Introduction to Inventory
Inventory is a form of an asset on a company's balance sheet, and it serves as a barrier between production and order processing, as previously mentioned. When an item in inventory is sold, its carrying cost transfers to the revenue statement's cost of goods sold (COGS) category.
What is Inventory?
Optimizing inventory is an essential aspect of managing inventory that considers supply and demand fluctuation. Inventory optimization is a series of techniques for businesses that seek to save money while keeping their inventory sellable. It reconciles investment restrictions with company goals and fulfillment objectives over many actual inventory units.
There are three techniques to value inventory. These are the methods:
First-In, First-Out (FIFO)
Weighted Average Method
Why Is Inventory Management Important?
Calculate ending inventory with this formula: Beginning inventory + net purchases – COGS = ending inventory. The ending inventory of the previous period serves as your starting inventory. The products you've purchased and added to your stock count are net purchases.
Improved Inventory Accuracy
Reduced Overselling Risk
Avoiding Stockouts and Having Too Much Stock
Improved Vendor and Supplier Terms
Inventory management software saves time that could be better spent on other tasks.
A Well-Ordered Warehouse
Improved Customer Service
Types of Inventory
While processing and managing stock, a corporation may encounter various forms of inventory. Some different inventory types are as follows:
Work in Progress
Maintenance, Repair, and Operations (MRO) Goods
Packing & Packaging Materials
Anticipation and Safety Inventory
Also known as book inventory, it is the smallest amount of stock a corporation needs to operate without waiting. Theoretical inventory is primarily employed in the manufacturing and food industries. It is calculated based on the actual versus theoretical data.
Digital inventory refers to keeping track of inventory activity. It entails using inventory tracking systems and other techniques to enhance transparency by monitoring and gathering data as finished products travel through the distribution chain.
What Is an Example of Inventory?
Inventory models can be made more tangible by using real-world examples. The examples below show how various types of inventory are used in manufacturing and retail operations.
Raw Materials/Components Inventory: Fabric, thread, dyes, and print designs are among the raw materials and components used by a t-shirt manufacturer.
Finished Goods Inventory: Charm necklaces are produced by a jewelry company. To make a finished object suitable for sale, staff connects jewelry to a preprinted card and slides it into cellophane wrappers. The finished good’s cost of goods sold (COGS) comprises its packing and the effort required to create it.
MRO Goods Inventory: Copy paper, files, printer ink, gloves, glass cleaner, and dusters for sweeping up the grounds are examples of maintenance, repair, and operating supplies for a residential property community.
Packing Materials Inventory: The primary packaging material for a seed company is a sealed bag containing, for instance, flax seeds. The secondary packaging involves putting the flax seed packets in a box for transit and storage. The bubble wrapping needed to transport stacks of product cases is known as tertiary packing.
What is Inventory Tracking?
What Is an Inventory Tracking System?
A supply chain management system’s inventory tracking system is a tool that helps you monitor your stock and manage inventory-related consistency. It continually monitors your stock levels and sends you an alert when they go below a certain threshold. When using an inventory tracking system, you can rest easy knowing that the platform will always display real-time inventory levels, preserve transparency, and accurately manage stocks. This way, you’ll have a better grasp on your inventory, and a sound inventory tracking system will drastically reduce the risks of miss-delivery or delivery delays.
On the other hand, inventory tracking is when you have constant inventory inspections and statistics—in other words, understanding your inventory levels in real-time and the accurate number of inventory, location, warehouse name, and other critical data. Furthermore, the inventory tracking system is the method, program, or system that allows this complete process. So, while we’ve talked about the inventory tracking system, it’s important to note that the phrases ‘inventory tracking’ and ‘inventory tracking system’ are not interchangeable.
What Can Inventory Tell You About a Business?
Tips for Managing Your Inventory
Consider purchasing inventory management software
Stay updated on the sales figures
Make use of the first-in, first-out (FIFO) method
“First in, first-out” is what FIFO stands for. Because the oldest inventory is the first to arrive, you should sell it out before the fresher supply is made available to customers. This e-commerce inventory control approach is especially critical for perishable goods’ businesses. You won’t be stuck with expired goods you can’t sell if you do it this way.
