Inventory management is a specialist subject. It’s not easy to determine an optimal inventory level – businesses need to increase their inventory in response to seasonal demands or price increases in raw materials. On the other hand, the stock of certain commodities may need to be reduced due to changes in consumer preferences. There are many factors influencing inventory levels with the devil being in the details. The quality of inventory management may well affect your sales performance. Therefore, whether your business is in manufacturing, retail or e-commerce, it is extremely important to understand the concept of inventory management.
Definition of an inventory and its purposes
Inventory is the goods and materials that a business holds in a warehouse. Through an inventory system, businesses can monitor and maintain their inventory level. Bear in mind that an inventory level that is too low or too high will result in the ineffective resource allocation leading to a rise in inventory cost.
An inventory has two main purposes
Responds to real-time demand: As production volume or shipment quantity varies daily, inventory acts as a buffer to fluctuations. If a certain amount of goods are well-stocked, businesses can successfully fulfill any unexpected customer orders without sacrificing potential revenue.
Bulk purchase discounts: Businesses often place larger orders with upstream suppliers in order to get better prices or discounts. The excess is stored as inventory, giving businesses the flexibility to defer buying when prices are high.
Inventory systems can determine the optimal time to reorder
Carrying too little stock increases the risk of being unable to fulfill customer orders and slows down your long-term business growth; meanwhile, carrying excessive inventory contributes to high carrying costs. To reduce unnecessary costs for your business, the following two methods of inventory management will help monitor your inventory levels and determine the right time to reorder.
- Continuous review system: a system where the stock level is updated in real-time. The system will automatically restock when the inventory level falls below a particular reorder point.
- Periodic review system: a classic inventory system where the inventory level is reviewed at a regular time interval (e.g. once a month). After that, a decision is made on how much stock should be reordered to bring the inventory level up to a given amount.
Control inventory costs with better inventory management
In order to reduce inventory costs, first you’ll need to analyse where the various expenses are being generated:
Types of inventory costs
- Purchase cost: This is the purchase price of goods, which varies with the quantity purchased.
- Ordering cost: These are the expenses incurred while creating and processing an order, including manpower, procurement cost, delivery cost, and quality control (QC) cost.
- Carrying cost: These are the expenses of holding inventory, which includes the storage facility, insurance, theft, damage or depreciation of goods, etc.
- Stockout cost: This is the lost sales associated with inventory shortage and order cancellations.
How to control inventory costs:
- Track your inventory level
Determining your optimal reorder point and production volume can ensure that you’ll never overstock or understock.
- Reduce obsolete stock
Obsolete stock refers to the inventory that is not expected to be sold at the moment, for example, inventory that is in transit, unsalable, reserved, or waiting for inspection. You should reduce the amount of obsolete inventory to better utilize warehouse space.
Inventory management: the first step to revenue growth
Whether you’re in retail, e-commerce or manufacturing, good inventory management can always reduce invisible costs for your business and bring new opportunities for generating growth. The following are a few advantages of quality inventory management:
- Reduced storage costs: Setting an optimum inventory level reduces the accumulation of excessive stock and releases storage space.
- Reduced quantity of unsalable products: Quality inventory management reduces the quantity of unsalable products caused by poor decision-making or inaccurate estimation of seasonal demands.
- Reduced loss of expirable goods: Special care should be taken of goods with a short expiration period, such as food, cosmetics or skin-care products. Keeping them in a climate-controlled storage environment and monitoring stock quantity can help avoid deterioration or expiration.
- Increased cash flow: Maintaining an optimal inventory level avoids excessive accumulation of stocks and frees up your cash flow.
Boxful’s customized warehouse and order management system – a safe haven for your products
Boxful Fulfillment is a flexible B2B warehouse solution for businesses, which saves you the hassle of managing warehouse issues and manpower costs. Boxful provides a second home for your goods and you can rest assured that your products are in good hands.
Our customised inventory management solution offers four major advantages:
- Flexible pricing
We charge according to your actual usage, so you can free up your cash flow during non-peak seasons.
- One-stop warehouse and logistics services
We don’t just provide warehouse services; our team can help you organize everything from warehouse management to logistics and improve your shipping efficiency.
- Cloud-based inventory management system
We have an excellent back-end system which allows you to manage your inventory anytime, anywhere, and avoid human error in your inventory records.
- 24/7 security and indoor temperature and humidity control
Our warehouse is equipped with video surveillance, ADT security systems, automatic fire sprinkler systems, and a temperature and humidity control system, which keeps your inventory safe from mold and deterioration. We offer no-contract, flexible warehouse and logistics solutions for corporate companies and SMEs, helping businesses optimize cash flow and resources.
Further readings：What is warehouse fulfillment and how can SMEs benefit from it?
Further readings：Good practices for warehouse management for cost-effectiveness and operational efficiency
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