The meaning of inventory management is the following: keeping inventory to the appropriate levels in the appropriate locations, at the appropriate times, and at the appropriate costs as well as prices.
Once the inventory has been sold, it becomes income. Inventory is represented as an asset on the balance sheet, but is in fact a liability before it is sold. Reduced cash flow occurs when money is tied up in the stock.
Good inventory management is best measured by inventory turnover. Inventory turnover measures how frequently inventory is sold over a period of time. An business does not wish to have more stock than its sales. If you have poor inventory turnover, deadstock will occur.
Inventory Management Definition
Managing inventory is about keeping track of the inventory purchased, produced, stored, and utilised. It regulates the whole supply chain, including buying, transport, warehousing, and delivery, making sure that you always have the appropriate quantity and kind of merchandise in the correct place at the correct time.
Inventory management involves, but is not limited to, monitoring purchases from suppliers and customers as well as storing goods, managing inventory levels, and executing orders.
inventory may be considered a liability (if not in an accounting sense). Spoilage, theft, damage, or changes in demand are risks when your inventory is too big. If the inventory is not sold before it’s at its “break even” point, then it may have to be destroyed at break even pricing or disposed of at clearance price.
Benefits of Inventory Management
The importance of inventory cannot be emphasised for any goods-based company, which is why inventory management improves your operational efficiency and longevity.
Effective inventory management allows companies to maintain a balance between the quantity of inventory they receive and the amount they sell. The more effectively a company manages its inventory, the more money it may save on operations.
The Following Are Several Significant Benefits of Inventory Management.
Understanding stock trends enables you to determine how much and where you have anything in stock, allowing you to make the most use of what you have. This also enables you to maintain less inventory at each location (store, warehouse), since you can fulfil orders from anywhere – all of this reduces inventory costs and the quantity of goods that goes unsold before it becomes outdated.
Maintain a Satisfied Customer Base
Inventory management requires the following:
- How soon your goods may be delivered to your consumers
- How dependable you are at fulfilling orders
- The degree to which you can provide visibility to your consumers
Customers will be considerably more inclined to return for more if they believe your organisation is capable of regularly delivering orders on schedule and informing them of available products. This is particularly true for business-to-business interactions. A missed deadline may be inconvenient for a consumer. This may result in a loss of sales and revenues for a company.
Grows your company
As companies get more sophisticated, their inventory management requirements also become more complex. Sam’s management of supplies and stock will get more difficult as she expands her product lines, employs more employees, opens new manufacturing sites, and expands her client base.
That is why, if you want to scale, it is critical to establish control over your physical inventory from the start. Rapid expansion often entails a plethora of time-consuming tasks: recruiting new employees, expanding existing facilities, and negotiating with new suppliers. Thus, establishing an effective stock system early on is critical. The longer you wait, the longer it will take – and the less time you will have to do it.
Effective Utilization of Warehouse Space
If similar goods are difficult to find, staff time is wasted. Mastering inventory management may assist in overcoming this obstacle.
It guarantees that you will never run out of stock.
Calculating the amount of inventory you should have on hand at all times is a component of inventory management. Too much inventory exposes you to the danger of ‘dead stock,’ or goods that cannot be sold owing to being out of date. If you order too little, you risk running out of stock, failing to fulfil client requests, and missing out on prospective sales.
By using a reorder point formula, you may guarantee that your inventory does not fall below a certain level. (I’ll elaborate on this later.)
It displays customers' behaviour patterns
If your consumers love what you have in stock, monitor how much of it sells, whereas if your customers despise what you have, it is best to measure how much of it has been covered in metaphorical cobwebs. In addition to gauging the effectiveness of previous promotions or product launches, inventory levels prior to and after such events may provide an idea of how well those efforts have been received.
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