Inventory management principles

Basic Inventory management principles

  Touseef Riaz

Posted on: 25 Mar 2022

Inventory management principles

Major Inventory management principles

An inventory management program is a system utilized by the company to manage inventory ordering, storage, use, and sale. It includes managing raw materials, intermediate products, and finished products of various types, as well as the storage and processing of such goods. Since the Covid-19 pandemic has heightened interest in the eCommerce business, many eCommerce giants like Amazon, Walmart, and eBay are placing a high importance on inventory management. 

That is why we are writing this to help new sellers understand what inventory management is and what are essential principles of inventory management. Along with what are good practices of managing your inventory. 

An understanding of inventory management

The core of a corporation's business is its inputs as well as its finished products. One of a company's most valuable assets is its inventory. This is especially true in retail, manufacturing, and food services. Inventory shortages can be extremely detrimental when and where they are required.

Furthermore, inventory is often considered to be a liability (even if it isn't in the strict sense of accounting). In order to deal with large inventories, you need to ensure that no items will be spoiled, stolen, damaged, or shifted out of demand. In the event of a catastrophe, insurance coverage is crucial, and if inventory is not sold within a timely fashion, it may be necessary to sell it at clearance prices or simply destroy the inventory.

The management of inventories is vital to businesses of all sizes for these reasons. In order to successfully manage stock levels, purchase amounts, production quantities, as well as when to sell and at what price, it is important to have a clear understanding of the timing and costs. Small companies typically maintain stock records manually and use spreadsheet formulas to calculate reorder points and quantities. Typically, larger organizations will use enterprise resource planning (ERP) software that will be more suited to their needs. Many of the largest corporations use the software as a service (SaaS) application.

 

5 Basic inventory management principles

  • Forecasting of demand

The cost of inventory can rank among the top five expenses for a business, depending on the industry. Inventory management principles offer the highest potential for savings when it comes to accurate demand forecasting. Inventory oversupply and undersupply can have a significant impact on business costs. A more accurate forecast depends on whether to stock end items or to source raw components.

Making sure you have safe stock levels and setting max-mins for each item in your inventory, based on lead times, is essential to ensuring you have what you need when you need it. By doing so, you avoid costly overstocks, handling idle inventory, and loss of storage space for fast-moving inventory increase incremental costs.

  • The Flow of warehouse materials

Warehouses are outdated and expensive when they are disorganized and dirty. The principles of lean manufacturing, including 5S, have made their way into warehouse operations. It is crucial to sort, set up an order, clean systemically, standardize, and maintain discipline so that there are no dollars lost due to poor processes.

Inventory management functions in much the same way as other industrial processes. When there is disorganization, money is wasted. For the purpose of ensuring consistently outstanding results, every process should be based on a formal, standardized process.

  • Turning of inventory/rotation of stocks

Managing inventory to the level of lot numbers is vital for minimizing costs in certain business sectors, such as pharmaceuticals, foodstuffs, and chemical warehousing. Among the key metrics used to evaluate the effectiveness of your inventory management program is the inventory turn rate.

Analyzing your demand forecast and warehouse flow requires defining the success level for stock rotation.

  • Counting the number of cycles

In order to maintain accurate inventory, cycle counting is a critical component. In addition, this will allow you to measure the success of your current processes and ensure that your processes are accountable for potential sources of error. Cycle counting is not without its financial implications. Some industries mandate periodic 100% validations. These usually occur when the inventory itself is counted perpetually or the entire building.

  • Process Auditing

Early and frequent auditing is one of the cornerstone principles in inventory management. Process audits are the first step toward identifying error sources. From receipt to shipping and each inventory transaction in between, an audit of the process should be conducted at each step.

You can improve business efficiency and lower costs by carefully observing each of these key core principles.
 

5 inventory management principles concepts and techniques

A successful business relies on the proper management of its inventory. Inadequate inventory planning will hinder your ability to grow and expand your business. Having overstocked inventory will negatively impact sales, cash flow, and profits. Let us take a look at 5 inventory practices that can help you prevent such disastrous outcomes. 

  • Data

A proper inventory management decision cannot be made without the correct data. In order to accomplish this objective, you should be tracking your inventory and sales data. You will need to collect the following information:

  • During what period were the units sold?
  • What is the comparison between sales last month and last year?
  • What is the current state of sales velocity?
  • Are the product's margins too slim or non-existent, or was it profitable?
  • Is there a product that is running low on inventory, and what products are overstocked and need removal?

Make sure you do not get so caught up in restocking that you overlook inventory that is not moving, as acting swiftly will give you more potential options for clearing out stuck inventory.

