What Is Inventory Management

Inventory management
What Is Inventory Management?

Inventory management refers to the process of ordering, storing, using, and selling a company's inventory. This includes
the management of raw materials, components, and finished products, as well as warehousing and processing of such
items. There are different types of inventory management, each with its pros and cons, depending on a company’s
needs.
The 13 types of inventory:

There are four different top-level inventory types: raw materials, work-in-progress (WIP), merchandise and supplies, and
finished goods. These four main categories help businesses classify and track items that are in stock or that they might
need in the future. However, the main categories can be broken down even further to help companies manage their
inventory more accurately and efficiently .
1. Raw Materials: Raw materials are the materials a company uses to create and finish products. When the
product is completed, the raw materials are typically unrecognizable from their original form, such as oil
used to create shampoo.
2. Components: Components are like raw materials in that they are the materials a company uses to create
and finish products, except that they remain recognizable when the product is completed, such as a screw.
3. Work In Progress (WIP): WIP inventory refers to items in production and includes raw materials or
components, labor, overhead and even packing materials.
4. Finished Goods: Finished goods are items that are ready to sell.
5. Maintenance, Repair and Operations (MRO) Goods: MRO is inventory — often in the form of supplies —
that supports making a product or the maintenance of a business.
6. Packing and Packaging Materials: There are three types of packing materials. Primary packing protects the
product and makes it usable. Secondary packing is the packaging of the finished good and can include
labels or SKU information. Tertiary packing is bulk packaging for transport.
7. Safety Stock and Anticipation Stock: Safety stock is the extra inventory a company buys and stores to
cover unexpected events. Safety stock has carrying costs, but it supports customer satisfaction. Similarly,
anticipation stock comprises of raw materials or finished items that a business purchases based on sales
and production trends. If a raw material’s price is rising or peak sales time is approaching, a business may
purchase safety stock.
8. Decoupling Inventory: Decoupling inventory is the term used for extra items or WIP kept at each
production line station to prevent work stoppages. Whereas all companies may have safety stock,
decoupling inventory is useful if parts of the line work at different speeds and only applies to companies
that manufacture goods.
9. Cycle Inventory: Companies order cycle inventory in lots to get the right amount of stock for the lowest
storage cost.
10. Service Inventory: Service inventory is a management accounting concept that refers to how much service
a business can provide in a given period. A hotel with 10 rooms, for example, has a service inventory of 70
one-night stays in each week.
11. Transit Inventory: Also known as pipeline inventory, transit inventory is stock that’s moving between the
manufacturer, warehouses and distribution centers. Transit inventory may take weeks to move between
facilities.
12. Theoretical Inventory: Also called book inventory, theoretical inventory is the least amount of stock a
company needs to complete a process without waiting. Theoretical inventory is used mostly in production
and the food industry. It’s measured using the actual versus theoretical formula.
13. Excess Inventory: Also known as obsolete inventory, excess inventory is unsold or unused goods or raw
materials that a company doesn’t expect to use or sell but must still pay to store.
What Are Inventory Carrying Costs?

Carrying costs are among the top inventory management challenges companies deal with. These expenses
arise from keeping products shelved at a warehouse, distribution center or store and include storage, labor,
transportation, handling, insurance, taxes, item replacement, shrinkage and depreciation. Opportunity cost—
the investment possibilities a company must decline because its resources are tied up in inventory—is also a
factor.
Typical holding costs, another name for inventory carrying costs, vary by industry and business size and often
comprise 20% to 30% of total inventory value, and it increases the longer you store an item before selling it.
The percentage will vary based on the number of items a business sells, its inventory turnover ratio, the
location of its warehouse or store and its storage requirements.
Inventory Carrying Costs Explained

Inventory carrying costs are a crucial metric that helps determine whether you’re running an efficient
operation. High carrying costs could mean your organization has more inventory on hand than it needs based
on demand, that you need to adjust the frequency with which you place orders with manufacturers or
distributors or that you could do better at keeping stock moving.
Inventory carrying costs can be sorted into four categories: capital costs, storage costs, service costs and
inventory risk costs.
Capital expenditures are monies spent on products and any interest and fees incurred if the company took out
a loan to pay for the goods. Storage costs can be fixed, like a mortgage for a store/warehouse, or variable, as
are labor, utility and administrative expenses. Taxes, insurance and inventory management software are all
examples of service costs.
Why Is Calculating the Cost of Carrying Inventory Important?

