What is Inventory Management?

Inventory management is the process of ordering, tracking, and managing disbursements of the items for which a company manages stock.

There are two main types of inventory:

1. Inventory of items that you purchase for consumption or run the operations.
2. Inventory for finished goods that you sell to customers.

Procurement mainly deals with the items you purchase for running the day-to-day operations.

With an effective inventory management process, companies can ensure they don’t run out of necessary items and avoid waste from the process.

When you don’t have an effective inventory management process, you must carry excess inventory or risk running out of items.

That leads to expedited orders, which increase costs.

Alternatively, suppose you don’t know how much inventory you carry at any time. In that case, it leads to duplicate orders because multiple people could order the same items not knowing the existing on-hand quantity.

Steps In Inventory Management

Here are the key steps in the inventory management process.

Inventory Planning

The inventory management process starts with the planning process, which includes identifying the items for which you want to maintain inventory.

You want to keep stock of the items you purchase and identify the most frequently used items.

At the most basic level, you want to keep stock of all high-usage items and where it makes sense to maintain inventory.

For example, if a critical item can be shipped daily from the vendor based on the daily usage, you are probably maintaining very low or no inventory.

But it makes sense to maintain inventory for items with a long lead time.

Demand Planning

Demand planning answers how much inventory you should carry at any time.

If you have the past usage data, you can look at the average monthly usage data to figure that out.

Suppose the inventory usage data is not available. In that case, you can work with stakeholders to understand the business needs and the plan for the current year and then develop a demand model.

If you don’t have usage data, you can start with a seed stock and then track the usage every week.

Tracking On-Hand Inventory

Once you know what you want to stock and how much, the next step is to keep an accurate count of on-hand quantity.

By tracking the on-hand and calculating the lead times, you can determine what you need to order and when.

You can also maintain mix and max levels of inventory. Many inventory management systems automatically generate purchase orders if the on-hand quantity falls below the minimum level.

You also need to have a process to update the on-hand quantity when the item is received.

In case you have multiple inventory locations, it is important to maintain an accurate on-hand count across different locations.

Tracking Usage And Disbursements

You need to track the disbursements or inventory adjustments to ensure you know the exact on hand.

Specifically, you should track what inventory is issued to whom and how much.

By tracking disbursements, you will know who is using the inventory, for what purpose, and the overall demand.

The inventory planner can then plug all this tracking data into your planning model to accurately forecast the demand.