  • Trends​​​​​​​

You will also need to provide some context in addition to the numbers. For instance, what are the current trends within the industry? What are your expectations regarding the future of the industry? Is there a plan to add more products to your product line, and how will that affect the sale of current products? What marketing or promotional events are taking place in the near future? Which marketing or promotional events are your competitors holding? Depending on the type of product sold, the weather, politics, sports, etc. You can better manage your inventory when you understand sales factors.

  • Timing

Keep in mind that the timing is very important. It is important that you anticipate the length of time it will take you to manufacture and ship your product. In order to avoid stockouts, it is essential to know how much lead time each order requires. When you realize you have two weeks' worth of product left and it will take two months for the restocking order to arrive, it is a terribly frustrating experience.

  • Tools

Considering all of the information at hand, what is the most efficient method of storing it? Starting out with a simple spreadsheet or pencil and paper may be fine, but as your inventory management grows, so does your number of products and suppliers.

At some point, an automated system will be needed to carry out complex and simple calculations. You should consider your long and short-term goals when deciding which kind of system to use. Think about the future before investing time and money into implementing an inventory system. You may find that what works for you today may not work for you next year.

  • Put your brain to work.

Please remember to put your data into context when using software or automated systems. Automated systems or software should not make all of your decisions on your behalf. You should review recommendations and make changes as necessary.

Your input is also crucial in order to make the recommendations as valid as they can be. You should check your data if you suspect something is amiss, such as cost, lead time, case pack versus unit cost, etc. Having incorrect inputs could cause serious problems.

 

Avoid these 5 inventory management mistakes.

The time has come to examine some common mistakes inventory managers make. Inventory management and mismanagement costs can increase significantly as a result of these mistakes. Knowing what the basic principles of inventory management are and the best practices to achieve these principles, you can implement them. 

  • Measurements of performance are not taken. 

In your organization, performance issues might already be a growing concern. Having no standard in place means that it will be hard to fix problems -- whether it is customer service, inventory turns, or the efficiency of warehouse operations. 

The two metrics listed above are two that your product manager should be aware of all the time. It would be good to start by mandating the tracking of fill rates and inventory turns for each product. The fill rate should be monitored constantly every day.

Nevertheless, the frequency of inventory-turn measurement depends on your company's sales cycle and production cycle. Managers should track as well as enhance these rates regardless of what they deem to be most appropriate for their operations.

  • Employees are not competent to manage inventory.

Having accurate inventory management is dependent upon having workers you can rely on to do the job correctly. Nobody has time to stop operations for any reason, let alone train them. Consider the following solutions when you implement a new inventory control system to avoid frustrations.
 

  • Make sure the right people are hired. In an inventory shortage, your organization may lose hundreds of thousands of dollars. Isn't it more appropriate to hire professionals or people who are competent in handling inventory in the first place?
  • Make inventory managers responsible. Are you aware of who is responsible for managing your warehouse's inventory? A trusted individual (or individuals) who are fully aware of and supportive of your strategic goals is essential. Your company may never achieve its goals if that is not the case.
  • From the beginning, emphasize training. The vendors who provide inventory management products and services often offer their employees on-site training. Take advantage of this opportunity.

 

  • Insufficient forecasting

Business owners need to ensure that they can fulfill customer orders while not tying up valuable cash in unnecessary inventories with accurate forecasting. If you do not develop a proactive plan for the future, your company will not be able to meet today's rapidly evolving market demands. Even seemingly important aspects, such as the number of stocks in your possession at any given moment, maybe unknown to you, but you will be unable to meet your employees' needs, and if the customers cannot be satisfied, they will seek alternative service providers.

As soon as you download your report, you'll know what's in stock or what's trending with your inventory management system.

  • There is no automated system in place for you.

You lose time and money sifting through paper and fixing errors one by one if you are currently using Excel or another manual process to track your stock. Errors are bound to occur. It is not feasible to work with Excel and other manual processes in real-time, and it is not desirable to have multiple users working with it at the same time.

In contrast, an automated system enables multiple employees of the company to monitor orders and shipments across multiple locations at the same time.

  • Inventory counts do not occur in reality.

Does your warehouse stop operations for days for physical inventories and to ensure the data in your software matches the data gathered physically? Stopping operations for days for such purposes is absolutely unnecessary, expensive, and outdated.

Rather than checking inventory levels in several sections at once, check only one section each day. Accurate data can be retrieved easily using barcode inventory management systems.

 

  • Conclusion

A company's ability to manage inventory properly can make or break it. Understanding the status of your inventory at any given time is essential to success. This means that you have read the article and gained a thorough understanding of the definition of inventory management and an understanding of inventory management principles, concepts, and techniques. 

An organization's inventory is its foundation, whether a physical store or an online shop. In light of this, it is important to pay special attention to it, no matter how busy you may be.