Inventory management is an essential aspect of any retail or wholesale business. It entails many benefits like increase in profitability, efficient utilisation of working capital etc. To gain an in-depth understanding of inventory management, you must learn the meaning of inventory.
Inventory refers to the stock of goods that an organisation holds. These goods include stock of raw materials, finished products, etc. They are considered non-capital assets and are used in the production process. Therefore, inventory management is essential to manage this stock of goods efficiently. The aim is to prevent wastage and maintain the sale of goods as and when required. Depending on nature, inventories can be broadly classified into three types. They are –
- Finished goods: These refer to the final product or output of a production-based organisation. They do not require further processing and ready for sale in the markets.
- Work-in-progress stock: This refers to the stock that has partly gone through the production process. These still need further processing or packaging before they are ready to be sold.
- Raw materials: This is the type of inventory that has not been through the production process at all. They generally contain goods that have just been purchased to produce finished goods.
What is inventory management?
Inventory/stock management refers to the systematic approach of buying and storing goods that are used directly in sales or used in the further production process. Management of stock is vital for e-commerce platforms for various reasons. Some of them are listed below. It is imperative to learn how proper inventory management techniques which can save money and help you optimise your business operations in more ways than one.
Benefits of stock management
- Accurate sales order fulfilment: An efficient inventory manager will know about the inventory needs of an organisation and place orders accordingly with the suppliers. It helps to make your products available to the buyers as soon as they order. This ensures that there is no wastage of raw materials. Proper management will also improve the productivity and efficient utilisation of instant business loans.
- Profit maximisation: Efficient management of stock will ensure that there are enough raw materials when they are needed the most. Many businesses face a sudden surge of demand. An inventory manager will thus help in taking advantage of this sudden rise in order by making sure that raw materials required for production are available when needed. It also helps to minimise wastage in case the company deals with perishable stock. Inventory management reduces cost, thereby increasing profits.
- Stock analysis reports: An inventory manager will be able to prepare stock reports that highlight and document the nuances of stock requirement in that particular niche. These reports help in making stock requirement forecasting decisions by the management. In the case of seasonal businesses, these reports are highly instrumental maintaining profits and avoiding dead stock.
Once you understand all you need to know about inventory management, you must know the various inventory management techniques used by managers for efficient utilisation of production resources. 3 of them are listed below –
- ABC technique- In this process, inventory is divided into 3 main categories according to their value. Category A, B and C are the categories. Group A consists of the most expensive goods while C being the least costly.
- JIT method- JIT stands for Just in Time method. In this method, the company maintains only enough inventories to last the current production cycle. It is a risky method but is useful for lowering cost and prevention of dead stock. It requires intricate planning and experienced managers.
- Consignment technique- In this process, the supplier provides the required goods to a retailer but holds ownership until the stock is sold. Upon completion of sales, the unsold goods are returned to the supplier.
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These are only a few techniques that are used by top organisations in their production processes. There are many other techniques like material requirement planning and economic order quantity model.