What is inventory management?

Inventory management refers to the processes a business puts in place in order to organise and control the ordering, tracking and storing of their stock. This can include everything from the ordering of raw materials or finished products and automated stock-check methods to keep this stock replenished, to the organisation of storing or warehousing this inventory. 

Well-implemented inventory management will govern the entire flow of goods, from the point a business purchases them right through to the point of sale. Ideally, this process should ensure that your business always has the right quantities of all items/products needed in the correct location and at the right time. 

However, in order to successfully utilise inventory management, it is important that you fully understand the basics. Read on to learn about the importance of procurement management, the specifics of how inventory management works in practice, and the crucial ‘four questions’ of inventory management you always need to remember.

What is procurement and inventory management?

While inventory management is an umbrella term that covers everything from ordering materials and other items of stock, to cataloging them in a business’ central logging system and physically finding a space to store them, procurement refers specifically to one part of this process. Put simply, procurement is the acquisition of the right quantity and quality of goods, stock and/or services your business needs, achieved at the best possible cost, at the correct time and place to directly benefit your business. 

The key to successfully navigating this aspect of supply chain management includes identifying the right suppliers to meet your stock needs, establishing good relationships with these suppliers and achieving the best possible price when purchasing the inventory you need from them. Keeping track of what your business currently has in stock and knowing what you need to buy and when is also key. In today’s modern marketplace, medium-to-large businesses will typically use some kind of inventory management software to help them properly organise and manage their inventory procurement needs.

How inventory management works

No matter how large or small, all businesses should use some kind of inventory management system in place. There are two kinds of inventory systems, periodic and perpetual. Periodic inventory management systems are typically used by smaller, independent retailers and sole traders, and require little technology. Under this system, a business will only carry out a full stock take periodically and list what stock they currently have. They will then use this figure to update a balance sheet manually. These stock checks usually happen only once or twice a year, or, if the business is particularly busy during a certain season – for example, Christmas, Valentines’ Day, or the summer. If this is the case, inventory checks can be taken on an ad hoc basis, as and when the owner feels one is required. From the resulting figures, the business can work out the cost of goods sold (COGS), as well as being able to more accurately decide what needs to be ordered in order to replenish stock.

As the name suggests, perpetual inventory management systems are in operation all year round and tend to be far more sophisticated methods of stock control. Typically used by larger businesses, the inventory count is updated constantly with the help of technology. Online trackers or the electronic cash registers (ECRs), for example, use barcodes to automatically record a sale, and inventory management software will update the business’ records to show that one less of the specific item purchased is available for sale. In turn, this will alert the business owner, or a procurement team, if the business is now running low on that item and if more need to be ordered. Automatic procurement can also be set up, meaning an item can be re-ordered as soon as the number of items in stock hits a certain level. As well as making the inventory and procurement management processes much simpler, automated perpetual inventory management systems can also update the business’ revenue tracker and balance sheets automatically, meaning that keeping your books in order is also much easier.

Why is inventory management important?

Properly implemented inventory management not only allows your business to keep track of its stock and help you decide when it’s time to replenish supplies of a certain goods, it actively saves your business money and helps to ensure you can keep your customers satisfied. The processes involved in successful inventory management allow you to make strong business decisions and the right purchasing decisions. It can also ensure you receive the real-time information you need about which products sell well and which don’t. This allows you to order more of what you know to be a good seller and cut back on the items not performing well, leading to maximised profits.

Additionally, inventory management can prevent you from tying up too much money in stock, which can create cash flow problems and even solvency issues. On the other side of the coin,  not spending enough on stock can hurt your customer service if you are unable to deliver the products/services you have promised due to inadequate stock levels. Finding the perfect middleground is far easier with proper inventory management.

What are the four questions of inventory management?

When it comes to what you need to remember in order to properly implement a successful inventory management system, there are four questions you should always be asking yourself. These are especially important if you are not using inventory management software to help you automate the process. The four questions are: 

What to order?

Knowing which goods/products your stockroom/warehouse is running low on, and whether or not this product is selling well-enough to order more is vital. It’s a fine balance – buying too many could leave too much revenue tied up in stock you can’t shift, however, not having enough to satisfy customer demand can damage your business’ reputation.

When to order?

To answer this question, it’s important to take into account how many specific items you still have left in stock, how quickly they are selling and how long a new supply will take to arrive. 

How much to order?

Once again, deciding on quantities is a fine balance between satisfying customer demand and ordering too much of a certain product. Remember, not only is business money tied up in stock you can’t sell, correctly storing the items could be an additional expense. Seasonal sales could be a key factor when answering this question. 

Where is the customer / where to stock it?

This is important if you have a number of retail outlets/platforms. If the target market for a specific item is located in a specific area, ensuring the inventory is managed with this in mind is key. For example, if you run a sports equipment company with shops located all over the country, you may stock surfboards that are a high-demand product in seaside locations during the summer. With this information at hand, inventory management can prevent you from mistakenly stockpiling surfboards in stores that are not located near the sea.