A Complete Guide to Inventory Management

Do you recognize the term "inventory management," but feel uncertain about what it entails or how to proceed? Inventory management, or inventory control, is the proper management of the number and storage location of products being sold to prevent shortages and erroneous deliveries.

This article provides an explanation of the basics of inventory management, from its purpose and importance to the challenges and solutions for inventory management operations.

What is inventory?

Inventory comprises the products that are being sold and stored in warehouses and other locations, and can be regarded as a company's stock. Depending on the industry, what is classified as inventory may vary.

Specifically, in the retail industry, including grocery, inventory refers to "products", which are not displayed on store shelves, but are stored in backrooms or warehouses. Furthermore, in the manufacturing industry, raw materials, work in process, and merchandise are treated as inventory - each managed in its own way. Another example is industrial companies that strategically store spare parts for distribution, enabling them to promptly meet the demands of their customers. Healthcare organizations may diligently store critical medical supplies and equipment to support patient care.

In addition, consumables such as office supplies that are not for sale, however needed by employees to generate revenue, are also treated as inventory. A third party logistics provider (3PL) stores and manages many types of stock on behalf of the customer, ensuring secure and organized storage solutions.

What is inventory management?

Inventory management involves regulating the quantity of inventory sold by the company in a manner that aligns with the current situation. In practice, the primary goals of inventory management are to "maintain optimal inventory levels" and "maximize profits while minimizing wastage of inventory".

If inventory management is done correctly, problems such as excess or shortage of inventory do not occur, but rather lead to cost reductions and increased operational efficiency. In reality, however, there are instances where proper inventory management is neglected, leading to missed sales opportunities caused by out-of-stocks or excess inventory, as well as additional expenses due to warehouse pressure.

In sum, effective inventory management is a critically important responsibility for any company and should be approached with meticulous attention.

Inventory management methods 

Inventory management methods include location management, in which each product is stored on a specific shelf or in a specific location. This is managed according to rules created by the company.

For example, if products are managed on shelves, the products are separated by tier, the storage location for each product is fixed, and the products are not mixed when entering and leaving the warehouse. With location management, you know the shelf location of each product, meaning there will be no discrepancies with the ledgers for inventory management.

Warehousing and inventory management as different terms

Warehouse management encompasses all the essential operations required for efficient warehouse functioning, including the effective management of inventory, goods, and products stored within the facility, as well as the allocation of employees to various tasks.

The purpose of warehouse management is to prevent delivery errors and delays and to maintain the quality of logistics operations. Inventory management, on the other hand, aims to enhance profitability by ensuring accurate inventory counts, optimal employee allocations, and efficient equipment management.

Therefore, despite the similarity in terminology, warehouse management and inventory management have distinct objectives and entities to oversee.

What is the purpose of inventory management?

The purpose of inventory management is to monitor sales, reduce distribution costs, and to effectively allocate funds. By implementing efficient inventory management practices, businesses can fulfill customer demands in a timely manner, reducing missed sales opportunities and ultimately enhancing profitability.

Furthermore, while inventory management incurs labor and storage costs, it is essential for mitigating the risks associated with excessive inventory and shortages, as well as ensuring accurate sales management.

Why is inventory management important?

Inventory management is important as it is directly related to a company's profits and business conditions. Accumulating excess inventory can inundate your warehouse with goods, preventing you from storing the inventory that you actually need, and ultimately impeding sales. In addition, the business situation may deteriorate due to problems such as high storage costs.

Inventory management is of utmost importance, as even if you reduce prices to dispose of excess inventory, it may not necessarily result in improved profits.

Challenges associated with manual inventory management

Before considering automation and while operations are still manual, inventory management can pose several challenges.

Human error leading to recording inaccuracies

When inventory management is done manually, it is easy to make mistakes in recording when goods or products are received or dispatched. If a mistake is made in recording inventory counts, sales may drop due to shortages or waste may occur due to overstocking, resulting in a decrease in productivity.

Over- or under-stocking due to mismanagement

When mismanagement occurs, the number of orders placed is also affected, resulting in over- or under-stocking. As a result, the company is unable to place orders for necessary products, resulting in lower profits due to inventory shortages and lost sales opportunities.

Locating merchandise can be time-consuming

When inventory is received and shipped, there is no place/shelf where inventory can be organized, making it difficult to locate stored products. If inventory location management is not properly executed, efficiency may be adversely affected as it can take considerable time and effort to locate where items are stored.

Inability to manage the system due to lack of manpower

Even if an inventory management system is implemented to improve efficiency, it may not be able to operate properly due to a lack of manpower.

