Saying that inventory management helps businesses achieve success is like calling the sun’s surface warm. It’s technically true, but it’s an understatement.
In reality, the sun is scorching hot, and managing inventory does more than help your business thrive. To understand why this practice is so important, let’s explore the top objectives of inventory management.
An overview of inventory management
Inventory management helps companies decide how much inventory to hold, when to reorder, and how to organize a warehouse efficiently.
It sounds straightforward enough. But several factors play into how well your business can manage its inventory:
- Supplier lead time is the time it takes to receive inventory.
- Demand is the amount of inventory customers want to buy in a given period.
- Safety stock is the extra inventory kept on hand to avoid stockouts.
- Carrying costs are the inventory costs associated with storing and maintaining stock, including rent, utilities, and insurance.
Effective inventory management is a delicate balance between all of these factors and more. You also have to decide whether to use a distribution center or warehouse (or both), how many staff are needed on the floor, and the volume of orders you can handle, all while balancing customer needs with profitability.
Luckily, knowing what a strong inventory management system can do is the first step to creating one that works — and we’re here to teach you.
The 13 key objectives of an inventory management system
Here are the objectives for setting up an inventory management system.
1. Achieve a good inventory balance
Knowing exactly how much inventory you need avoids both understocking (which leads to missed sales) and overstocking (which ties up capital and increases holding costs). A well-balanced inventory keeps enough products to meet demand without overspending on storage and potential waste.
2. Improve inventory turnover
A high inventory turnover ratio means products are selling quickly, which is good for cash flow and reduces the risk of obsolescence. And analyzing inventory turnover helps you implement ABC analysis, a method for categorizing items based on their value and importance. With ABC analysis, you prioritize high-value stock (“A” items) and manage them more closely, ensuring there’s enough on hand while dedicating less attention to lower-value (“C”) items.
3. Organize your warehouse
Identifying top sellers helps you organize the warehouse for faster picking, packing, and shipping. Workers don’t need to spend extra time trying to find stock with a high turnover. And if you know which products customers often combine, storing them close together or kitting them offers the same benefit.
Take warehouse optimization one step further by using barcode scanners to quickly identify, categorize, and track inventory across storage areas. Plus, the right inventory software makes the reordering process easy. To place orders, just scan the product barcodes and enter a few details.
4. Gain repeat customers
Effective inventory management leads to what every business owner aims for: repeat buyers. If you have the items customers look for every time they shop, they’ll see the business as reliable and be more likely to return.
