What is inventory management and its advantages?

Inventory management is the method with which the company can keep track of a company’s stocked goods and monitoring their weight, dimensions, amounts, and location.  The primary objective of inventory management is to give the business owners a pointer to minimize the cost of holding inventory and also to let them know when it’s time to replenish products. It can also be a good management system to know when a business needs to or buy more materials.

Why inventory management is important?

An effective inventory management ensures a business has enough stock on hand to meet customer demand. An improper/unplanned inventory management can lead to business either losing money on potential sales that can’t be filled, or wasting money by stocking too much inventory. There are a host of other glaring faults which can be kept in check with an efficient inventory management.

Advantages of inventory management:

1. Avoid spoilage

Certain items for consumption like foods, beverages, and even make up products have an expiry date. Thus there is a chance of these things getting spoiled if not used on time. With an efficient inventory management, the unnecessary spoilage can be stopped.

2. Avoid dead stock

Dead stock basically means the stock of goods that are not essentially running out of stock but could have gone out of season, out of style, or otherwise become irrelevant. If you manage the inventory in a timely manner, you can avoid dead stock.

3. Save on storage costs

Warehousing is often a variable cost. That is to say that there is a fluctuation of rates based on the quantity of products you’re storing. If a business stocks more goods than required at once or end up end up with a product that’s difficult to sell, the storage costs will go up.

4. Inventory management improves cash flow

Not only good inventory management is more cost-efficient, it also improves cash flow in one way or the other. All the products that you already paid for is like an investment but what sits for too long in your inventory is definitely not something which is profitable unless sold. Rather it is just a pile up.

A good inventory management factors cash flow management. This is the case because the inventory directly affects sales (by dictating how much you can sell) and expenses (by dictating what you have to buy), and both of these elements determine as to how much cash you have on hand. In other words, a better inventory management leads to better cash flow management.

Essential inventory management techniques

1. Set par levels

 Par levels mean that a minimum amount of product that must be at hand at all times. When the inventory stock dips below the predetermined levels, this gives an indication to buy more.

 Par levels can be factored based on the time needed to sell a product and how long it takes to get them back in stock. This process involves lots of decision making and research so a systematic strategy is put in place before ordering. This enables in quick decision making.

2. First-In First-Out (FIFO)

Perhaps the most important factor to look into is the first-in first-out for inventory management. What this means is that the oldest stock is dealt with first instead of the newer ones. Ensuring FIFO means the perishable products don’t end up getting spoiled.

FIFO is also a good practice for non-perishable products. If the products continue to sit for long, they too would eventually wear out. There are also some changes in the packaging which might change the design and feature of the products. Products can also get obsolete if they are not sold. In order to manage a FIFO system, you’ll need an organized inventory management service.

3. Manage relationships

Quick adaptability is the key to managing relationships. Strong relationships can ward off the troubles in regards to returning a slow selling item to make room for a new product, restock a fast selling product very quickly, and troubleshoot manufacturing issues. If you are adept in managing relationships, it can also be beneficial in the expansion of storage space. A better relationship management goes a long way. In fact, it can also bring the results for instances when a minimum order quantity of has to be negotiated with.

4. Regular auditing

It goes without saying that regular reconciliation is vital, and in the current times, the use and reliance on software is prevalent. With the help of software, the warehouse stock can be tracked easily. That being said, the facts must match up at the same time. However, it’s important to make sure the facts match up. There are several methods for doing physical inventory, spot checking and cycle checking.

This content is meant for information only and should not be considered as an advice or legal  opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.

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