Here are some key advantages:
- Cost Reduction: Proper inventory management helps in minimizing carrying costs, such as storage, insurance, and handling expenses. It also prevents overstocking, which ties up capital and warehouse space, and reduces the risk of obsolescence.
- Reduced Holding Costs: Holding costs, including expenses related to storing and managing inventory, can be reduced through efficient inventory turnover. This ensures that products move through the supply chain at an optimal pace..
- Prevention of Stock outs and Overstock: By having optimal stock levels and safety stock in place, businesses can prevent stock outs, ensuring they can fulfill customer orders promptly and avoid lost sales opportunities.
- Optimized Cash Flow: By avoiding overstocking and stock outs, businesses can optimize their cash flow. They invest in inventory only as needed, preventing excess funds from being tied up in surplus stock.
Improved Cash Flow:
- Faster Turnover: Streamlining inventory processes allows for faster turnover, freeing up capital for growth, R&D, or debt reduction.
Enhanced Customer Satisfaction:
- Accurate Order Fulfilment: Maintaining optimal inventory levels ensures timely and accurate order fulfilment, directly contributing to customer satisfaction and loyalty.
- Reduced Lead Times: You can improve supplier negotiations and reduce lead times by better understanding inventory needs, resulting in faster order processing.
- Automation and Technology: Automating inventory management streamlines operations, minimises manual errors and frees up time for strategic tasks. This efficiency extends to order processing, restocking, and other inventory-related activities
- Forecasting Accuracy: Data-driven inventory management enables businesses to make more accurate predictions about future demand. This helps in planning production schedules and order quantities.
- Adherence to Standards: You can ensure compliance with industry regulations and standards by implementing effective inventory management practices that maintain precise records and traceability.
- Data-Driven Insights: Inventory management systems provide valuable data and analytics, allowing you to make informed decisions about products, pricing strategies, market trends and overall supply chain health.
- Optimised Product Mix: You can increase profits by optimising their product mix based on consumer demand for high-margin items.
- Identification of Obsolete Stock: Regular inventory monitoring helps prevent financial losses by identifying slow-moving or obsolete stock, which can be sold at reduced prices before write-offs or liquidation becomes necessary. This is particularly crucial in industries where product lifecycles are short or subject to rapid technological changes.
Supply Chain Resilience:
- Visibility across the Supply Chain: You can prevent supply chain disruptions by gaining visibility and taking proactive measures. With accurate demand forecasting and inventory planning, businesses can communicate effectively with suppliers, leading to better relationships. This can result in favorable terms, discounts, and improved overall supply chain collaboration.
Features to look out in Inventory Management Software:
Real-time tracking of inventory levels, including details about stock on hand, committed stock, and stock in transit. This feature helps businesses maintain accurate stock counts.
Capability to manage and track inventory across multiple locations or warehouses. This is essential for businesses with distributed operations.
Integration with barcode scanners to facilitate efficient and accurate data entry, reducing manual errors and improving the speed of inventory management processes.
Tools for managing purchase orders, sales orders, and other order-related documents. This includes features like order creation, tracking, and fulfillment.
Advanced analytics and forecasting tools that help businesses predict future demand based on historical data, market trends, and other relevant factors.
Features for managing supplier information, tracking lead times, and optimizing reorder points. This helps in building stronger relationships with suppliers and improving the overall supply chain.
Reporting and Analytics:
Comprehensive reporting tools that provide insights into key performance indicators (KPIs), stock turnover rates, and other relevant metrics. Customizable reports enhance decision-making.
Mobile-friendly interfaces or dedicated mobile apps that allow users to access and manage inventory data on the go. This is particularly useful for businesses with field operations.
User Permissions and Access Control:
Granular control over user access rights to ensure that employees have appropriate permissions based on their roles. This helps in maintaining data security and integrity.
Automated Alerts and Notifications:
Automated alerts for low stock levels, stockouts, or any other inventory-related issues. Notifications help businesses address problems promptly and prevent disruptions.
Batch and Serial Number Tracking:
Support for tracking and managing inventory items by batch or serial numbers. This is crucial for industries where traceability is essential, such as pharmaceuticals or electronics.
Integration with Accounting Software:
Seamless integration with accounting software to ensure that financial data is synchronized, streamlining the reconciliation process and providing a comprehensive view of business finances.
Cloud-based solutions that offer flexibility, scalability, and accessibility from anywhere with an internet connection. Cloud-based systems also often provide automatic updates and backups.
