How Inventory Management Helps Improve Supply Chain Visibility
Inventory is an integral part of any business operation. In a supply chain, all areas converge into a well-maintained inventory. Inventory management plays a vital role in the supply chain process and can have a massive effect on how your business fares in the long run, making an impact on business revenues as well. According to a recent industry analysis report, the inventory management software market is expected to grow from 2020 to 2026 at a CAGR of over 5%.
With respect to supply chains, inventory management is the systematic process or approach to control and oversee purchases, maintain stock, regulate product costs, and manage order fulfillment. Inventory management typically extends beyond basic monitoring and reordering processes to include demand forecasting and end-to-end production management.
A variety of data – Excel worksheets, Google sheets and docs, or other manual techniques – is used in inventory management to keep track of products and processes. With time and improved technology, various inventory management software has emerged to make inventory management more systematic and easier.
1. Helps achieve a balanced ratio of inventory turnover.
This is one of the key metrics in warehouse management. A low inventory turnover ratio indicates overstocking, while a high inventory turnover ratio indicates you might have trouble meeting market demands due to lower than average inventory. Using these metrics makes it easier to plan ahead to keep a better balance in inventory.
2. Improves cash flow. A good inventory control system will help ensure that too much money is not tied up in inventory. Unless the product leaves the shelf quickly, there is no return on it. Proper inventory management helps keep capital free to be used in other departments and invested back into business to realize revenue growth.
3. Improves customer service. Optimized inventory management provides the details on both items in stock and items out of stock. It can prevent orders from being placed for out-of-stock items and makes it easier to fulfill orders with real-time tracking to ensure that the product reaches the customers doorstep as promised.
The complex task of inventory management involves dealing with numerous stock-keeping units (SKUs) across multiple warehouses to determine if the right amount of product is in stock to meet the demands of the customers and operate profitably. There are several ways or methodologies to manage inventory, including:
Just-in-time methodology. This methodology uses analysis of customer behavior and trends to determine buying patterns, and typically relies on procuring products once an order is placed. The advantage is that customer demands can be met without having excess stock in inventory. At the same time, misreading market trends can lead to out-of-stock situations and lost sales.
ABC analysis. With this methodology, stock or inventory is divided into three separate categories. A being the most important product and C being the least important (or least sold) product. This allows the business to maintain higher stock of the most sold products while stocking less of slow-moving products. The advantage of ABC analysis is better control over inventory, however, constantly analyzing and categorizing inventory can be time and labor-intensive.
Stock review. The simplest and most often used method for inventory control, stock review is a laborious process involving regular review of stock available with respect to future requirements. This method is prone to errors as it requires a lot of human manual effort.
Inventory management offers insights into the most important factors that affect the supply chain business such as availability of stock for order fulfillment, behavior and preferences of the customers, and financial well-being of the company. Because inventory is a crucial and costly asset of the business, having an efficient control system in place is important to face the demands of the ever-changing market and tackle emerging competition.
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