Any service that has anything to do with large volumes of products, whether it is a warehouse or even a small supermarket, needs some sort of system to keep track of the products they deal with, whether during the purchasing process, or when the products are in the warehouse. It does not even have to be physical products, as software can also be considered inventory.
This system is usually referred to as inventory management.
What is the role of inventory management?
Products do not fall out from the sky! They travel from point A, which is where they originally are (supply chain warehouses/manufacturers) to point Z, which is where your warehouse is. And they do not magically disappear from your warehouse either! They go to your customers, which can either be retail stores or end users spread over multiple locations and various sales channels.
In order to make sure this process is carried out smoothly, everyone utilizes some form of inventory management system. Even Amazon, the biggest online marketplace, has inventory management systems in place that are virtually unmatched in the world.
These systems are used from the minute your products are acquired from supply chains, to when new products are being made out of the raw materials, when the finished products are stocked in warehouses, when sales are made, and when the data from those sales is reported.
Setting up an effective inventory management system will mean that your business is optimized and stays afloat. It determines the quality of your business, whether it is offline or online.
Let’s imagine the horrible scenario under which your business does not have a decent inventory management system in place:
Think about this: you do not have enough room to house enough products, but because you have not utilized an inventory management system in place, you make the mistake of ordering too many products. What are you going to do with the ones which do not fit inside your warehouse? In a worst-case scenario, imagine those products are perishable! Your business will be extremely damaged as a result. A mistake which could have been avoided if you had the right system in place. The products that cannot be sold for whatever reason, are often referred to as dead stock. Dead stock can be extremely damaging to your business.
If you do not have the proper management system in your warehouse, you will not be able to send out orders to customers in time and your business will suffer as a result. Customer demand is always high, and customers are ruthless. They will take being let down once, maybe even twice. But after three times, that’s when the negative reviews will start pouring in.
In the case of Amazon, for example, sometimes because of bad inventory management, customers will place orders on products that are actually out of stock. But the customer does not know that! When the product does not arrive, they will file a complaint against your account and eventually have it suspended!
Additionally, by not having a good inventory management software installed for your business, you make your business prone to more human error, as too many products can lead to many problems if you are relying solely on manpower to carry out inventory management.
These are just some of the problems that can occur as a direct result of bad inventory management, or the lack thereof.
Before implementing inventory management techniques, you need to familiarize yourself with economic order quantity, or EOQ, as well as lead time.
What is the EOQ?
EOQ, or economic order quantity, is the sweet spot for product quantity that your business should ideally have. Why economic? Because by upholding the correct EOQ, you will make sure you cut down on as much costs as possible, namely holding, storage, and order costs. This obviously also depends on the amount of inventory you usually tend to carry. After you’ve got this taken care of, then you can figure out which types of inventory management you wish to implement in your business.
Lead Time is Crunch Time
You’ll hear a lot of people talk about “lead time” when it comes to inventory management. This refers to the amount of time between the start of a process until it ends. Why is this important? Because it can be affected by inventory management itself. If we were to consider the start of a process in your company the arrival of products, then without proper inventory management, that time will be badly affected.
What are the methods of inventory management?
As with the variety in products, there are various ways of managing inventory. We are going to go through some of the common inventory management processes which you need to know and can use to fully optimize your business and manage inventory:
Have you ever heard of par levels? They are the least number of products which you have to have in stock at all times. Once you go below these levels, it’s time to restock! When you go below par levels, that does not necessarily mean you need to reorder a large number of items. Ordering a minimum quantity will be sufficient for you to rise above the par level. Also, keep in mind that each product can have its own separate par level, because each product sells differently.
A reorder point is when the amount of product you carry reaches a point where you have order again and replenish inventory. You can specify the reorder point by first of all specifying your safety stock levels. Safety stock is the amount of products that you keep for a rainy day. Let’s say a reorder point of sale arrives and your suppliers cannot provide you with new stock. That’s when your safety stock will come in handy. It’s just another way of inventory control.
Have a backup plan!
Inventory management across multiple channels should also include backup plans in case things go wrong. What can go wrong? Well, plenty of things!
- You might have an insane amount of sales in a short period of time, and you will sell too much of your stock.
- People order some of your products, but the supply chain you order from runs out of stock.
- Your supply chains suddenly increase carrying costs, or they suddenly stop making a line of products.
- You do not have enough space to stock inventory, or you forget to calculate time JIT.
- You miscalculate inventory costs.
These are just some of the “last minute” problems that you can face.
If all of this sounds too much to handle, and these systems scare you, then you’ve come to the right place! With Jerome Basilio’s services, you will no longer have to worry about inventory management, stock safety, tracking inventory, and so on. Just take a look at our website, and you’ll see how our inventory management software can optimize your business to the next level!