How to Set up an Inventory System:
Setting up an effective inventory system is a crucial step for businesses to manage their stock efficiently. Here’s a general guide on how to set up an inventory system:
- Define Your Objectives
- Choose the Right Inventory Management Software
- Gather and Organize Information
- Establish a Coding System
- Set Reorder Points and Order Quantities
- Implement Barcode Scanning
- Establish Storage Locations
- Train Your Team
- Integrate with Other Systems
- Regularly Update Inventory Records
- Implement Quality Control Measures
- Monitor and Analyze Performance
- Continuous Improvement
By following these steps, you can establish an efficient and well-organized inventory system that meets the specific needs of your business.
How to Manage an Inventory System?
Managing an inventory system involves ongoing activities to ensure accuracy, efficiency, and alignment with business goals. Here’s a guide to effectively manage an inventory system:
Regular Audits and Physical Counts:
Conduct regular audits and physical counts to compare actual stock levels with the recorded levels in the system. This helps identify discrepancies, such as theft, damage, or data entry errors.
Update Inventory Records in Real Time:
Ensure that inventory records are updated promptly and in real time. This includes recording stock movements, adjustments for sales and returns, and any other changes to stock levels.
Implement a Reorder System:
Set up automated reorder points to trigger replenishment orders when inventory falls below a certain threshold. This helps prevent stockouts and ensures that products are consistently available to meet demand.
Optimize Stock Levels:
Regularly analyze stock levels to identify slow-moving or obsolete items. Adjust order quantities and reorder points to optimize stock levels and reduce carrying costs.
Utilize Barcode Scanning and RFID Technology:
If applicable, continue to use barcode scanning or RFID technology to streamline data entry processes. This helps minimize errors and improve the speed of inventory management tasks.
Monitor Supplier Performance:
Keep track of supplier performance metrics, such as lead times, order fulfillment accuracy, and product quality. This information is crucial for maintaining strong relationships with reliable suppliers.
Forecast Demand Accurately:
Utilize demand forecasting tools to predict future demand based on historical data and market trends. Adjust inventory levels and ordering strategies accordingly.
Train and Educate Staff:
Provide ongoing training for staff members involved in inventory management. Ensure that they are familiar with the system, understand their roles, and adhere to best practices.
Implement Quality Control Measures:
Maintain quality control measures for incoming shipments. Inspect goods for damage, verify quantities, and update the system with accurate information.
Regularly Review Reports and Analytics:
Regularly review reports and analytics generated by the inventory management system. Analyze key performance indicators (KPIs) to identify trends, areas for improvement, and potential issues.
Adapt to Changes in Demand or Operations:
Be flexible and adaptive to changes in demand, market conditions, or internal operations. Adjust inventory management strategies and parameters as needed to align with evolving business requirements.
Integrate with Other Systems:
Ensure that the inventory management system remains integrated with other business systems, such as accounting, e-commerce, and order processing. This helps maintain consistency and avoids data silos.
Address Issues Promptly:
Promptly address any issues or discrepancies identified in the inventory system. Investigate the root causes of problems and implement corrective actions to prevent reoccurrence.
Regular System Updates and Maintenance:
Keep the inventory management software up to date with the latest releases and patches. Regularly perform system maintenance to ensure optimal performance and security.
Foster a culture of continuous improvement. Encourage feedback from staff involved in inventory management and use insights gained to refine processes and enhance the system over time.
By actively managing your inventory system with these practices, you can promote accuracy, efficiency, and responsiveness to changes in your business environment.
Tips to maintain the inventory stocks –
A, B and C Method –
Set your product in A, B & C level so that it will be available on time for sale. For example – costly and fast-moving products keep at level A, regular and the less costly products keep at level B and average and slow-moving products keep at level C.
Track all received and sales products –
Keep it updated with all sales and ordered items as per the date, time, pricing, locations and name of the suppliers and buyers, mood of payment, etc.
Try to use the latest and updated software –
Make sure that your software is well integrated and can help you to manage all stocks.
Analysis of supplier performance –
From time to time, analyse your supplier performance if you have a supplier or third party that supplier is delivering the product frequently late or untimely or short an item/order. Take action and try to discuss with them and try to find out the problem. Be prepared to deal with the uncertainty of stocks.
FIFO (First In – First Out) method –
It is used for perishable goods and prescription drugs, such as food, cosmetics, flowers, etc. It is used for the purpose of cash flow within the calculation of the cost of goods sold.
This is the end of our discussion on how to set up an inventory. Let us know if you have any doubts or confusion; kindly drop us a comment in the comment box.