A Beginner's Guide to Inventory Management - Busy Accounting Software
A Beginner's Guide to Inventory Management - Busy Accounting Software

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Date: 23 Sep 2022


A Beginner's Guide to Inventory Management

Inventory management can be a hassle for businesses or lead to enormous savings.

The lifeblood of a product-driven firm is inventory. It's what keeps people buying from you and paying you money. Internal inventories are essential for service-based businesses that rely on certain products to conduct tasks. 

Inventory is a crucial component of any business in any situation. And controlling this inventory is essential to ensuring that the right goods are stocked in the right amounts to balance needs without using too many resources.

It would be nearly difficult to keep track of all these moving elements manually. Software for inventory management is essential for companies of all sizes and sorts. It's crucial for e-commerce companies, in particular, because they need to process and dispatch orders with extreme precision.

What is Inventory Management?

Inventory management helps businesses determine which products to order when and in what quantities. Inventory is tracked from product acquisition to sale. The technique recognises trends and reacts to them to guarantee adequate merchandise to fulfil client orders and proper warning of a shortfall.

 

Inventory turns into revenue after it is sold. Inventory ties up cash before it is traded while being listed as an asset on the balance sheet. As a result, having too much stock is expensive and lowers cash flow.

Inventory turnover is used in accounting to determine how frequently stock is sold over time. A company doesn't want to have more inventory than sales. Deadstock, or unsold stock, can result from a lack of inventory turnover.

Different types of Inventory

There are numerous types of inventory that a business could encounter. To pursue good inventory management, it is essential to understand each.

Basic types of Inventory

There are five basic sorts of inventory regarding the goods a company might sell.

Raw materials

Any material utilised in the production of completed goods, or the separate parts that make them up, is referred to as a raw material. These can be created or obtained by a company directly, or they can buy them from a supplier.

Work in Progress Inventory (WIP)

Retailers who produce their goods are again referred to as having work-in-progress inventory (WIP). These are parts or products currently in production but are not yet ready for sale.

Finished goods

Finished goods are items that have been finished and are prepared for sale. These can have been produced in-house by the company or bought as a complete, finished good from a source.

Most retailers will either buy full, finished products from a source or commission a third party to produce specific products. As a result, finished items are frequently (though not always) the sole sort of inventory that needs to be managed in retail inventory management.

Maintenance, repair & operations (MRO) goods

MRO goods are items used in the production of products but do not directly contribute to the end product.

This can include things like:

  1. Tools for production and repair

  2. Uniforms and safety gear

  3. Cleaning products

  4. Equipment

  5. Battery

  6. Computer networks

And everything that is used up or thrown away during the production.

This kind of little inventory could seem insignificant. MRO, however, is inventory that must still be acquired from a source, kept somewhere, and recorded in financial records.

Packaging supplies

Anything you use to pack and protect goods—either during storage or transportation to customers—is a packaging material.

For online retailers, this is consequently of special importance. And could incorporate stuff like:

  1. Bubble wrap.

  2. The padding

  3. Chip packaging.

  4. A variety of boxes.

When managing their inventory, many retailers neglect to consider packing supplies. However, as stocks of these products must be constantly used and maintained, it is crucial to include them in total inventory reporting and accounting.

Finished Goods

It's also helpful to further split finished goods into a few additional sorts of inventory in a retailing context. This dramatically improves inventory visibility for a business, enabling better allocation and management.

Available for sale

This stock also referred to as "available inventory," has been produced or acquired and is stored in the warehouse in preparation for sale. It could be easily picked, packed, and transported whenever needed.

Allocated

This is stock that a customer purchased and assigned to a sales order. As a result, it cannot be sold again and must be eliminated from the inventory figure.

In-transit

This is the unsold stock being moved, such as stock being transferred to a different warehouse or a delivery being made in response to a purchase order.

Seasonal

This inventory also referred to as "anticipation stock," has been produced or acquired especially to meet an anticipated increase in demand. For instance, to cover Black Friday sales or your busiest time of year.

Safety

This serves as a stock buffer to protect you in the event of any unanticipated increases in demand or issues with supply.

