One of the principles of supplying goods to a market is that the company must hold enough stock to satisfy customer demand without holding too much. Holding just the right quantity of stocks to satisfy demand will help to minimize cost.
Inventory is the physical stock of item that a business or an organization keeps at hand for efficient running of its affairs. Inventory management on the other hand involves the supervision of non-capitalized assets and stock items. It sees to the flow of goods from manufacturers to the warehouse and from these facilities to the point of sale. In short, it involves ordering, storing and using of a company’s inventory: raw material component and finished. In addition, inventory management can also be seen as maintaining an effective internal control over inventory including safeguarding the inventory from damage or theft, using purchase order to track inventory movement, maintaining an inventory ledger and frequently comparing physical inventory counts with the amount that is on record.
There are 3 types of inventory: raw material, work-in-progress and finished goods inventory.
The inventory that a company holds can be one of its most valuable assets or even a liability. In most inventory intensive businesses, a shortage of supply of inventory can present a lot of undesirable effects for the company. On the other hand, having more inventory at hand than needed can result in spoilage, theft, damage or even decline in demand. In this case, inventory can be said to be a liability to the business in question (if not in the accounting sense).
In the mid to late 1990’s, retailers started implementing modern methods of inventory management systems due to the advances in computer and software technology. The system works in a circular process from purchase tracking to inventory management and to re-ordering and back around again.
Inventory can and should be insured and in the event that it is not sold off in time, it may have to be disposed of at clearance price or gotten rid of.
Bearing this in mind, it is clear that inventory management is very important for businesses. Knowing the right time to restock certain items, how many of such items to produce or buy, how much to pay, when to sell and at what price can become difficult choices to make without the right information.
Given the significant costs and benefits that is associated with inventories, companies spend a lot time trying of find out what constitutes the optimal level of inventory that should be maintained at all times so as not to have too much or too little of stock at any point in time.
Inventory management is not without its pros and cons. Here are 10 of them.
Advantages of inventory management
- It helps to maintain the right amount of stocks: contrary to the belief that is held by some people, inventory management does not seek to reduce the amount of inventory that you have in stock, however, it seeks to maintain an equilibrium point where your inventory is working at a maximum efficiency and you do not have to have many stocks or too few stocks at hand at any particular point in time. The goal is to find that zone where you are never losing money in your inventory in either direction. With the aid of an efficient inventory management strategy, it is easy to improve the accuracy of inventory order.
- It leads to a more organized warehouse: with the aid of a good inventory management system, you can easily organize your warehouse. If your warehouse is not organized, you will find it very difficult to manage your inventory. A lot of businesses choose to optimize their warehouse by putting the items that have the highest sales together in a place that is easy to access in the warehouse. This ultimately helps to speed up order fulfilment and keeps clients happy.
If you enter into a warehouse or a facility without proper inventory management, it is immediately apparent. Managers and business owners who do not implement an effective inventory management system usually have troubles keeping track of assets and executing work order so they just end up not being kept in the right place. It is not just an eyesore but it can also lead to a variety of safety hazards as well.
- It saves time and money: an effective inventory management system can translate to time and money saved on the part of the business. By keeping track of the product that you already have at hand, you can save yourself the hassles of having to do an inventory recount in order to ensure your records are accurate. It also allows you to save cash that would have otherwise been spent on slow moving products.
- Improves efficiency and productivity: inventory management devices like bar code scanners and inventory management software can help to greatly increase the efficiency and productivity of a business. They do this by eliminating the manual way of doing things thus allowing employees to do other more important things for the business.
- A well-structured inventory management system leads to improved customer retention: for customers to keep patronizing you, you will need to always have the goods they want, at the amount they want, and at the time they want it. Inventory management helps you to meet up this demand by allowing you to have the right products all the times so that you and your customers are never stranded.
- Avoid lawsuits and regulatory fines: like mentioned previously, inventory management allows you to keep your warehouse or facility in order. If it is not kept in order, it can result in lawsuits, injury and fines associated with not following regulatory guidelines and rules. In addition, proper inventory management (including keeping records of your staff activities) helps document your actions in the event of an undesirable situation.
