Business across industries, inventory management plays an essential role in effective supply chain operations. Competent inventory management, from production to retail, guarantees that appropriate stock is available when they are needed, reducing costs and raising consumer delight. To highlight the importance of inventory management in contemporary corporate operations, let us examine several forms of inventory management, in this blog.

Before we try to understand what inventory management is, let us understand inventory first. 

The verb “inventory” refers to the act of counting or listing items. Inventory is both the manufactured commodity that is offered for sale and the raw materials required in their manufacturing. 

Types of Inventories

There are different types of inventories, some of these are mentioned below:

Raw Materials: Raw materials are the materials a company uses to create and finish products. When the product is completed, the raw materials are typically unrecognizable from their original form, such as oil used to create shampoo.

Work In Progress (WIP): WIP inventory refers to items in production and includes raw materials or components, labor, overhead and even packing materials.

Finished Goods: Finished goods are items that are ready to sell.

Maintenance, Repair, and Operations (MRO) Inventory: MRO is inventory — often in the form of supplies — that supports making a product or the maintenance of a business.

Safety Stock and Anticipation Stock: Safety stock is the extra inventory a company buys and stores to cover unexpected events. Safety stock must carry costs, but it supports customer satisfaction. Similarly, anticipation stock comprises raw materials or finished items that a business purchases based on sales and production trends. 

Decoupling Inventory: Decoupling inventory is the term used for extra items or WIP kept at each production line station to prevent work stoppages. Whereas all companies may have safety stock, decoupling inventory is useful if parts of the line work at different speeds and only applies to companies that manufacture goods.

Cycle Inventory: Companies order cycle inventory in lots to get the right amount of stock for the lowest storage cost.

Inventory Management

Now let us understand inventory management.

Inventory management involves overseeing the flow of goods from manufacturers to warehouses and ultimately to customers. To fulfil client demand, the proper items must be available at the right time, location, and quantity while reducing expenses and optimizing efficiency.

Let’s understand this with an example:

Effective inventory management in the retail sector makes sure that retailers don’t overstock or understock products—rather, they have the right amount on hand to satisfy consumer demand. For example, a clothes merchant may use inventory management software to monitor sales patterns and modify orders as necessary. This reduces surplus inventory during quiet times and helps avoid stockouts during periods of high demand.

Just-in-Time (JIT) Inventory Management

Just-in-Time (JIT) inventory management is a strategy focused on minimizing inventory levels by receiving goods only as they are needed in the production process or by customers. Just-in-time (JIT) inventory reduction lowers holding costs and boosts operational effectiveness. JIT is frequently used to optimize production procedures and reduce waste in industrial sectors like electronics and automobiles.

Example: The car industry was changed by Toyota’s innovative use of Just-In-Time (JIT) manufacturing procedures. Toyota cut expenses and increased productivity by building a network of trustworthy suppliers and keeping low inventory levels. As a result, the company became a global leader in lean manufacturing techniques.

Vendor Managed Inventory (VMI)

Vendor Managed Inventory (VMI) is a collaborative approach where suppliers manage inventory levels at their customers’ locations. Based on shared data and agreements, the supplier monitors inventory and restocks products as needed.

VMI is commonly employed in retail, healthcare, and manufacturing industries to enhance inventory visibility and minimize stockouts.

Example: Procter & Gamble (P&G) collaborates with retailers like Walmart and Target to implement VMI. By leveraging sales data and real-time inventory monitoring, P&G ensures its products are readily available to customers without overstocking shelves, optimizing inventory levels and improving customer satisfaction.

Now let us understand what inventory control is:

Inventory control refers to the procedures and systems that manage and optimize inventory levels to satisfy consumer demand while reducing expenses such as holding, ordering, and shortages.

It’s the hands-on part, ensuring accurate records and efficient processes. This includes:

• Inventory tracking: Keeping tabs on the quantity and location of all inventory items.
• Warehouse management: Organizing the physical storage and movement of inventory.
• Cycle counting: Regularly checking physical inventory against records to identify discrepancies.
• Inventory control software: Utilizing technology to automate tasks and improve accuracy.

Conclusion

Inventory management isn’t a one-size-fits-all solution. The best approach depends on your industry, product types, and sales patterns. But by understanding its core principles and the different methods available, you can find the perfect balance for your business and keep your customers coming back for more!

Also read: Inventory Turnover Ratio: Examples and Importance