What Is Inventory Management? Benefits, Challenges, and Methods

Whether you’re interested in pursuing this career path or have your own business, inventory management is important for today’s companies. In this article, learn more about inventory management, why it’s important, and the different careers in this field. 

What is inventory management?

Inventory management is the supervision of a company’s inventory, including the processes for producing, ordering, storing, and selling products in the market. This includes managing the warehousing and processing of raw materials, components, and finished products.

Effective inventory management keeps a company organized. It also provides critical data to help businesses respond to trends, avoid breakdowns in supply chain management, and maintain profitability. 

The importance of inventory management

Inventory management impacts production, warehouse costs, and order fulfillment. Having effective inventory management helps contain costs and ensure businesses have the correct amount of stock. It also cuts down on excess inventory.

Benefits of inventory management 

Efficient inventory management can streamline production and fulfillment processes for a business. Here are some benefits of an inventory management strategy:

• Lower costs and saves money

• Prevent overspending on warehouse storage

• Minimize storage needs

• Reduce losses to improve cash flow

• Forecast sales trends

• Satisfies customers with timely deliveries

Inventory management challenges

The main challenges in inventory management is keeping too much inventory that the company is unable to sell, lacking the inventory to fulfill orders that come in, and not tracking inventory correctly. Here are some other challenges:

• Poor or outdated processes and inventory management systems

• Changes in customer demand as needs and desire change

• Difficulty navigating a warehouse to locate specific products

Types of inventory

There are four main types of inventory, as follows:

Raw goods: Raw goods are materials used in the manufacturing of products. Usually, they appear in the early phases of production. Raw materials can include metal, plastic, fabric, or wood that are used to create finished goods. They may come from one or more suppliers.

Work-in-progress (WIP): WIP is a partially finished product that is waiting to be completed. WIPs take account of production costs such as labor, raw materials, and equipment, which are then later attributed to cost of goods.

Finished goods: Finished goods are products that are available in stock for customers to buy. When a WIP is complete, it becomes part of finished goods inventory.

Maintenance, repair, and operations goods (MRO): MRO are materials and equipment that are used in production but do not count as part of the final product. This may include personal protective equipment, office and cleaning supplies, and more.

Less common types of inventory might include safety stock, packing materials, cycle inventory, service inventory, transit, theoretical, excess and maintenance, and decoupling inventory. Every company has different ways of categorizing its inventory.

Inventory vs. stock: what's the difference?

Inventory is often called stock in retail businesses such as supermarkets, pharmacies, and clothing stores. In other industries, inventory refers to raw materials, sales goods in storage, and components used in production. Some say "stock" is more commonly used in the UK. Despite the difference, the two terms are often interchangeable.

Inventory management methods 

Inventory management methods vary depending on business structures and sizes but ultimately enhance operations by reducing waste and managing costs. The following are some common methods:

1. Just in time (JIT)

Just-in-time (JIT) inventory management aims to maximize efficiency and lower costs by coordinating inventory arrival with the start of production. The goal of this method is to keep as little inventory on hand as possible and still meet a high production volume level for the product's demand. To have a successful JIT inventory business, you’ll need proper forecasting of needs and close relationships with dependable suppliers.

Benefits: 

• Reduces waste on unnecessary stock 

• Lower costs by avoiding having unused goods

• Avoids having more storage space for inventory than necessary

2. Material requirements planning (MRP)

Material requirements planning (MRP) is a supply planning system that helps manufacturing businesses determine the inventory requirements to meet a product’s demand. MRPs function based on demand and bill of materials (BOM) by examining the types of materials needed, the required amount of each material, and the manufacturing completion date. 

Benefits: 

• Gives businesses a balanced inventory

• Allows businesses to have the right amount of material for production 

• Eliminates manual processes, like looking up past sales and existing inventory 

3. Economic order quantity (EOQ)

Economic order quantity (EOQ) is a formula used to calculate the optimal order size to meet demand and stay within budget. EOQ is useful for any business, large or small, that manages inventory. The goal is to reduce the amount of over-ordering and waste, lower the cost of storage, and maximize quantity discounts offered by vendors. 

Benefits: 

• Minimizes storage and holding costs

• Helps maintain inventory levels that match customer demand

• Provides specific numbers for how much inventory to hold 

4. Day of sales inventory (DSI)

The day sales in inventory (DSI) is a sales monitoring and inventory tracking measurement tool. The DSI is also called the average age of inventory because it calculates how long it takes for a business to sell its inventory and considers how long the current inventory will last.

Benefits:

• Reduce cost from overspending on inventory

• Effectively manage cash flow

• Prevent waste from outdated inventory

• Helps determine the statistical data for a company’s inventory management, tracking, and sales

Inventory management system

An inventory management system (IMS) is the process of organizing and tracking inventory management. Some advanced technological tools today allow automatic processes and streamlining data entry to track products from supplier to customer. There are three types of IMS:

• Perpetual inventory system: These are the most accurate because they track inventory in real time and are supported by powerful software tools. Oracle's NetSuite ERP is an example.

• Periodic inventory system: Periodic inventory systems count inventory at the beginning and end of a specific period of time. It is not as accurate as perpetual systems but it can be done on Microsoft Excel or Google Sheets.

• Manual inventory system: As the name suggests, manual inventory systems use pen and paper to track sales. This is typically viable only for small businesses.

Careers in inventory management

From entry level as an inventory associate to leading a team as a demand manager, inventory management is a career field filled with opportunities to learn, grow, and advance.

Inventory associate: Inventory associates receive shipments, count stock, and keep inventory records, including correcting errors in actual inventory in stock and the numbers in the system. This job may include data entry into a computer system and operation of machinery to move or count inventory.

• Average annual base salary (US): $36,013 [1]

Inventory controller: Inventory controllers deal with inventory data documentation, including developing systems to organize the information. They are responsible for monitoring inventory levels to meet a project’s demand, which may include conducting audits and producing reports to ensure order fulfillment logistics run smoothly. 

• Average annual base salary (US): $43,619 [2]

Inventory analyst: Inventory analysts, sometimes called purchasing managers, manage a company’s inventory by analyzing sales statistics, trends, and forecasts. Analysts optimize the efficiency and production of a business’s inventory management.

• Average annual base salary (US): $53,950 [3]

Materials manager: Materials managers oversee inventory, stock supplies, and maintain vendor relationships in manufacturing companies. With the budget in mind, they negotiate with suppliers to get the best deal without compromising quality. Communication and leadership skills are important because they need to convey the information in purchase reports to senior management.

• Average annual base salary (US): $75,010  [4]

Demand planning manager: Demand planning managers lead a team of planners who develop models for accurately drafting a company’s inventory needs. A major responsibility of the planning team is to use inventory trends and demand forecasts. The goal is to produce an accurate prediction with the available data by collaborating with management, supply chain, and sales teams. 

• Average annual base salary (US): $79,132 [5]

Learn inventory management

Take the next step to learn more with this course Inventory Management, as part of the Leverage Data Science for a More Agile Supply Chain Specialization from University of California Irvine. Learn how to use data science to manage inventory in uncertain environments, calculate inventory for products, and more.