What Is Inventory Management? Benefits, Methods, and Careers

Inventory management is an important part of the supply chain and therefore a major part of a supply chain manager's responsibilities. It involves the process of ordering, storing, tracking, and controlling inventory. This includes managing raw materials, components, and finished products, as well as warehousing and processing such items. It's a critical business function that aims to minimize inventory costs while ensuring sufficient stock is available to meet customer demand and maintain efficient operations.

Working in inventory management can be a lucrative career choice thanks to the demand for these types of professionals. Learn more about inventory management, its importance, and the different roles you can explore. Afterward, build your knowledge of the supply chain with the Rutgers Supply Chain Management Specialization.

What is inventory management?

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

Without proper inventory management, supply chain managers and companies cannot accurately forecast inventory, and may face risks such as product waste and warehouse shortages. 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. 

How is inventory management different from logistics?

Both inventory management and logistics are important parts of supply chain management. Whereas inventory management is concerned with the stock levels and storage of inventory, logistics focuses more on the flow of that inventory, including transportation, distribution, and delivery.

Learn more: 7 Major Supply Chain Trends

Inventory management: benefits and challenges

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

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

What is an 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. Three types of IMS are:

• 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.

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.

4 inventory management approaches

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

There are several opportunities to consider if you're interested in inventory management—or in advancing to a supply chain management career.

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]

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