For example, if the system is managed by a single employee, it may become too personalized, and other employees may not be able to handle it. Before introducing the system, it is advisable to fully consider the allocation of employees and the operation of the system.

Challenging to systemize conventional operations

While opting to systemize inventory management for enhanced efficiency, it is essential to acknowledge that fully supporting existing business operations may not always be feasible. Choosing a system solely based on its low cost and functions often leads to incomplete systematization, resulting in unaddressed aspects of the business. Hence, selecting a product that aligns with your company's unique business flow is critical for achieving comprehensive system integration.

There is a huge amount of information for management decisions, and it is difficult to retrieve it. Inventory management is used not only to manage products, but also as information for management decisions as it is related to sales. By keeping an eye on inventory management data and understanding how products are selling, it becomes material for considering how to approach the target customers.

However, the larger the number of products in inventory management, the more information is retrieved, making it easier to make use of the information for management decisions. 

Business procedures are not standardized

Inventory management operations are frequently conducted manually and can be reliant on specific individuals, leading to a lack of standardization and inconsistency in procedures from employee to employee.

If the person in charge differs according to the product category, problems tend to occur, such as not being able to understand the details of the work without asking the person in charge. Also, if each employee has a different procedure for the same task, it is a challenge to know what to refer to in order to unify the work procedures.

3 ways to improve inventory management

To address inventory management challenges, there are three effective approaches to consider: strictly enforcing rules and guidelines, conducting regular inventory checks, and implementing a robust system. These strategies can significantly enhance the accuracy, efficiency, and overall effectiveness of inventory management processes within an organization.

Enforce rules and guidelines

If inventory management differs from employee to employee, it will become a personalized task and cannot be managed properly. Specifically, decide where the products are stored, and manage the locations to determine which products are stored where and in what quantities.

If all employees follow the rules for location management, it will improve the efficiency of inventory and the time required to search for merchandise, which is why it is important to firmly establish the rules and make them stick.

Conduct regular inventory checks

The timing of inventory counts differs among companies, with some conducting them at the end of the month, end of the year, or fiscal year-end. 

If there is a discrepancy in the inventory count, a lot of labor is required to search for the item or check past picking lists. However, the shorter the interval between inventory counts, the more accurately data and actual counts can be managed. In case of any discrepancies in inventory counts, it becomes easier to identify the root cause.

Accurate inventory counts can help prevent erroneous orders and ensure timely ordering of items as and when required. To enhance productivity, it is advisable to conduct inventory counts regularly over a brief span of time.

Implement a robust inventory system

An inventory management system will allow you to keep track of inventory storage and the status of incoming and outgoing shipments in real time. Inventory management systems include inventory listing, receiving/issuing management, and picking list functions to help you keep an accurate count of the number of products in stock.

Moreover, inventory management systems facilitate the sharing of inventory status with all employees, thereby enhancing work efficiency and reducing the occurrence of errors resulting from omissions. Some inventory management systems can add QR codes or barcodes to products, which can then be read by a handy terminal (data collection terminal) for efficient inventory management. 

5 benefits of streamlining inventory management

Streamlining inventory management and automating warehouse operations provides benefits such as increased productivity and the ability to maintain inventory levels without over- or under-stocking. The following section provides a detailed explanation of each of the five benefits of more efficient inventory management.

1. Increased productivity

By streamlining inventory management, it becomes possible to shorten time to shipment and reduce labor and other costs, leading to increased productivity while efficiently targeting customer acquisition. In addition, having the right products in the right place prevents shipping errors and reduces the labor involved in handling returns. 

2. Reduction of excess inventory

When inventory data and actual counts are properly captured and managed, the risk of having excess inventory is reduced, thus eliminating unnecessary costs. In order to avoid excess inventory, it is important to correctly manage inventory and monitor inventory counts.

3. Understand the situation in the warehouse and prevent shortages

Knowing the status of inventory in the warehouse will help prevent shortages and improve company sales. Specifically, if you know what is going on in the warehouse, you will be able to prevent shortages, which in turn will prevent lost sales opportunities and poor product quality.

Inventory that is buried beneath other products may be regarded as missing as it is difficult to locate, resulting in lost sales opportunities and potential damage due to prolonged storage.

4. Warehouse space can be saved by eliminating waste

If inventory management is not in place, the warehouse may become so filled with merchandise that there is no space left for storage. Nevertheless, having a clear understanding of your warehouse's status can aid in eliminating waste, minimizing dead space, and ensuring that the products you require are stored in the appropriate location.

