Inventory Management in 2023: Manage and Improve Stock Flow

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Inventory management is the system a business uses to order, store, organize and move inventory through their supply chain. It ensures businesses have the right amount of product in the right place at the right time.

It also tracks your company’s stocked goods and monitors their weight, dimensions, amounts, and location.

The goal of inventory management is to minimize the cost of holding inventory by helping you know when it’s time to replenish products or buy more materials to manufacture them. This helps you maintain optimal inventory levels and minimize costs.

Inventory management vs inventory control

Inventory control is contained within inventory management, but it is slightly different.

Inventory control refers to the process of regulating, monitoring, and handling the inventory that you already have at your store, while inventory management also accounts for demand forecasting, ordering, and receiving inventory.

Inventory vs stock

Stock refers to the finished goods that you have available to sell to your customers, while inventory might include materials used to create the finished goods, as well as the finished goods themselves. Because of this subtle distinction, all stock is included within inventory, but not all inventory is referred to as stock.

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Inventory management is a critical part of any successful business, ensuring your store has enough of the right inventory at the right time. However, inventory management grows in complexity as your business scales.

Effective inventory management requires a delicate balance of not having too much inventory (leading to overstocking) or too little inventory (causing stockouts). Below are some of the benefits of inventory management, as well as the challenges.

Benefits of inventory management

1. Avoid spoilage
2. Avoid dead stock
3. Save on storage costs
4. Improve cash flow
5. Optimize fulfillment

Effective inventory management is essential for ensuring a business has enough stock on hand to meet customer demand. Poorly-handled inventory management can result in a business either losing money on potential sales that can’t be filled or wasting money by stocking too much inventory.

Whether you’re a small business or company using enterprise resource planning (ERP), inventory management helps your business do a number of important things:

1. Avoid spoilage

If you’re selling a product that has an expiry date, like coffee or tea, there’s a very real chance it will go bad if you don’t sell it in time. Managing inventory effectively helps you avoid unnecessary spoilage.

2. Avoid dead stock

Dead stock is stock that can no longer be sold—not because it's expired, but rather because it may have gone out of season, out of style, or otherwise become irrelevant. By adopting a diligent strategy, you can address this costly inventory mistake.

3. Save on storage costs

Warehousing is often a variable cost, meaning it fluctuates based on how much product you’re storing. When you store too much product at once or end up with a product that’s difficult to sell, your storage costs will go up. Avoiding this will save you money.

4. Improve cash flow

Not only is good inventory management more cost efficient; it improves cash flow in other ways, too. Remember: inventory is product you’ve likely already paid for with cash (checks and electronic transfers included), and you’re going to sell it for cash. But while it’s sitting in your warehouse, it’s definitely not cash.

This is why it’s important to factor inventory into your cash flow management. Inventory directly affects sales (by dictating how much you can sell) and expenses (by dictating what you have to buy). Both of these elements factor heavily into how much cash you have on hand. In short, better inventory management leads to better cash flow management.

When you have a solid inventory system you’ll know exactly how much product you have in real time. Based on sales, you can project when you’ll run out so you can replace it before then. Not only does this help ensure you don’t lose sales (critical for cash flow), but it also lets you plan ahead for buying more by ensuring you have enough cash set aside.

Money spent on inventory is money that is not spent on growth. Manage it wisely.

5. Optimize fulfillment

Good inventory management can help improve order fulfillment in a few beneficial ways. You can use tactics like inventory distribution, which involves having inventory in multiple fulfillment centers to ensure your products are close to your customers. This speeds up delivery time while reducing shipping costs—both of which help keep customers happy.

Proper inventory management also means offering buyers a seamless return experience, while ensuring that usable inventory is quickly reentered into circulation.

Inventory management challenges

1. Phantom inventory
2. Changing demand
3. Supply chain issues
4. Difficult counting processes
5. Disorganized stock rooms

While effective inventory management offers many benefits, you must overcome some challenges to achieve efficiency. Although these challenges arise in different ways, they all lead to one of three costly problems: too much inventory, not enough inventory, or lost inventory. Let’s look at each of these challenges more closely.

1. Phantom inventory

One of the primary challenges of inventory management is dealing with phantom inventory.

Phantom inventory refers to a situation where your point of sale system is reporting available inventory that doesn’t actually exist in your store. This situation can be costly, as it will lead to inaccurate stock levels that can impact your decisions regarding your product offering and reordering.

2. Changing demand

Shifts in demand can also cause challenges with inventory management. For example, the pandemic led to radical changes in demand almost overnight, causing many stores to run out of stock of multiple products very quickly.

3. Supply chain issues

Similar to demand, another external factor that can greatly affect your inventory management is the global supply chain. Supply chain constraints will cause stock outs at your store if you don’t have enough safety stock on hand.

4. Difficult counting processes

Counting inventory is a difficult and time-consuming process. Since counting inventory takes so long, you’ll likely need to either close down your store for a day or ask staff to come in outside of operational hours (which costs overtime). On top of this, manual inventory counts are prone to errors which can cause further issues.

5. Disorganized stockrooms

Maintaining an organized stockroom is another challenge of inventory management. A messy stockroom will make it difficult for associates to find inventory for customers when they need it—which hurts customer experience—and can even lead to inventory shrinkage.

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1. Raw goods
2. Work-in-progress (WIP)
3. Finished goods
4. Maintenance, repair, and operations goods (MRO)

Raw goods

Raw goods are materials or substances used in the early production or manufacturing of goods. Raw materials can include wood, metals, plastics, or fabrics used in the creation of finished goods. A business owner or manufacturer acquires these materials from one or more suppliers or producers.

You can divide raw materials into two groups:

• Direct materials, which are used in the final product. For example, the fabric you use to make clothing.

• Indirect materials, which are used throughout production but not included in the final product. For example, the oil you use to maintain a machine.

Raw materials represent an asset on your company’s balance sheet. You pull raw materials over time and use them to produce finished goods.

Work-in-progress

When you use direct and indirect materials in production, you must recognize the move of materials into works-in-progress (WIP). WIP describes a partially finished product awaiting completion.

On a balance sheet, WIP represents all production costs: labor, machinery, raw materials, and other equipment. It reflects only the value of products in this production stage. Costs are then transferred to the finished goods account and attributed to the cost of sales.

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