- Schedule maintenance: once you get hold of a new appliance, you can begin to schedule routine and preventative maintenance, issue work order to your staff and track that the maintenance was actually carried out. This will help to elongate the life span of that particular asset.
- Reduction in holding costs: yet another benefit of an efficient management system is that it helps to save on inventory cost. These types of cost can be large and can be detrimental to a healthy profit margin. These types of costs are financing costs, warehouse rent, warehouse staff salaries, electricity bills, security et al. The key to keeping these costs in check is to have only the amount of inventory that you need at a particular time. With an inventory management program that assists you to make good forecasts, you can avoid over stocking and thus over pay on holding costs. Furthermore, having confidence in your forecast will mean that you will not have to hold a lot of “safety stock”.
- Flexibility: a good inventory management strategy will allow the manager to be flexible and adapt to situations as they arise. The business world is dynamic and often unpredictable, and the same can also be said for inventory management. There are a plethora of problems that could come up such as incorrect shipments, warehouse accidents, manufacturing issues, theft et al. It is usually not possible to foresee or predict with certainty when they could happen, but if they happen, the best case scenario will be for the manager to know at once so that he or she can rectify the issue.
- Increased information transparency: a good inventory management helps to keep the flow of information transparent. This information includes when items were received, picked, packed, shipped, manufactured et al. You also get to know when you need to order more of any good, when you have too much stock or too little stock.
Disadvantages of inventory management
- Bureaucracy: even though inventory management allows employees at every level of the company to read and manipulate company stock and product inventory, the infrastructure required to build such a system adds a layer of bureaucracy to the whole process and the business in general. In instances where inventory control is in-house, this includes the number of new hires that are not present to regulate the warehouse and facilitate transactions. In instances where the inventory management is in the hands of a third party, the cost is a subscription price and a dependence on another separate company to manage its infrastructure. No matter the choice you go for, it translates to a higher overhead cost and more layers of management between the owner and the customer. From the view point of the customer, a problem that requires senior management to handle will take a longer period of time before it will be trashed out.
- Impersonal touch: another disadvantage of inventory management is a lack of personal touch. Large supply chain management systems make products more accessible across the globe and most provide customer service support in case of difficulty, but the increase in infrastructure can often mean a decrease in the personal touch that helps a company to stand out above the rest. For instance, the sales manager of a small manufacturing company that sells plumbing supplies to local plumbers can throw in an extra box of washers or elbows at no charge to the customer without raising any alarms. This is done for the sake of customer relations and often makes the customer feel like he is special. While free materials can also be provided under inventory management, processing time and paper work make obtaining the material feel more like a chore for the customer or even an entitlement.
- Production problem: even though inventory management can reveal to you the amount of stock you have at hand and the amount that you have sold off, it can also hide production problems that could lead to customer service disasters. Since the management places almost all of its focus on inventory management to the detriment of quality control, broken or incorrect items that would normally be discarded are shipped along with wholesome items.
- Increased space is need to hold the inventory: in order to hold inventory, you will need to have space so unless the goods you deal in are really small in size, then you will need a warehouse to store it. In addition, you will also need to buy shelves and racks to store your goods, forklifts to move around the stock and of course staff. The optimum level of inventory for a business could still be a lot of goods and they will need space to be stored in and in some cases additional operational costs to manage the inventory. This will in turn increase cost and impact negatively on the amount of profit the business makes.
- Complexity: some methods and strategies of inventory management can be relatively complex and difficult to understand on the part of the staff. This may result in the need for employees to undergo training in order to grasp how the system works.
- Some inventory management systems such as the fixed order period system compels a periodic review of all items. This itself makes the system a bit inefficient.
- High implementation costs: some inventory management systems can come at a high price because the business needs to install specialized systems and software in order to use them. This can be problematic for large businesses which operate in difficult locations. Even after installing the costly system, it still needs to be maintained and upgraded on a regular basis, thus incurring more costs.
- Even with an efficient inventory management method, you can control but not eliminate business risk.
- The control of inventory is complex because of the many functions it performs. It should thus be viewed as a shared responsibility.
- Holding inventory can result to a greater risk of loss to devaluation (changes in price).