Inventory Management versus Inventory Control

Although they may sound similar, inventory management and control are different.

Your manufacturing, sales, supply chain, and fulfilment are all included in inventory management. Without an inventory management system, it won't be simple to manage inventories, suppliers, production lines, etc.

Inventory control outlines how a company controls the currently stored inventory. Understanding your current inventory levels, where it is maintained, and whether or not it is in a sellable condition is known as inventory control. Inventory control also refers to how a company operates to cut down on the amount of time spent maintaining inventory.

Why is Inventory Management important?

A company's ability to serve consumers and increase revenue depends on effective inventory management. For several reasons, efficient stock management is crucial. A company will overspend on stock and lose money by storing extra inventory if it orders more raw materials than it needs to create its products. If inventory management orders insufficient raw materials, there won't be enough goods to satisfy demand.

Essential terms and techniques in Inventory Management

Formulas and analysis are used in several inventory management strategies to plan stock. Others depend on protocols. Every technique aims to increase precision. Its requirements and inventory determine a company's methods.

ABC Analysis

This technique determines the most and least preferred stock categories.

Batch Monitoring

This strategy clusters comparable things to keep track of expiration dates and find defective items.

Shipments in Bulk

This approach considers supplies that suppliers load straight into trucks or ships. Bulk inventory is purchased, stored, and shipped.

Consignment

If your company uses consignment inventory management, you won't pay a supplier until a product has been sold. Up until your business sells the inventory, that supplier still owns it.

Cross-Docking

This technique entails unloading goods from a supply vehicle onto the delivery truck directly. Storage is essentially done away with.

Forecasting demand

Predictive analytics of this kind aids in predicting consumer demand.

Dropshipping

Dropshipping is sending products from a supplier's warehouse straight to a client.

Economic Order Quantity (EOQ)

This method outlines the precise quantity of inventory a business should order to cut holding and other expenditures.

FIFO and LIFO

You move the oldest stock first using the first in, first out (FIFO) method. According to the last in, first out (LIFO) theory, since prices are constantly rising, the most recently purchased inventory is the most expensive and therefore sells first.

Just-In-Time (JIT) Inventory

Companies employ this technique to keep stock levels as low as possible before replenishment.

Lean Manufacturing

This methodology focuses on clearing the manufacturing system of waste or items that do not add value to the customer.

Materials Requirements Planning (MRP)

For production, this system encompasses planning, scheduling, and inventory management.

Minimum Quantity of Orders

A business that relies on minimum order quantities will only purchase the bare minimum of inventory from wholesalers with each order to keep prices down.

Reorder Points:

Using this technique, businesses may determine how much inventory they must keep before placing another purchase and then manage their inventory accordingly.

Process of Inventory Management

Knowing the specifics might help with your stock management and inventory planning because many factors go into inventory management.

  1. Forecast demand

The first step in inventory management is demand forecasting. Making a reasonable prediction about the future demand for your products is the process of demand forecasting. Various methods exist to calculate these numbers, and it might be challenging to estimate the driving variables, quantity, quality, pricing, and other considerations.

  1. Place purchase orders

Inventory control is essential because it allows you to anticipate needs before they become urgent. Depending on the situation, supply and demand can change significantly. You can determine when to purchase orders using a system already in place.

  1. Produce goods

Producing more goods than you can sell will cause capital to be locked up, depleting your company of crucial funds. On the other side, if you produce too few goods, you risk running out of stock and missing out on sales. The thorough information provided by inventory management helps you determine how much merchandise you need and when.

  1. Stock inventory

After manufacturing or buying your goods, you must efficiently and transparently stock your inventory. Keeping stock that considers your items' requirements is essential, whether you're storing finished products or raw materials used to make finished things.

  1. Sell products

The next step is to sell your inventory and get your goods to customers. By giving you information on the number of available items and facilitating swift product location inside a warehouse, inventory management aids in the efficient movement of goods.

  1. Sales report

For the success of your business, keeping track of your inventory and sales is essential. Data and reports can pinpoint your company's weak points and potential growth areas.