Even if your products aren’t perishable, allowing them to sit on the shelf for an extended period can cause them to become obsolete when fresher options become accessible. Another factor is that if your provider updates the packing of their items, the old stock becomes outdated, so it’s critical to sell the old inventory first.
Begin your research by acquiring credible information
Inventory managers optimize warehouse space, prices, and computing capabilities using data from numerous sources. Examples are supplier information, batch numbers, SKUs, picking rates, and other items. Keeping track of this data will help you build a valuable data store that will form the basis for your analytical strategy.
Inventory management software can assist you in accurately creating, tracking, and storing this data by integrating with UPC scanners and other RFID equipment to reduce manual data entry. Furthermore, simple-to-understand panels that show inventory control indicators and KPIs can be used to provide data and insights.
Use the last-in, first-out (LIFO) strategy, but sparingly
LIFO allows warehouses to protect themselves from escalating costs. Cars, for example, are susceptible to continuous price hikes. As a result, the most recent merchandise you purchased is always more expensive than earlier inventory.
You’ll make a smaller gain on these high-priced, last-in things if you sell them first, which implies you’ll be able to report a lower taxable income and reduce your tax liability. One of the few times where LIFO makes sense is in this situation. The United States is the only country that uses LIFO, although widely recognized accounting rules discourage it (GAAP).
Understand economic order quantity (EOQ inventory model)
The ideal amount for your organization to purchase to have just enough product on hand to meet client needs without keeping too many items in stock is the EOQ. You’ll need more of the valuable, slower-moving objects if you’re working with a fast-moving item and in contrast, fewer of the practical, slower-moving items if you’re working with a fast-moving thing.
However, speed, or how rapidly products move, isn’t the only factor. The EOQ fluctuates depending on how much it costs to make, transport, maintain and manage the item. You’ll be able to purchase fewer stock levels if you learn to adjust EOQ, lowering handling and storage expenses while increasing profit.
Learn about the difference between EOQ and MOQ (MOQ)
The appropriate quantity of merchandise to order is known as the EOQ. A supplier’s MOQ is the smallest number of items they will sell. For example, you might only be able to order a specific item in one-pallet or one-container quantities.
You may need to choose a new vendor or product if your MOQ is more significant than your EOQ, or you might have to accept a less-than-ideal condition. Your vendor ties may come into play, allowing you to create custom orders or lower the MOQ in various ways.
Examine your stock
Assessing your stock is the first step toward proper inventory management, and identifying stock levels is the first stride toward adequate control. You can do the audit yourself or employ someone to do it. A complete audit looks at additional performance parameters, such as your inventory turnover ratio and inventory expenses compared to past trends and a physical count of stock.
An inventory audit can help you identify areas where you can grow, such as receiving difficulties, and it can also help you keep track of shrinkage.
Maintain a consistent stock-receiving strategy
When it arrives, verify the number of palettes, cartons, and storage keeping units (SKU) in the stock, enter this data into a warehouse management system (WMS) and manually place the stock inside the facility.
The disparities between what your system claims you have and what you have on hand can be reduced if you do it the same way every time. And, by designating an SKU to track the quantity and position of your product, connecting your SKUs with your warehousing software solutions can be a crucial step in setting up your receiving operations for success.
Effective inventory management begins with accurate and dependable intake procedures to have merchandise on hand to fulfill consumer demand.
Order restocks yourself
Instead of letting suppliers handle your reorders, take charge of them yourself. You’ll be able to keep a closer watch on consumer demands and estimate future purchases. Furthermore, inventory management software can help set automatic reorders and provide current sales history.
While it may seem like extra work, managing your orders may save you time, guarantee you have the items on hand to satisfy client demand and assist you in effectively managing your storage space by getting the right amount of product on your shelves.
Recognize the 80/20 rule when it comes to inventories
Maintain vendor and supplier relationships
Provide customer behavior insights
Use Dropshipping Inventory Management
Just in Time (JIT) inventory
Just-in-time, also known as JIT, is an inventory management method whereby labor, material, and goods (to be used in manufacturing) are refilled or scheduled to arrive exactly when needed in the manufacturing process.
