How to Master Inventory Management in 2024

Inventory management is a crucial part of any business that deals with physical goods. It involves ordering, storing, using, and selling the right products at the right time and place. Inventory management helps you avoid stockouts, reduce costs, improve cash flow, and satisfy customers. In this article, we will explain what inventory management is, why it is important, and how you can master it in 2024.

Key Takeaways

Inventory management is a vital part of any business that deals with physical goods. It involves ordering, storing, using, and selling the right products at the right time and place. Inventory management helps you avoid stockouts, reduce costs, improve cash flow, and satisfy customers. To master inventory management in 2024, you should:

Use an inventory management software to automate and streamline your inventory processes.

Implement an inventory management method to determine how much and when to order or produce inventory.

Segment your inventory to prioritize your inventory decisions and allocate your resources accordingly.

Track your key performance indicators to measure and monitor your inventory performance against your goals and benchmarks.

What Is Inventory Management?

Inventory management is a part of supply chain management that involves supervising the flow of goods from manufacturers to warehouses to point of sale. A key function of inventory management is keeping detailed records of new and returned products as they are entering or leaving the warehouse or point of sale.

Inventory management also involves forecasting demand, planning replenishment, optimizing inventory levels, and controlling quality. The goal of inventory management is to have the right products in the right place at the right time.

Why Is Inventory Management Important?

Inventory management is vital to a company’s health because it helps make sure there is rarely too much or too little stock on hand, limiting the risk of stockouts and inaccurate records. Inventory management also has several benefits, such as:

Saving money: Understanding stock trends means you see how much of and where you have something in stock so you’re better able to use the stock you have. This also allows you to keep less stock at each location (store, warehouse), as you’re able to pull from anywhere to fulfill orders — all of this decrease’s costs tied up in inventory and decreases the amount of stock that goes unsold before it’s obsolete.

Improving cash flow: With proper inventory management, you spend money on inventory that sells, so cash is always moving through the business.

Satisfying customers: One element of developing loyal customers is ensuring they receive the items they want without waiting.

How to Master Inventory Management in 2024?

Inventory management can be challenging, especially in a dynamic and uncertain market. However, there are some techniques and best practices that can help you master inventory management in 2024. Here are some of them:

Use an inventory management software: An inventory management software can help you automate and streamline your inventory processes, such as tracking, ordering, replenishing, and reporting. It can also help you integrate your inventory data with other systems, such as accounting, sales, and e-commerce. An inventory management software can save you time, money, and errors by providing real-time visibility and control over your inventory.

Implement an inventory management method: An inventory management method is a set of rules or formulas that help you determine how much and when to order or produce inventory. There are different types of inventory management methods, each with its pros and cons, depending on your company’s needs. Some of the most common methods are:
- Just-in-time (JIT) inventory management: This method aims to minimize inventory by ordering or producing only what is needed, when it is needed. This reduces inventory costs and waste but requires accurate demand forecasting and reliable suppliers.
- Materials requirement planning (MRP) inventory management: This method uses a computerized system to calculate the quantity and timing of materials needed for production based on sales forecasts, production plans, and inventory levels. This helps optimize production efficiency and reduce excess inventory but requires complex calculations and data inputs.
- Economic order quantity (EOQ) inventory management: This method uses a mathematical formula to determine the optimal order quantity that minimizes the total cost of ordering and holding inventory. This helps balance inventory costs and demand but assumes constant demand and fixed costs.
- Days sales of inventory (DSI) inventory management: This method measures how many days it takes for a company to sell its average inventory level. It is calculated by dividing the average inventory by the average daily sales. This helps evaluate inventory turnover and liquidity but does not account for seasonal variations or product mix.

Segment your inventory: Segmenting your inventory means grouping your products into different categories based on their characteristics, such as demand, profitability, lead time, or lifecycle stage. This helps you prioritize your inventory decisions and allocate your resources accordingly. For example, you can use the ABC analysis to segment your inventory based on their annual sales value. Products with high sales value are classified as A items, products with medium sales value are classified as B items, and products with low sales value are classified as C items. You can then apply different inventory policies for each category, such as ordering more frequently and maintaining higher safety stock for A items than for B or C items.

Track your key performance indicators (KPIs): Tracking your KPIs means measuring and monitoring your inventory performance against your goals and benchmarks. This helps you identify your strengths and weaknesses and take corrective actions if needed. Some of the most important KPIs for inventory management are:
- Inventory turnover ratio: This ratio measures how often you sell and replace your inventory in a given period. It is calculated by dividing the cost of goods sold by the average inventory. A high inventory turnover ratio indicates high sales efficiency and low inventory costs, while a low inventory turnover ratio indicates low sales efficiency and high inventory costs.
- Inventory accuracy: This metric measures how closely your physical inventory matches your records. It is calculated by dividing the number of accurate inventories counts by the total number of inventory counts. A high inventory accuracy indicates effective inventory control and data quality, while a low inventory accuracy indicates inventory errors and data discrepancies.
- Fill rate: This metric measures how well you fulfill customer orders from your available inventory. It is calculated by dividing the number of orders fulfilled by the number of orders placed. A high fill rate indicates high customer satisfaction and loyalty, while a low fill rate indicates stockouts and lost sales.
- Stockout rate: This metric measures how often you run out of stock for a product or a location. It is calculated by dividing the number of stockouts by the total number of orders. A low stockout rate indicates high inventory availability and reliability, while a high stockout rate indicates inventory shortages and poor planning.

