What is Inventory Management and Why Does it Matter?
There are a ton of processes that go into running a business. There’s so much to manage and monitor. Marketing, communication, team-building, selling, and logistics. A big part of logistics is dealing with inventory.
Inventory is the goods that a business is holding for the purpose of selling to the public. It’s pretty much the stuff that you’re selling. But there’s a lot that goes into selling your inventory. You obviously know that products don’t come out of thin air as soon as someone clicks “Order” on Amazon.
Inventory needs to go through a process of arriving at a facility, being organized and put away, then being sent out to customers. Behind that process there’s ordering materials, waiting for production to finish, sending products out to a facility, allowing time for them to be organized, having them be sent out to a deliverer, and then ultimately arriving at the doorstep of an eager customer.
And that’s just the tip of the iceberg. So much could go wrong in these steps and the steps between them.
Read on to learn about inventory management and why it matters.
What is Inventory Management?
Inventory management is the process of supervising the flow of goods from the manufacturer to facilities to the point of sale. It’s making sure that there’s something for the customer to receive when they click “Order” and that it’ll get sent out in a reasonable time.
The main goals of inventory management are to minimize the cost of holding inventory and prevent stockouts.
Why is Inventory Management Important?
Inventory management is important because it’s what keeps your business afloat. If you don’t manage your inventory, then your business might be at risk of running into a stockout or overstocking. Your business could also just have a horrible cash flow.
Stockouts happen when you don’t have any inventory to sell to a customer. A customer might want one of your products, but if you can’t give it to them then they’ll take their money somewhere else. If you run out of stock on Amazon, then your ranking will plummet and all your momentum on the platform will be stopped.
Overstocking happens when a facility is holding too much inventory. This can be just as bad for your business as stockouts. If you’re renting storage space or you’re participating in Amazon’s FBA program, then you could lose a lot of money. Storage space is limited so you might have to rent more space for a simple mistake. Amazon’s FBA program is great, but Amazon charges you for sending inventory to their facilities. You’ll be met with hefty fees if you send too much inventory.
Your cash flow gets tied up when it’s just sitting inventory. If you have inventory that hasn’t been sold in a long time, then you could be losing money. That’s money that isn’t working for you.
Bottom line, inventory management is important because it helps you make more profits. Click here to learn how you can improve profit margins.
Inventory Management Vocab
There are a lot of terms that are thrown around when talking about inventory management. Here’s a quick list of some words, phrases, and their definitions:
- Stockouts - Not having enough inventory to sell
- Overstocking - Having too much inventory in stock
- Demand - How many products are projected to sell
- Inventory optimization - Using inventory in the most efficient way possible
- Dead stock - Inventory that isn’t selling
- Lead times - How long it takes for your (or your third party’s) facilities to receive an order from the supplier once it’s been ordered
- Forecasting - Predicting how many sales will be made in order to prepare inventory
It’s also important to know the different types of inventory. Here they are:
- Raw materials - Materials or pieces of the product that need to be assembled
- In progress - Just what it sounds like, this is inventory that is currently being assembled
- Repair - Inventory that’s being checked, fixed, or updated
- Finished - Inventory that’s ready to be sold!
Inventory Management Tips
There’s a lot to know about the ins and outs of inventory management. But here are some tips that all business owners should know:
It’s important to monitor sales and identify any patterns. Does your product do better on certain weeks than others? Does it do better in certain months? It’s important to watch your sales and identify any patterns. This could help you comfortably order the perfect amount of inventory.
Partner with a good supplier
Do research on suppliers and make sure they have a good reputation for the job. Establish and maintain a healthy relationship with them, they’re the ones keeping your products pumping out into the hands of paying customers!
Have contingencies in place
It isn’t your fault if a transport truck gets stuck on the highway, or the supplier shuts down for a week, or if your products just magically disappear—but it’s still going to hurt your business. You can’t excuse any stockouts even if it’s not your fault.
That’s why it’s important to have a backup plan in place. Have another supplier ready to start production even if it’s a bit pricier than what you’re used to. Rent out a bit of space somewhere to keep extra inventory and have it ready to be sent out in case you ever need it.
Want to Master Inventory Management? Use ShipmentBot!
Software could greatly enhance your inventory management. With software, you could get real-time updates on your inventory, supplies, and logistics.
ShipmentBot is an innovative inventory management software that uses AI to forecast inventory needs. This means that you’ll never go out of stock or overstock, you’ll always hit the sweet spot! It even takes into account sales trends, lead times, and more.