Formulas in Inventory Management

For various needs, several formulas might be utilised. Here are a few varieties and how they can grow a business.

  1. The formula for Economic Order Quantity (EOQ)

Your EOQ is the ideal quantity of stock to order to keep your ordering and holding costs to a minimum. A company can save a lot of money by using the EOQ.

  1. The formula for Days Inventory Outstanding (DIO)

Days Inventory Outstanding (DIO) is the days before the stock is sold. A smaller DIO is generally better because it produces income more quickly. But bear in mind that distinct markets, goods, and business strategies will have varying average DIOs.

  1. Reorder point formula

Deciding when to place another order for the stock is complicated. Some calculations can help with the same.

  1. Safety-stock formula

Safety stock is necessary to prepare for unanticipated events and serves as a backup in case you run out of stock. To satisfy demand, it's critical to maintain safety stock, but too much can strain your cash flow.

Benefits of Inventory Management

Inventory management done right can benefit your company's expansion in a variety of ways. Here are a few of the benefits:

Cut expenses

It costs money to buy merchandise, manage storage, pay for insurance, and pay personnel. Inventory should be managed well to cut expenses.

Boost cash flow

You can free up more money to spend on other essentials by optimising the inventory level you maintain.

Prevent stockouts and overstocking of goods

Both carrying excess inventory and experiencing stockouts are expensive. Both of these situations can be avoided with better inventory management.

Better terms can be negotiated with suppliers

You can bargain with suppliers more effectively if you have comprehensive knowledge of your inventory. For instance, knowing that you sell a lot of one item during a particular year's season may enable you to negotiate a lower price with your supplier.

Enhance the customers ’ experience

Customers are more likely to return and maintain their loyalty when they know they can depend on you always to have stock and provide the best deals.

Increase profitability

You can improve the profitability and expansion of your company by comprehending your inventory, demand, and turnover.

Effective Inventory Management practices

You may adequately maintain your inventory using a variety of ways. 

Inventory classification using ABC analysis

ABC analysis is a technique for organising your inventory into a hierarchy of most-to-least-important things. The top-priority "A" goods are the best sellers; "B" goods are worthwhile, but medium-priority items; and "C" items are lower priority.

Recognise your reorder point

Knowing when to order extra stock requires a reorder point calculation that fits your company's demands. Having sufficient supply stops unexpected stockouts brought on by market fluctuations. A formula can also enable you to retain less inventory when necessary during business downturns.

Keep safety stock readily available

Excess stock on hand guards against shifting lead times, shifting client demand, and varying market conditions. By maintaining safety stock, you may avoid stockouts and guard against inaccurate forecasts, which could cost you money, clients, and market share.

Inventory management by batch and expiration date

You may avoid having any obsolete or expired merchandise by keeping track of your inventory batches and expiration dates. Neglecting to keep track of unsalable goods will deplete your financial resources and endanger your company.

Increasing inventory turnover rates

Understanding market demands can be improved with your inventory turnover rate calculation. You can decide what steps to take to better stock your inventory by analysing your products' needs. To maximise turnover rates, you might experiment with price, client demand forecasts, or stock liquidation.

Monitor KPIs for inventory management

By setting specific objectives for each day, week, quarter, or year, tracking inventory key performance indicators (KPIs) can help eliminate guesswork.

Reduced dead stock counts

Reducing dead stock will be perfect for streamlining operations because it can waste resources. Real-time data tracking allows you to reduce lead times, eliminate unnecessary stock, and boost forecasting accuracy by keeping track of your inventory.

Conclusion

Inventory management is key to success for a product based business. Keeping a tab on your inventory and manufacturing process can also help you pinpoint areas where improvements can be made, and also lead to significant cost savings over time.

If you are looking for an inventory management solution for your business, you can try Busy's Inventory Management Solution. With features like MRP wise stock, Batch Wise Details, and Serial Number Wise Stock, Bill of Materials and much more, Busy can be the ideal solution for your inventory management requirements. You can also take a free trial of Busy to see if it is right for your business.