JIT approach has the capacity, when adequately applied to the organization, to significantly improve the organisation’s competitiveness in the market by minimizing waste and improving production efficiency and product quality.
The main focus of JIT is to identify and correct the obstacles in the production process. It shows the hidden problems of inventory. The prime objective of JIT is to increase the inventory turnover and reduce the holding and all related costs.
A car factory, for example, uses a JIT system to function with basic minimum inventory levels due to a high dependence on the distribution chain to supply the parts needed to make cars. The components required in the production of automobiles do not come beforehand or when necessary; instead, they are required just when they are needed.
The manufacturer’s ability to deploy JIT depends on how it controls its vendors. They are under tremendous pressure since the material supplier must be ready with plenty of high-quality material whenever the need arises.
The specifics of how organizations deploy JIT in particular environments may differ, but the essential steps remain the same, which are stated below:
Just-in-time inventory control cuts waste boosts working capital, increases adaptability, maximizes personnel, and promotes team engagement.
Surplus Inventory and Deadstock
When a company’s inventory has a surplus of what is required, it’s called surplus inventory. It can either be for product design or an abundance of goods for its own defined limit. While some company executives may view an excess inventory as a positive, those selling items with expiration dates may consider it a downside, as the excess will go to waste if not sold in time.
The inventory that merchants and e-commerce sellers fail to sell — inventory that also has a low chance of selling in the future – is known as dead stock. Deadstock differs from returned goods in that it has never been sold to a consumer. Deadstock goods are usually stored in warehouses or the storage of a physical location.
Deadstock is a more significant issue for e-commerce enterprises that don’t have reasonable inventory control or management in operation. Inventory management solutions or technology are considerably less likely to leave businesses with surplus inventory on their store shelves.
xDeadstock is also known as ‘obsolete stock, ‘dead inventory,” and ‘excess inventory/stock,’ among other terms.
What is an Inventory Management System?
An inventory management system (or inventory system) monitors your goods across the entire supply chain, from purchasing to production to end sales. It guides your approach to inventory management for your business.
Any venture that deals with stock needs a system to track and control it accurately. With no system in place, you’ll be operating on a fully ad-hoc basis — and it won’t take long for your business to become overstocked or understocked.
Inventory systems indicate how many components or ingredients you need to produce or assemble your final product. Without this insight, you may have excess stock, eroding your bottom line, or insufficient supply to meet customer demand.
While an inventory management system is a must have, deciding which one is entirely up to you. You can adopt countless methods, ranging from simple approaches to comprehensive solutions.
Perpetual Inventory Management Systems
A perpetual inventory system is an inventory control strategy that uses inventory management software that automates the process to track when merchandise is moved or acquired in real-time. Companies will record stock changes in a perpetual inventory program at the moment of the trade.
Whenever items are bought or sold, a perpetual inventory system records inventory counts regularly. This inventory method is more precise and efficient than a periodic inventory system in inventory accounting.
Here's a step-by-step walkthrough of how this inventory system works.
Manual, Low-Tech Inventory Management
Inventory Management via Spreadsheet
Excel could be a fantastic option if you seek a low-cost tool to manage your inventory. Many of us are generally acquainted with the software, whether for bookkeeping or spreadsheet forms, and it’s a viable solution for inventory management apps. Excel can handle essential inventory management for small enterprises thanks to interactive tools, functions, and formulas that make spreadsheets more dynamic and engaging.
Like anything else that’s free or cheap, Excel isn’t perfect for managing inventory, but it has many valuable capabilities. While it is simple to make errors with Excel, it is entirely capable of handling the stock of a starting company.
Excel inventory management is an attractive option for smaller businesses that are just starting and wish to track their inventory. However, before using Excel spreadsheets, you must first become familiar with the program and learn how to arrange your inventories using categories sections and manual product input.
These steps will help you manage your inventory using Excel:
Make an Excel spreadsheet
Add any appropriate product categories in columns
Fill out the spreadsheet with each item you sell
As sales roll in, adjust the quantities
Keeping track of your inventory counts is critical, as neglecting to do so can
lead to delays in your distribution chain and various inventory problems.