Because holding costs may make up one quarter of all inventory spend, they can affect a business’ overall
financial health. If an organization can’t quantify the cost of keeping stock on hand, such as by employing an
inventory or stock control system, it may end up with cash flow problems.
A company could also miss out on a promising investment or growth opportunity because it has too much
money tied up in inventory—all without leaders even realizing how much carrying costs are holding back the
business.
10 Components of Inventory Carrying Cost

1- Cost of capital
2- Cost of storing inventory
3- Employee cost
4- Opportunity cost
5- Obsolescence
6- Insurance and taxes
7- Administrative costs
8- Material handling
9- Shrinkage
10- Delayed innovation
Why inventory accuracy is important?

Inventory accuracy is about more than having without inventory accuracy, you could have the wrong lot
numbers, the wrong on-hand balance, or misplaced items. It all adds up to confusion, work, and obsolescence.
Don’t let this eat into your profit margin.
An accounting of your materials. Inventory issues affect every other aspect of fulfillment. Without an accurate
inventory you can’t prepare for spikes in demand. You won’t even know that you should prepare.
It’s not all about saving money either. If your inventory doesn’t match what the customer receives it reflects
on your fulfillment processes.
Without inventory accuracy you could have the wrong lot numbers the wrong on hand balance or misplaced
items.
The just in time strategy (JIT) for inventory management:

The just-in-time inventory strategy is similar to the pull strategy: businesses order inventory “just in time” to
fulfill a customer’s order or a business need.
Successfully implementing a just-in-time inventory management strategy requires reliable suppliers, vendors, and third-
party logistics partners
Without them, a business could fail to meet customer demand, which is always a recipe for disaster.
Just-in-time inventory offers businesses lower inventory carrying costs, less headstock, and improved cash flow. On the
other hand, companies that rely on JIT inventory are not always able to meet demand and sometimes have to overpay
for a product just to get it to their customers quickly.
How Does Walmart's Inventory System Work?

Walmart employs an inventory management system of Walmart that allows suppliers to access data on the
inventory levels of their products. This system supports the Walmart vendor-managed inventory model used
by the company, which helps to reduce operating costs and allows the company to offer low selling prices.
Benefits of the Inventory Management of Walmart

There are several benefits of using an inventory management system, and Walmart has reaped the rewards of
using such a system.
Reduced Inventory Size: One of the most significant advantages of Walmart's warehouses is the reduction of
inventory size. Warehouses are storing fewer goods. A smaller inventory is less expensive to keep. Cross-
docking also allows Walmart to deliver goods to stores more quickly
‍ Helps Reduce Costs: Walmart’s inventory management helps to keep track of products and their stock levels
so that Walmart can order the necessary amount of products and avoid ordering too much or too little.
Eliminates Stock-Outs: another benefit of Walmart's inventory management is that it eliminates stock-outs.
By having an accurate view of what products are in stock
‍ Improves Customer Service: Another great benefit of Walmart's inventory management is improving
customer service. By having a well-managed inventory, Walmart can ensure that its shelves are always stocked
with the products customers need.
Walmart is known for its advanced information systems specifically designed to support international retail
operations, including e-commerce operations. These information systems cover every area of the business. In
inventory management, Walmart uses a system that allows suppliers to access data on the inventory levels of
their products. This system supports the company’s vendor-managed inventory model, which helps minimize
operating costs and enables the business to offer low selling prices.
One of Walmart weaknesses is the so-called:

The bullwhip effect is the propagation of error in the form of inadequacy or excesses in the supply chain. A
small error in one part of Walmart’s supply chain could lead to bigger errors and higher costs across the supply
chain.
Walmart solved this problem through:
The company minimizes the bullwhip effect in its supply chain through the vendor-managed inventory model.
Vendor-managed inventory allows suppliers to directly access Walmart’s inventory data. In this way, the
company’s personnel have minimal contribution to possible errors in managing the movement of goods from
the suppliers to the company’s stores.

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Inventory management

What Is Inventory Management?

The 13 types of inventory:

What Are Inventory Carrying Costs?

Inventory Carrying Costs Explained

Why Is Calculating the Cost of Carrying Inventory Important?

10 Components of Inventory Carrying Cost

Why inventory accuracy is important?

The just in time strategy (JIT) for inventory management:

How Does Walmart's Inventory System Work?

Benefits of the Inventory Management of Walmart

One of Walmart weaknesses is the so-called:

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