Tips

Conduct regular inventory audits to verify your inventory accuracy and identify any discrepancies or issues.

Use barcodes or RFID tags to label and track your inventory items and locations.

Implement cycle counting to count a portion of your inventory on a regular basis instead of doing a full physical count once a year.

Use safety stock to buffer against demand uncertainty and supply variability.

Use reorder point to trigger replenishment orders based on your current inventory level and lead time.

Use demand forecasting to predict future sales based on historical data, market trends, and other factors.

Use inventory optimization to determine the optimal order quantity and frequency that minimizes your total inventory costs.

Inventory Management: A Global Perspective

Inventory management is the process of overseeing, controlling, and organizing a company’s inventory or stock of goods. It involves tracking the quantity, location, and status of various items within a business, including raw materials, work-in-progress products, and finished goods. Inventory management ensures that the correct quantity of items is available at the right time, minimizing excess inventory or stockouts.

In this blog post, we will explore some of the latest statistics and trends in inventory management from a global perspective. We will also discuss how inventory management software can help businesses optimize their inventory practices and achieve better results.

Global Inventory Management Market Size and Growth

According to a report by Global Market Insights, the inventory management software market size surpassed USD 3 billion in 2020 and is anticipated to exhibit a CAGR of 5% between 2021 and 2026. The report attributes the growth of the market to the increasing internet connectivity and e-commerce spending, which have boosted the demand for efficient inventory management solutions.

The report also segments the market by deployment type, application, end-use, and region. It reveals that cloud-based inventory management software is expected to grow at the highest CAGR of 7% during the forecast period, as it offers lower upfront costs, scalability, and accessibility. The report also identifies retail, manufacturing, healthcare, and logistics as some of the key end-use sectors for inventory management software.

Global Inventory Management Practices and Challenges

A survey by TradeGecko, a cloud-based inventory management platform, reveals some of the most important inventory management practices and challenges faced by businesses across the world. The survey involved 573 respondents from various industries and regions.

The survey found that the most important inventory management practices are forecasting (61.3%), warehouse management (50%), logistics (46.8%), and back-end technology (32.3%). These are closely followed by training data scientists (21%), returns management (21%), and data interchange technology (17.7%).

The survey also identified some of the common inventory management challenges faced by businesses, such as inaccurate data (35.4%), human error (33.9%), lack of integration (28.8%), excess inventory (27.6%), and stockouts (26%).

Global Inventory Management Benefits and Opportunities

Inventory management can offer various benefits and opportunities for businesses in terms of cost control, customer satisfaction, planning and forecasting, risk mitigation, and operational efficiency.

According to a study by Aberdeen Group, best-in-class companies that use inventory management software have achieved significant improvements in key performance indicators such as:

Inventory accuracy: 97% vs. 88% for industry average
Order fulfillment rate: 96% vs. 87% for industry average
Customer retention rate: 89% vs. 81% for industry average
Gross margin: 35% vs. 29% for industry average

Moreover, inventory management can also help businesses leverage emerging technologies such as artificial intelligence (AI), machine learning (ML), internet of things (IoT), blockchain, and robotics to enhance their inventory processes and outcomes.

For instance, AI and ML can help businesses improve their demand forecasting accuracy, optimize their replenishment strategies, reduce their inventory holding costs, and prevent stockouts. IoT can help businesses monitor their inventory levels in real-time, track their inventory movements across the supply chain, automate their inventory tasks, and improve their inventory security. Blockchain can help businesses increase their inventory transparency, traceability, and accountability, as well as reduce their inventory fraud and errors. Robotics can help businesses automate their warehouse operations, improve their picking accuracy and speed, reduce their labor costs, and increase their warehouse safety.

Inventory management is a vital business practice that can have a significant impact on a company’s profitability, competitiveness, and customer satisfaction. As the global market for inventory management software grows rapidly, businesses should adopt the best inventory management practices and leverage the latest technologies to optimize their inventory performance and gain an edge over their rivals.

Frequently Asked Questions

What is the difference between inventory management and warehouse management?

Inventory management is the process of ordering, storing, using, and selling inventory, while warehouse management is the process of managing the physical operations and activities within a warehouse, such as receiving, storing, picking, packing, and shipping inventory.

What are the types of inventory?

There are four main types of inventory: raw materials, work-in-progress, finished goods, and spare parts. Raw materials are the inputs used to produce goods or services. Work-in-progress are the partially completed goods or services that are still in the production process. Finished goods are the final products or services that are ready for sale or delivery. Spare parts are the components or accessories that are used to repair or maintain goods or equipment.

What are the costs of inventory?

There are three main costs of inventory: ordering costs, holding costs, and shortage costs. Ordering costs are the expenses incurred when placing and receiving orders from suppliers, such as transportation, inspection, and administration costs. Holding costs are the expenses incurred when storing and maintaining inventory, such as rent, utilities, insurance, depreciation, and obsolescence costs. Shortage costs are the opportunity costs or penalties incurred when there is not enough inventory to meet demand, such as lost sales, customer dissatisfaction, and reputation damage.

Reference:

https://www.gpo.gov/fdsys/pkg/USCODE-2011-title26/pdf/USCODE-2011-title26-subtitleA-chap1-subchapE-partII-subpartD-sec472.pdf

http://publications.cta.int/media/publications/downloads/1749_PDF.pdf

https://www.researchgate.net/publication/312602707