What is Inventory Management? How Does it Work?

Businesses always want to be able to process inventory quickly to limit costs and save labor. But managing inventory effectively is not easy. This is a problem for any manager. Because in the process of inventory management, you will always have to update modern management software and machines with many features to shorten time and improve labor productivity. 

The article will be the most overview picture of inventory management. It will help you gain more knowledge and answer questions that most people ask.

What is inventory management?

Inventory management is a system whereby stock and assets are tracked as the entering and leave a destination whether it be a warehouse wholesaler or final. Point-of-sale stock review is the easiest method to perform and it is most appropriate for small businesses. The advantage is its simplicity. The disadvantages are that it's a time-consuming process and it's highly dependent on the skill and know-how of the person conducting the inventory.

Important of inventory management as:

• Inventories allow for a smooth flow of production process by ensuring the adequate supply of raw materials are available to production lines.
• Inventories serve as buffers against uncertain usage.
• Reduces stock-out situations.
• Inventories represent resources acquired at a cost, thereby locking up substantial working capital.

How does Inventory Management Work?

Tracking Inventory Levels

Tracking inventory levels is a crucial aspect of managing a successful business. With accurate and efficient inventory tracking, businesses can ensure that they always have the right amount of stock on hand to meet customer demand and avoid costly stockouts or overstock situations.
Implementing an effective inventory tracking system allows businesses to monitor their inventory levels in real-time, ensuring that they have visibility into what products are in stock, what products are running low, and when it's time to reorder. This not only helps streamline operations but also improves customer satisfaction by minimizing delays and ensuring timely fulfillment of orders.

Setting Optimal Inventory Levels

Setting optimal inventory levels involves determining the right amount of inventory to maintain in order to meet customer demand while minimizing holding costs. Businesses aim to have enough inventory on hand to meet demand without overstocking. To achieve this, they set:

• Reorder points (ROP) - when to reorder stock
• Economic order quantity (EOQ) - optimal order size that minimizes total ordering and holding costs

Other considerations include lead times, safety stock buffers, seasonality, and trends. Inventory optimization models can help determine ideal stock levels.

Placing and Receiving Orders

Placing and receiving orders are integral components of the procurement and inventory management processes in businesses. Purchase orders need to be placed with suppliers to replenish stock. A receiving process should validate shipments against orders before stock is added to inventory.

Costing Inventory

Costing inventory involves assigning and tracking the costs associated with the goods that a business holds in its inventory

There are various methods for costing inventory, and the choice of method can influence how a company reports its financial performance. Here are some common inventory costing methods:

• First in, first out (FIFO)
• Last in, first out (LIFO)
• Weighted average cost
• Specific Identification

Reporting

Reporting in inventory management involves the generation and analysis of various reports that provide insights into the status, movement, and valuation of a company's inventory. These reports are essential for making informed business decisions, optimizing stock levels, and ensuring efficient supply chain management.

Key inventory management reports might include:

• Inventory valuation - value of inventory by product, location, etc.
• Stock levels - what products need to be reordered
• Age analysis - avoid obsolete items

Proper inventory management provides visibility and control to optimize overall working capital for a business.

Objective of inventory management

Inventory is always stored for business use under certain circumstances. Although there is always a tendency to want to sell out of stock and not want to have inventory for a long time, they still have to keep a certain amount of inventory for the following purpose:

• Purchasing material at an economical price, at the proper time and in sufficient quantities
• Providing a suitable and secure storage location
• To ensure timely availability of material
• Maintenance of raw materials and component parts in sufficient quantity to meet the demand of production
• A definite inventory identification system
• Suitable requisition procedure

Type of inventory management

In general, there are several types of inventory management as:

• Production inventories
• MRO (Maintenance, Repair and Operating Supplies) inventories
• In-Process inventories
• Finished goods inventories
• Cycle inventory
• Safety stock inventory
• Anticipation inventory
• Pipe-Line inventory
• Fluctuation inventory

Some types of the inventory we can categorize inventory as raw materials, work in progress and finished goods.

