What Is Inventory Management? Benefits, Challenges, and Methods

An inventory may include finished goods, raw materials in production, and/or goods undergoing processing. Whether you’re interested in pursuing a career in supply chain management or have your own business, inventory management is important for today’s companies. Read on to learn more about inventory management and explore the various career paths it offers. 

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 organised. 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 fulfilment. 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 fulfilment processes for a business. Key benefits of an inventory management strategy include:

• Reduced inventory costs 

• Prevention of overspending on warehouse storage

• Optimisation of storage needs

• Improved cash flow through reduced losses

• Accurate forecasting of sales trends

• Enhanced customer satisfaction through timely product deliveries

Inventory management challenges

The main challenges in inventory management include managing surplus inventory that remains unsold, experiencing product shortages when fulfilling incoming orders, and inaccuracies in tracking inventory. Among other challenges of inventory management are:

• Poor or outdated processes and inventory management systems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

Over ten types of inventory exist. Plus, every company has different ways of categorising its inventory. Listed below are the four common types :

• 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 labour, 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. 

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. 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 maximise 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 unnecessary stock levels

• 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 maximise quantity discounts offered by vendors. 

Benefits: 

• Minimises 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 organising 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 perceptual 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

A career in inventory management presents numerous opportunities for professional growth. Detailed below are popular inventory management job roles and the average annual compensation they provide. 

Inventory manager: Inventory managers are tasked with planning optimal order sizes and maintaining precise inventory records. Besides making critical decisions regarding warehouse stocking, inventory managers work towards developing inventory control systems to optimise warehouse efficiency. 

• Average annual base salary :₹7,208,000 per year [1]

Inventory controller: Inventory controllers deal with inventory data documentation, including developing systems to organise the information. Also known as stock controllers, inventory controllers produce and handle invoices for both vendors and customers. 

• Average annual base salary : ₹4,28,000 per year [2]

Material manager: Material managers oversee the procurement of 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 : ₹8,80,000 per year  [3]

Demand planner: A demand planner primarily focuses on generating precise sales forecasts by analysing historical sales data to detect trends, seasonal variations, and other patterns. The analysis aids in creating accurate demand projections. 

• Average annual base salary : ₹10,00,000 [4]

Learn more about inventory management with Coursera

Managing inventory is aimed at ensuring efficient storage and distribution to prevent any potential shortages in stock. However, whilst unsold, inventory locks up cash, thereby increasing costs and reducing cash flow. Just in time (JIT), materials requirement planning (MRP), economic order quantity (EOQ) and days sales of inventory (DSI) are among the popular inventory management strategies you can utilise to streamline supply chain operations. 

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