What is Inventory Management (& How Do You Do It)? The Ultimate Guide

Inventory management is the way you manage and control the products that you sell, buy and store in your business – as well as any components you might use to make things.

It’s super important for any business that sells physical products to get good at inventory management – and that’s down to how much those products cost.

Because chances are the biggest cash outlay in your business is on your actual physical stock. And it's not just the cost of buying it – it's the cost of storing it too, as well as things like transport and insurance, plus the risk that it could go to waste.

Stock wastage is a particularly big issue in inventory management.

If you deal in perishable goods – like food and beverages – or just products that have a limited shelf life or go out of fashion – like medicines, cosmetics, toys or clothing – then you need a laser focus on inventory management. Otherwise you’ll end up spending money on goods you never sell.

Ultimately, whatever the size of your business or the products you deal in, if you can manage your inventory well – keeping your stock levels lean and avoiding waste – you’ll free up cashflow to power other parts of your business, and be much more profitable.

What's the difference between inventory & stock?

A couple of terms that it's useful to keep in mind as we learn about inventory management:

stock means actual finished goods that you sell, while inventory covers everything – your finished goods, plus the components or ingredients you might use to make them. That includes things like packaging – as well as what’s called MRO (or maintenance, repair and operations inventory): that's the goods that keep your business running - things like machinery parts & cleaning products.

Different types of inventory

Other types of inventory it’s good to understand include

Raw materials – If you’re a manufacturer, then these are the things you use to make your finished goods

Work-in-progress inventory: Any inventory that’s part-way through the manufacturing process

And probably the most important type of inventory to get a handle on: Safety stock

Safety stock & stock outs

Safety stock is basically your buffer. It’s the inventory you keep on hand to avoid what we call a “stock out”. Which is where you run out of something you want to sell – or of something you need to make a finished product.

Stock outs are bad because they cause delays. And delays really undermine your customer relationships - and can even cost you a sale. In eCommerce especially, people will often move on to your competitors if they can’t get what they want right away.

Stock outs are even worse for manufacturers though, because when you have an unplanned stock out it can mean stopping an entire production run until you can get more parts or ingredients.

Imagine a factory where the workers suddenly have nothing to do, but you still have to pay them. Or a brewery that runs out of bottles just when some lager needs to leave the vats.

So good inventory management means not running out stock.

But it ALSO means not having too much stock. Because as we said earlier, that ties up too much money – and can lead to waste.

It’s a real balancing act – and setting the right safety stock levels is one way of getting that balance right.

While another way is using Reorder Points.

What is a reorder point?

A reorder point is simply the point at which you need to buy more stock.

So let’s say you set a reorder point of 150 for a line of mobile phones you sell. Once your stock drops to 150, that’s when you need to buy more, so you don’t run out.

Each stock item has a different reorder point, and there are three things that go into working them out:

How many of each item you sell in a day

How many days it takes for new stock to reach you once it’s ordered

And how much of a safety stock buffer you’ve set

So as you can see, a fast-selling item that comes from far away – and takes a long time to arrive once you order it - will need a high reorder point

While on the other hand a slow-moving item that can be delivered to you in just a couple of days, will have a reorder point that’s much lower.

You can go into all the details of reorder points and safety stock on our website – there’s a free calculator for working them out right here. For now though, let’s look at how you put them into action – and that’s where inventory management systems come in to play.

For more about inventory management, check out http://www.unleashedsoftware.com
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