How Do You Do Inventory Management?

When a business orders, stores, uses, and sells its goods, that’s called inventory management. This includes keeping track of raw materials, parts, and finished goods and storing and working with them. Depending on the needs of the business, there are different ways to handle inventory, and each has pros and cons.

The Good Things About Inventory Management

One of a business’s most important assets is its stock. In industries with a lot of inventory, like retail, manufacturing, food services, and others, the main things a company sells are its raw materials and finished goods—not having enough goods when and where they’re needed can be very bad.

On the other hand, inventory can be seen as a debt, though not in a financial sense. If you have a lot of goods, some might go bad, be stolen, get damaged, or become less popular. Inventory needs to be protected, and if it doesn’t sell by the due date, it might have to be thrown away at low prices or even destroyed.

Inventory management is essential for all of these reasons, no matter your business size. It’s not always easy to decide when to buy more goods, how much to make or buy, how much to pay, when to sell, and what to charge. Small businesses usually keep track of their stock by hand and use spreadsheet (Excel) methods to figure out when to reorder and how much to order. More prominent companies use enterprise resource planning (ERP) software. The biggest companies use software-as-a-service (SaaS) apps that are highly customized.

Different types of businesses need different inventory management techniques. It is possible for an oil depot to keep a lot of stock for a long time, which lets it wait for demand to rise. A fire in the U.K. in 2005 caused millions of pounds in damage and fines, and keeping oil is expensive and risky. But there is no chance that the stock will go wrong or go out of style 1Businesses that sell perishable goods or items that are in high demand right now, like 2021 calendars or fast-fashion items, can’t keep supplies on hand, and guessing wrong about when or how many orders will come in can be expensive.

It is challenging for companies with complicated supply lines and manufacturing processes to balance the risks of having too much or too little inventory. To reach these levels, companies have come up with several inventory management strategies, such as just-in-time (JIT) and materials requirement planning (MRP).

Financial services firms are one company that doesn’t keep an accurate inventory and instead relies on service process management.

Keeping track of inventory

• Companies usually plan to sell their finished goods within a short time frame—a year. This means that their inventory is an ongoing asset. Before inventory can be added to a balance sheet, it has to be counted or weighed in person. Companies usually have complex inventory management tools that can track how much inventory they have at any given time.
• There are three ways to keep track of inventory: weighted-average costing, first-in-first-out (FIFO) costing, and last-in-first-out (LIFO) costing. There are usually four different parts to an inventory account:
• The different things that a company buys to make things are called “raw materials.” A lot of work has to be done on these things before they can be turned into a finished product that can be sold.
• Goods-in-process, another name for “work in process,” are raw materials being turned into finished goods.
• Finished goods are final items ready for a business to sell to its customers.
• Merchandise is the finished goods that a business buys from a supplier to sell again later.

How to Manage Your Inventory

A company will use different inventory management methods depending on the type of business or product being looked at. The just-in-time (JIT) method, materials requirement planning (MRP), economic order quantity (EOQ), and days sales of inventory (DSI) are a few of these management techniques. These are the four most popular ways to look at inventory. There are others.

1. JIT, or just-in-time management

In the 1960s and 1970s, this way of making things started in Japan. Toyota Motor (TM) made the most progress in its growth. By only keeping the inventory they need to make and sell products, this process helps businesses save a lot of money and cut down on waste. This method lowers the prices of insurance and storage, as well as the cost of selling or getting rid of extra stock.

It can be risky to use JIT inventory management. If there is an unexpected rise in demand, the manufacturer might not be able to get the stock it needs to meet that demand. This could hurt its image with customers and cause them to buy from competitors instead. Delays of any size can be a problem. If a critical input doesn’t come “just in time,” there could be a bottleneck.

2. Planning for Materials Needed (MRP)

For this inventory management method to work, manufacturers must have accurate sales records to plan their inventory needs accurately and let their material providers know about those needs on time. For instance, a company that makes skis and uses an MRP inventory system might ensure that plastic, fiberglass, wood, and metal are all in stock based on what they think their customers will want. A manufacturer can’t fill orders if they can’t correctly predict sales and plan when to buy more inventory.

3. Order Quantity for Business

This model is used to determine how many units a company should add to its stock with each batch order to keep costs low while still meeting the needs of customers who always want to buy. The model’s costs for inventory include prices for holding and setting up.

With the EOQ model, companies can ensure they buy just the proper inventory each time, so they don’t have to place too many orders or have too much on hand. It thinks there is a trade-off between the costs of setting up and keeping an inventory and the total costs being the lowest when both fees are low.4

4. Number of days that an item was sold

This ratio tells you how many days a company takes to sell all of its inventory, even things that are still being worked on. There are different ways to look at DSI, which is also written as days inventory outstanding (DIO), days in inventory (DII), days sales in inventory, or days inventory.

The number shows how many days a company’s current amount of inventory will last, which shows how liquid the inventory is. A smaller DSI is usually better because it means there is less time to get rid of the inventory. However, the average DSI varies from industry to industry.

Red Flags for Inventory Management

If a company changes how it keeps track of its products all the time for no good reason, the people in charge are likely trying to make the business look better than it is. The SEC wants public companies to tell the public about their LIFO reserve, which can make stocks cost the same under LIFO and FIFO.

A business may have trouble selling its finished goods, or its inventory may become obsolete if it has to write off a lot of its stock. This can also be a sign that a business might not be able to stay competitive and keep making goods that people want in the future.

Which of the following is one of the four main types of inventory management?

Suppose you want to know more about inventory management. In that case, there are four different types: just-in-time (JIT), materials requirement planning (MRP), economic order quantity (EOQ), and days sales of inventory (DSI). Sometimes, one way of managing goods is better for a business. Each has pros and cons.

What did Tim Cook do to keep track of Apple’s stock?

People say that Tim Cook is great at buying things. Cook is said to have said, “Inventory is like dairy products.” “No one wants to buy milk that has gone bad.” This is why managing supplies can save a business a lot of money.

What does inventory management look like in real life?

As an example, let’s look at a just-in-time (JIT) method for stock. With this method, a business gets goods as close to when they are wanted as possible. Because of this, if a car company needs to add airbags to a car, it gets them as the cars come off the assembly line instead of always having a supply on hand.

Conclusion

• Inventory management keeps track of all your goods, from raw materials to finished goods.
• Inventory management tries to keep things in check so there aren’t too many or too few items on hand.
• Just-in-time management (JIT), materials requirement planning (MRP), economic order quantity (EOQ), and days sales of inventory (DSI) are the four main ways to handle inventory.
• Each method has pros and cons, which are listed below.