Inventory management is a technique of managing inventory and stock. As a key component of supply chain management, it includes various aspects such as inventory storage, controlling of ordering of inventory and controlling the price of the product that is for sale.
In this article we cover the following topics:
Why Inventory Management Is Important?
Inventory management is a prime component of COGS (cost of goods sold) and therefore its a key driver of total assets, profitability and tax liability. Financial ratios, such as inventory turnover ratio comprise of inventory values for measuring certain elements of the financial health of a business. For these reasons, and changes in product and other materials prices that affect the inventory value we can say inventory management is important.
In addition, inventory management is also a vital component to manage the supply chain of the company. While chunking money to buy the excessive stock a company can end up paying more for shipping, insurance, warehousing and allied services for transporting and maintaining the inventory. Finding the best alternative to buy, store and manage inventory can make a huge difference between profits and losses.
Holding inventory requires a lot of liquidity. That’s the reason why a good inventory management is important for a company to grow. Like the cash flow, it can make or break your business.
What can be saved due to Inventory Management?
An effective inventory management can result in saving in a few critical ways:
- Avoid Spoilage
Commodities that have an expiry date (like makeup or food item), have a high chance to get spoilt if the product isn’t sold in time. A good inventory management system helps a business to avoid needless spoilage.
- Avoid Dead Stock
Deadstock implies a stock that cannot be sold, but not necessarily because it expired. The stock could have gone out of fashion, out of season, or otherwise become irrelevant to be marketed. By managing the inventory in a better way, deadstock can be avoided.
- Save on Storage Costs
Warehousing is considered as a variable cost., There exists a fluctuation on storage cost based on how much commodity is being stored. If the excessive product is being stored at once or commodity that’s hard to sell is stored, the storage costs will go up.
Example for Inventory Management
One of the techniques of inventory management in JIT
Just-in-time is also popularly known as JIT. It enables companies to reduce waste by managing only the stock of inventory that is required to produce and sell products, resulting in a significant saving of money. This management technique minimizes insurance and storage cost, as well as the cost of discarding excess inventory.
However, this JIT technique can turn to be risky in high demand scenarios. If the demand of the product suddenly spikes, the manufacturer of the goods may not be able to get the required inventory in order to meet that unexpected demand, which may deteriorate the reputation with customers and also drive business towards competitors. Even the smallest delay can turn into a challenging situation; if a key input does not arrive “just in time”. A bottleneck can result.
What are the benefits of Inventory Management?
In addition to making the business more organized, a good inventory management can also help in the following ways:
- It helps to keep the business profitable
- It reduces and eliminates unnecessary costs
- It helps in achieving economies of scale
- It analyzes sales patterns and forecasts future sales
- It also analyzes performance against competitors
- It also prepares the business for the unexpected situation
An efficient and effective inventory management is very important to ensure that a business has enough inventory on hand to fulfil its customer demand. Improper handling of inventory can result in losing potential sales or blocking money due to the stocking of excessive inventory. An effective inventory management can help a business in preventing these mistakes. With an optimum inventory management in place, an organization has a better chance for long-term survival and profitability.