Keeping track of your inventory counts is critical, as neglecting to do so can lead to delays in your distribution chain and various inventory problems.
Dedicated Inventory Management Software
Many modern businesses rely on inventory management. They operate solely to assist merchants in organizing their supply chains. Firms can use the solutions to develop more complicated, nuanced inventory management systems.
Dedicated inventory control solutions are available in a variety of sizes and configurations. Many are now cloud-based, making them simple to set up and grow as needed.
Among the most notable benefits of a dedicated inventory management software are:
- Stock levels are constantly updated
- Low stock alerts are sent automatically
- Businesses can use barcodes or lot numbers to track assets
- Record-keeping accuracy
Why You Need an Inventory Management System
Now, let's consider why an inventory management system is critical to a growing or reputable business:
Keep your expenses under control
Enhance your delivery
Manage your forecasts and planning
Inventory management is possible in a fraction of the time
Increasing supply chain efficiency
Retailers and e-commerce enterprises can implement distribution network diversification more effectively with an inventory management system. When it concerns the distribution chain, unexpected obstacles are expected. If you have more providers, you lessen the chance of long product wait periods if one of them fails to deliver on schedule.
You can plan ahead of time for a specific period, such as peak season, to purchase the correct inventory quantity from a supplier and avoid problems.
Inventory turnover rate is high, which means more revenue
A company’s income can increase through efficient inventory management and control. A business can use inventory planning to bridge the gap between increasing revenues and lower costs. If a company neglects the benefits of inventory control in its industry, marketing, and manufacturing, it may be difficult to maximize its operational efficiency.
The cost of procurement and inventory manufacturing significantly impacts gross profit. A company’s gross profit can be improved by lowering its production costs. As a result, an appropriate inventory strategy is critical. And, with all circumstances equal, such a corporation would report more revenues, leading to higher profitability, demonstrating the necessity of inventory management.
An inventory control strategy facilitates purchase Economies
Inventory planning and monitoring are essential for reducing procurement economies and ensuring product consistency. This strategy ensures that smooth flows of raw resources are maintained.
Purchase Economies are also facilitated by swiftly selling all slow-moving commodities and maintaining the appropriate stock levels. As a result, there are no shortages throughout the manufacturing process — inventory management benefits help reduce the chances of losses to disuse or degrade items, emphasizing the necessity of inventory management. Objects are regularly checked based on these factors.
Features Your Inventory Management System Must Have
Centralized inventory management
A notable feature of an inventory control system is keeping track of all inventory details. An inventory management system accurately records inventory quantities, product history, and other product attributes.
Among the best attributes of inventory management software is that it integrates with other inventory system modules. Excellent centralized inventory management aids in accurately functioning the inventory management system.
A centralized inventory management system boosts the team’s productivity and communication. As a result, team members from various locations can communicate and collaborate.
Tagging and Barcoding inventory system
Reducing common human errors is another fantastic advantage of the inventory system. Manual data entry is prone to error, but reading the barcode saves workers time. Worker training exercises and budget value are reduced thanks to the barcoding feature. In the past, recording product data required a great deal of time and effort. The inventory control system’s barcoding and tagging functionalities have made it more accessible. Now the most time-consuming tasks are handled in the shortest possible time.
As a result, inventory management system technology allows you to track things efficiently using tagging and barcoding.
Reporting on the company's operations
Forecasting inventory levels
Notifications about inventory details
Inventory backup and protection
Cloud data software and the Internet of Things (IoT)
Inventory management software is cloud-based and accessible from a variety of devices. In addition, inventory management system technology is IoT-driven, making it easier to effectively and smartly capture all of the inventory’s data.
The Internet of Things (IoT) helps to keep inventories coordinated and streamlined. All of the company’s employees can obtain real-time updates.
Ease of integration with other systems
Product's demand and supply
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Frequently Asked Questions
The four main inventory types are WIP, components/raw materials, Maintenance, Repair, and Operations (MRO) Goods, and finished goods.
On the other hand, ‘sales’ refers to exchanging something of worth for an offering.