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. Learn more about inventory management, its importance, and its different careers.

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 and provides critical data to help businesses respond to trends, avoid breakdowns in supply chain management, and maintain profitability. 

The importance of an inventory control system

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

Benefits of inventory management 

Efficient inventory management can streamline a business's production and fulfillment processes. Some benefits of an inventory management strategy include:

• Lower costs and save money

• Prevent overspending on warehouse storage

• Minimize storage needs

• Reduce losses to improve cash flow

• Forecast sales trends

• Satisfy customers with timely deliveries

Inventory management challenges

The main challenges in inventory management are keeping too much inventory that the company cannot sell, lacking the inventory to fulfill orders that come in, and not tracking inventory correctly. Other challenges include:

• Poor or outdated processes and inventory management systems

• Changes in customer demand as needs and desires change

• Difficulty navigating a warehouse to locate specific products

Types of inventory

Depending on your industry and company, you may manage four main types of inventory: raw goods, work-in-progress, finished goods, and maintenance or repair goods. 

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

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

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

Maintenance, repair, and operations goods (MRO): MRO are materials and equipment used in production but not count as part of the final product. These 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 inventory, theoretical, excess and maintenance inventory, and decoupling inventory. Every company categorizes its inventory differently.

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 while still meeting 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 

• Lowers 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 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. It is also called the average age of inventory because it calculates how long it takes 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

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. Explore careers as an inventory associate, inventory controller, inventory analyst, materials manager, and demand planner. 

Inventory associate: As an inventory associate, you receive shipments, count stock, and keep inventory records, including correcting errors in actual inventory in stock and the numbers in the system. In this role, you may enter data into a computer system and operate machinery to move or count inventory.

• Average annual base salary (US): $37,503 [1]

Inventory controller: As an inventory controller, you deal with inventory data documentation, including developing systems to organize the information. You may be responsible for monitoring inventory levels to meet a project’s demand, including conducting audits and producing reports to ensure order fulfillment logistics run smoothly. 

• Average annual base salary (US): $50,205 [2]

Inventory analyst: As an inventory analyst, sometimes called a purchasing manager, you manage a company’s inventory by analyzing sales statistics, trends, and forecasts. In this role, you optimize the efficiency and production of a business’s inventory management.

• Average annual base salary (US): $66,538 [3]

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

• Average annual base salary (US): $98,486 [4]

Demand planning manager: In this role, you 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 accurately predict the available data by collaborating with management, supply chain, and sales teams.

• Average annual base salary (US): $102,385 [5]

Learn small business inventory management on Coursera.

Inventory management is an important process that can help you lower costs, minimize storage needs, and project sales trends. 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 the University of California Irvine. Learn how to use data science to manage inventory in uncertain environments, calculate inventory for products, and more.