5. Properly stored, inventory quality is maintained

Implementing effective inventory management practices is crucial for maintaining product quality. Establishing clear workflow rules, such as "shipping products in the order of oldest to newest" and "monitoring storage periods for accuracy," helps ensure adherence to proper procedures. Long-term storage of inventory carries risks such as deterioration, dust accumulation, and insect infestation, requiring careful attention. Additionally, humidity and direct sunlight can lead to product deterioration, emphasizing the importance of shipping items promptly to minimize exposure. By prioritizing these measures, product quality can be preserved throughout the inventory management process. 

5 Ways to solve your manual inventory management challenges

Effective inventory management necessitates clear identification and management of product quantities, storage locations, and storage conditions, all in accordance with predefined rules. By integrating a warehouse management system, human errors can be minimized, and the overall quality of operations can be improved. To address and overcome inventory management challenges, the following five strategies are recommended:

1. Create rules and thorough management

The key to inventory management is to create rules that are appropriate for your company's operational methods and have your employees thoroughly follow them.

To create rules and solve inventory management issues, you must first create a manual and organize your warehouse environment. The first rule to be established is location management, which thoroughly protects the location of inventory and prevents it from being mixed during receiving and shipping.

2. Implement a warehouse management system

Warehouse management systems (WMS) are equipped with functions to manage inventory, and in some cases, compared to manual management, this has reduced the number of erroneous orders.

In addition, inventory management can be performed simply by attaching barcodes to shelves and products and reading them with a handy terminal, making picking work more efficient. If the introduction of a warehouse management system can improve the speed of employee work and the quality of work, it can be expected to increase productivity.

However, warehouse management systems have not only advantages but also potential disadvantages such as high costs, which must be carefully considered. For example, installation costs, running costs, and labor costs to systemize the current inventory are all costly, which is why the choice must be made in consultation with the budget. 

In the long run, the introduction of a system is effective as it tends to reduce labor costs and expenses compared to manual operations by employees. In addition, there are several types of warehouse management systems available, so be sure to consider two things before choosing: what functions they offer and whether they fit into your current workflow.

For instance, if a system offers inventory management functions but lacks compatibility with a handy terminal, its implementation would not improve the efficiency of inventory status checks. Hence, it is vital to consider the support system available post-implementation. It is advisable to inquire about the level of support provided to address any issues or difficulties that may arise during system operation. Ensuring robust support is in place therefore enhances the overall effectiveness and success of the new system implementation. 

3. Understand the inventory

Create a comprehensive list and obtain a clear understanding of where the inventory is stored and the available quantity. It is preferable to have real-time access to this information, particularly if receiving and shipping occur on a daily basis. Mismatches between the management data and actual inventory numbers can lead to excesses or shortages in inventory.

In addition, since inventory management is related to sales and management strategies, a correct grasp of inventory will prevent missed business opportunities. Manual entry of inventory counts can lead to human error, which is why it is important to utilize a warehouse management system or inventory management system to efficiently and accurately track inventory. 

4. Preparing the warehouse environment

It is very important to keep the warehouse tidy and clean on a regular basis. A clean warehouse environment ensures that employees feel good about their work and that the quality of the goods is protected. Neglecting proper cleaning and maintenance of the warehouse can have adverse effects not only on the health of employees but also on the quality of products, as poor environmental conditions can lead to contamination. 

Insect infestation can also become a concern if the warehouse is not maintained in a clean condition, potentially leading to a decline in product quality and loss of customer confidence.

5. Organize shelves and keep inventory from getting mixed up

If shelves can be organized, products can be shipped from oldest to newest without being mixed up with other products, thus preventing shipping errors while protecting quality.

In concrete terms, numbering shelves and location management will make it easier to keep track of each product's inventory. Also, ensure to make your employees aware of following the rule of keeping products in a fixed location, and when handling products for picking, do not place them in random locations.

By effectively managing inventory and preventing mix-ups, it is possible to save time and labor, improve productivity, and ultimately reduce costs.

Conclusion

In this article, we have outlined inventory management in detail. To summarize, inventory management is the process of maintaining an appropriate number of inventory items of the products being sold, depending on the situation.

Neglecting inventory management can result in overstocking or understocking, leading to missed sales opportunities and losses from disposing of excess inventory. Proper inventory management is crucial to avoid problems such as decreased profits and productivity due to the inability to implement effective management and sales strategies.

Therefore, in order to properly manage inventory, why not try implementing a warehouse management system or inventory management system to improve operational efficiency? In addition, some companies offer outsourced inventory management, which allows you to manage inventory even with lack of manpower.