Inventory Management - Meaning, Importance, Parameters, Process & Example

Published by MBA Skool Team, Last Updated: July 12, 2022

What is Inventory Management?

Inventory management is a critical process in business which ensures the availability of the right amount of finished goods to meet the orders fulfillment along forecasted demand while maintaining the working capital balance. Inventory Management is the business process of managing, storing, moving, sorting, arranging, counting and maintaining the inventory i.e. goods, components, parts etc. It makes sure that the core processes of a business keep running efficiently by optimizing the availability of inventory.

Importance of Inventory Management

Inventory Management includes managing and controlling raw materials, stocks, finished goods, warehousing, storage and other aspects which help reach the product from production to distributor or retailer. Each organization regularly strives on efficient inventory management to uphold optimum inventory to be able to meet its necessities and avoid over or under inventory that can impact the monetary statistics of the firm.

Inventory is forever dynamic. A prerequisite of inventory management is steady and vigilant assessment of exterior and interior factors and control via planning and evaluation. Most of the businesses have an individual department of inventory planners who incessantly observe, control and evaluate inventory and interface with manufacturing, procurement and finance sections of the firm.

In a business or association, all the functions are interlinked and coupled to each other and are time and again overlapping. Some key features like supply chain management, logistic handling and inventory management form the spine of the business delivery function. Therefore these functions are very significant to the managers.

Any organization which is into manufacturing, trading, sale and repair of a product will unavoidably hold stock of a range of physical possessions to assist in future utilization and sale. While inventory is a necessary evil of any such business, the organizations cling to inventories for various reasons; some of them are speculative purposes, functional purposes, physical necessities etc.

• All organizations occupied in fabrication or trade of products keep inventory in one form or the other.

• Inventory can be in whole state or unfinished state.

• Inventory is held to assist in future use, sale or further value accumulation.

• All inventoried resources have profitable value and can be measured as assets of the firm

Challenges of Inventory Management

There are certain challenges in inventory management process, following are the important ones:

1. Understanding the Inventory

Organizations should take a holistic view into knowing both basic vs. non-basic matter and at what time they should be ordered. Basic items are those that you sell ant time of the year and need incessant replenishing of stock.

By sorting these out from non-basic or seasonal items inventory levels can be much more allied with a recognized schedule and product lifecycle. However, knowing your items are is just the first step. One must have knowledge about stock capacity, what is going to be ordered, the size of the order, and what needs to be refilled.

2. Incompetent Processes

Built on or rely on dated software or manual processes are used for inventory management systems. This creates an extremely demanding work setting for anybody caught up in the inventory management process. One must begin with a review of current standard operating procedures and settle on where gaps may lie in the systems.

3. Client Demand

Customers needs are varying daily and they are looking to their distributors to allow for elasticity in orders. With the mounting demand of struggle it becomes more taxing to keep up with the exclusive needs of the consumers to reassure they do not have those needs met by some other firm. All these factors help in understanding inventory management.

Inventory Management Parameters

Inventory management can be efficiently done on the basis of 4 broad parameters:

Number of units in the stock

Inventory is nothing but a collection of similar or different stock keeping units (SKU) which have to be stored efficiently before being sold or sent to next stakeholder. Now the number of these items would decide how big or small space we would need, how much staff would be required to manage them, their retrieval mechanism and many other considerations.

Cost of managing inventory

There are lot of inventory costs involved in the process of managing the inventory like carrying costs, holding costs, storage costs etc. Before going into inventory management, a company needs to budget the costs which would be required.

Availability of inventory on time

Inventory is useful for business if it arrives at time and leaves at time. If there are delays in availability of inventory to the right person at the right time, then inventory management will become difficult.

Location for storing inventory

As discussed above as well, the location is very important. We see there are lot of warehouses near airports, highways etc. where managing the inventory and transportation would be easier as compared to a location which is far off. It has to be compared to the inventory cost like rent and manage the inventory efficiently.

Inventory Management

Inventory Management Example

Inventory Management is very important for a business to run smoothly. Imagine a cake manufacturing shop if it keeps running out of flour and sugar. Flour and sugar are like the main raw materials which keep the business process running. The cake maker needs to plan the quantities of sugar and flour so that he never runs out of them when he wants to make a cake. But inventory management is just not about bulking up the supplies.

If too much flour and sugar are stocked and there is not as much demand for cake, the flour and sugar would go bad which would cause financial losses to business. Inventory Management advocated optimization of inventory. The inventory management makes sure that the cake maker has almost the exact amount of sugar and flour which are just enough to make cakes which match with the demand of cake eaters who order cake from his shop.

Hence, this concludes the definition of Inventory Management along with its overview.

This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

Browse the definition and meaning of more similar terms. The Management Dictionary covers over 2000 business concepts from 5 categories.

Continue Reading:

Share this Page on:
Facebook ShareTweetShare on Linkedin