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The Basics of Inventory Management

Inventory management is an integral part of any successful business, serving to provide uninterrupted production, sales and/or customer service at a minimum cost.

Inventories usually consist of goods, raw materials and finished products. Since each of these elements is essentially equal to money for the business owner, effective management of these assets is key to making a profit and having optimum stock of items in your inventory.

An inventory management system tracks the sale, purchase and payments related to these elements of inventory. Ineffective inventory management can contribute to losses or business failure, since this crucial component is so vital to the profits and costs of the business.

Inventory management can be highly complex. This guide will provide you with a thorough knowledge of inventory management, including elements of an effective inventory management system, different tracking systems and other terms and procedures you need to know.

What Is Inventory Management?

Inventory management consists of many factors. Your business will use inventory management to replenish stock, track costs of inventory, track profits, forecast inventory, forecast prices, forecast demand and more.

The process involves finding a system to track orders, shipping, costs, stock and sales. It also involves the software that may be used to predict inventory status and track materials.

All of these factors will help keep costs in check, maintain a proper merchandise assortment, set targets and monitor profits efficiently. Inventory is one of your most valuable assets as a business owner, and an adequate inventory management system will help you track those assets and prepare them optimally.

Elements of an Inventory Management System

An effective inventory management system consists of a few basic elements. Most importantly, it is vital to be clear and descriptive of storage locations, items and inventory numbers. Ambiguous or unclear descriptions will be extremely difficult to manage later on.

Suggested primary elements are:

  • A list of purposes and objectives for the inventory tracking system.
  • A purchase plan to acquire necessary items for inventory management, to ensure neither too much nor too little is purchased.
  • Clear and easy-to-understand storage locations and tags for these locations. These locations can be within your facility or at other accessible storage locations.
  • Inventory labels that are easy to read.
  • Unique and short item numbers for each item.
  • Item descriptions that are well-defined and clear.
  • Units of measure for how you will quantify your inventory (per box, per product piece, per 100 pieces, etc.).
  • A starting count of your inventory stock.
  • Software that tracks inventory activity. Inventory management software (see a list of options below) helps create invoices, purchase orders, printing, payment receipts and more. The software should ideally be usable by multiple people who track and work with the inventory. If your business operates in the cloud or in multiple locations, you should strongly consider a cloud-friendly inventory management system for ease of use.
  • Policies and a plan surrounding all inventory management procedures.

Terms and Procedures to Know

  • Stock Keeping Unit (SKU): The unique combination of all of the components that are assembled into the finished product, which is considered a single SKU. An SKU can also refer to the alpha-numeric identifier of distinct stock items. Any change in packaging or product results in a new SKU.
  • Stockout: Running out of the inventory of an SKU.
  • New Old Stock (NOS): Merchandise that is being offered for sale that was manufactured long ago but has never been used.
  • Buffer/safety stock: Stock kept of items to ensure that the product does not run out.
  • Anticipation stock: Building up extra stock for periods of increased demand.
  • Reorder level: The level of stock that is required to call for a reorder of goods.
  • Pipeline stock: Goods still in transit or in the process of being distributed.
  • Distressed inventory: Expired stock, or inventory where the potential to be sold at a normal cost has passed or will soon pass.
  • Stock rotation: Changing the way inventory is displayed on a regular basis.
  • Inventory credit: The use of stock as collateral to raise finance.

Different Inventory Tracking Systems and Strategies

Many inventory tracking software systems exist, and finding the right one for your needs may require a little research. Some recommended tracking systems and software are:

  • POS Maid: Free software program (POS stands for “point of sale”) which is very helpful for small retail businesses. The program makes it easy to fill in inventory, manage customers and employees, generate financial reports and more.
  • InFlow: This program allows users to view their entire inventory by location and category. InFlow allows you to share reports and build item kits.
  • Fishbowl Inventory: As an add-on for QuickBooks, this software can be an easy addition to your current system. The software prides itself on being speedy and accurate, with easy reordering and receiving processes.
  • ABC Inventory Software: Another free system, ABC Inventory has multiple features, including barcode tracking, sale and shipping order management, appointment scheduling, sale quotations, unlimited database record and more.

Inventory tracking systems track inventory in numerous ways:

  • By barcode or serial numbers
  • By radio-frequency identification (RFID)
  • Through wireless tracking technology

Strategies for stocking inventory:

  • The “Just-in-Time” Method: Plan to receive stock as it is needed instead of maintaining a high inventory.
  • Materials Requirement Planning: Schedule material deliveries based on projected requirements and sales forecasts (more practical for larger operations).

Well-managed inventory is important because businesses rely heavily on these items to make a profit. Even if you don’t need an inventory tracking system now, it may become critical as your business grows. Without a carefully balanced and managed inventory system, your business could suffer from a lack of organization and may lose revenue as a result.