What is inventory management?

2 February 2023

Inventory management – the key to business success.

Inventory management is a phrase that sounds simple, but has lots to unpack behind it. In its fundamentals, it’s the process a company uses to make sure it never, or rarely, has more product than it needs standing and costing it money, but always has enough to meet demand, and therefore make money.

Understanding your inventory.

First of all, what’s your inventory? Your inventory is the stock you have on hand – stock for which you’ve either paid, or spent the time and money to create. As such, your inventory is everything which is potentially a source of profit, before you’ve sold it. Once you’ve sold it, it’s known as revenue, because it’s generated you income. So, maintaining the right level of inventory is crucial to the successful running of a business. You need to maintain just enough inventory at any time to meet market demand at whatever level that exists.

It’s important to recognize though that inventory doesn’t just refer to stored stock of completed and saleable gods. If you make products on site, it also refers to stored stock of all the component parts of what you make. Screws, nuts, glue, widgets, they’re all part of your inventory too, because if you don’t have enough of them on site, you can’t create the products for which there is hopefully demand, but if you maintain too high an inventory level of nuts and bolts, they represent an economic deficit in your business until demand requires them to be turned into saleable product. So inventory management becomes a much more complex problem to solve than it might first have appeared. Add in packing materials and the like and inventory becomes “anything for which there has been financial outlay, but which has yet to be transformed into income.”

Finding your inventory.

Managing all that is all about knowing what you have, and knowing where it is. When you get to the point of having warehouses full of inventory, the central point of inventory management becomes clear – knowing what you have and where it is becomes a much larger challenge at that level, and also knowing what you don’t have or are nearly out of becomes crucial. You may be the finest ocarina maker in all of West Texas, but if you’re out of packing materials, they’re going to sit on your shelves, rather than being turned into profit, music, and happy customers.

That’s the point of inventory management – making sure the balances are always right to keep turning your inventory into money, and stop it turning into economic liability.

Given that this seems like a fairly straightforward goal, there are a quite baffling number of ways to deliver inventory management. ABC analysis tells you what your most and last popular type of stock is, batch tracking tracks items, for instance, by expiration date, so you don’t lose money simply by sending out fresher stock while letting older stock rot on your shelves, consignment inventory management means you don’t pay your supplier until the item is sold on, dropshipping is a relatively new form of inventory management that cuts out middle men altogether as far as storage is concerned, letting suppliers send product direct to customers.

Demand forecasting does exactly what it says it does – it predicts customer demand for a product, and pulls in inventory to meet that prediction. Just-in-time processing is a way of minimizing excess inventory by trusting that you can supply to customers “just in time”, meaning inventory spends the smallest amount of time on warehouse shelves before it’s shipped out again…

There are many more types of inventory management techniques, but they all focus on the single central equation of getting your inventory out to customers in the fastest possible time, and turning economic liability into profit.

Planning demand.

Demand planning is an important part of inventory management – if you don’t have a good idea of what the demand for your product is, you have no idea how much inventory you need at any one time.

Once you know your demand forecast, though, inventory management becomes a lot more straightforward, in that it then has a target to meet – the amount of demand. Whether you run a company that sells direct to customers (in which case, you’re practicing retail inventory management) or you make items for sale to other companies (manufacturing inventory management), knowing, or being able to accurately forecast your demand is the cornerstone of inventory management.

Most companies, and certainly any that require a regular warehouse to stock their inventory, will these days use a sophisticated inventory management system to give them easy access to their inventory data. Often, those systems will come with automatic re-stock functions, up to and including the level of projected demand, and will give owners and managers the real-time reach over their inventory that modern businesses need in order to make the most of sales opportunities.

Inventory management systems.

There are various types of inventory management system on the market, some with features that lean more heavily on stock movement, and others that focus more on trend tracking, to ensure you have the most accurate information on demand, so you can plan your inventory management with greater finesse.

Inventory management is a matter at the heart of all successful businesses – a matter of planning out what your customers need or want, and ensuring you can supply it without over-investing in stock that isn’t profitable.

In 2023, it’s only a matter of time before new inventory management systems are launched that have access to real-time data on demand projection, and artificial intelligence-driven inventory management, to shave off more and more human guesswork and potential for error in the business.

That way, inventory management will be optimized, and businesspeople will be able to focus more on the critical strategic decisions of their role, while inventory management is more or less automated.