• Raw materials are unprocessed materials used to produce a good. Examples of raw materials include aluminum and steel for manufacturing cars.
• Work in progress inventory is the partially finished materials and components that have begun their transformation into finished goods. Half assembled car is an example of work-in-progress inventory.
• Finished goods are products that have completed production and are ready for sale to customers.

What are the reasons for keeping inventory?

• The time lags present in the supply chain from supplier to user at every stage require that you keep certain amounts of inventory to use in this lead time.
• Demands vary periodically but the manufacturer's capacity is fixed. This can lead to stock accumulation so that goods are available during high demand.
• In some cases, some stock gains the required value when it's stored for some time to allow it to reach the desired standard for consumption.

4 mistakes in inventory management

There are 4 mistakes when managing inventory that, if you don't pay attention, you can lose hundreds of millions of your business.

No periodic inventory

If you do not regularly schedule inventory and do not have periodic inventory reports, this will lead to serious consequences. Typically, when a business needs a number of goods to supply to a partner, it will not have enough supply or do not know all the expired items. At this point, the business will have to cancel that shipment. This will cost your company a great deal of money.

Unable to determine the minimum amount of goods in stock

While the minimum amount of inventory cannot be determined, a business may hold more than required or less than it needs. If storing a number of goods in the warehouse but the enterprise does not have the norm, when customers or sales staff need a large number of goods to export according to market requirements, the company will not have enough goods to supply them. This will lead to your business losing credibility with partners and losing sales opportunities for the sales team.

Unscientific arrangement of goods

Items that are frequently needed by businesses, if not arranged properly, will take a long time in the process of exporting. Typically, if you leave the goods inside, it takes a lot of manpower to move inside when needed. Such arrangements of goods will take time to pick up and unload. In addition, it can cause the goods to be crushed, the goods are dented or damaged unsatisfactorily. In the end, the business has to take it out and destroy it, which costs money.

Outdated Inventory Management Tool

If the management software or warehouse machinery is not upgraded, it can pose great risks to the goods in our warehouse. Therefore, it is necessary to update regularly to upgrade the warehouse management tool for your business. This will help you optimize the company's time and money. 

👉 Read More: Top 20 Inventory Management Software (Free And Paid)

Experience choosing inventory management software

In fact, you will have to face many problems in the process of managing the warehouse of your business as: Typical secure excel file, easy to repair, difficult to expand, accounting software is relatively difficult to use, requires technical skills in accounting…. 

Therefore, there should be many people who are warehouse managers, warehouse accountants or business owners who are still having a headache: How to synchronize warehouse data or software data in files with each other?

For software warehouse management, there are two common types: accounting software and management software. Regarding software accounting, it will work according to accounting principles. 

So, it is necessary to have professional and experienced accountants to be able to check all transactions in warehouse management. That's why accounting software is for accountants. Left with managers who do not have much accounting skills, they often use sales management software or specialized warehouse management software to solve problems. 

In sales management software, it is one of the easiest to use because sales managers will often be interested in how many businesses sell, how much revenue they have, rather than the sales. enterprise specialized profession.

How much does an inventory manager make?

Inventory management is normally entrusted to an inventory manager. The inventory manager must have the following characteristics:

1. Planners must know how to manage the purchase and production of materials in different parts of the world. The goal is the right inventory at the right time.
2. Coordinators in many departments are involved in inventory management purchasing, logistics… The inventory manager must coordinate all departments
3. The inventory manager must maintain the right level of inventory which can satisfy the customer's request. But to reduce inventory costs often these two indicators are conflicting.

In Vietnam, an inventory manager has a salary of 9-10 million VND depending on the workload, working location, and the size of the warehouse. The current warehouse manager has a salary of 10-15 million depending on the workload, the size of the warehouse, the industry, the commodity segment, the business or the location. 

In the US, an inventory manager can achieve a salary of up to 10,0000 USD. 

Conclusion

The key to inventory management is finding the right inventory range to balance customer satisfaction and business costs. You need to have enough inventory but not too much. The inventory manager must be focused on defining the right inventory level and constantly checking it. To meet customer demand and its fluctuations, you should keep a level of extra inventory. On the other hand, the money spent on maintaining this extra inventory represents an additional cost.