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What is Inventory Management

What is Inventory Management
14 min read

What is Inventory Management

Published 2 Aug 2024
If your business relies on inventory management, it likely faces challenges, especially with manual processes. Handling vast amounts of inventory can significantly raise the risk of human error and inefficiency, and lead to delays and inaccuracies in order fulfillment.

This article will provide techniques and solutions to help protect your business from these negative impacts. Also, we will discuss how Enterprise Resource Planning (ERP) systems can be a useful tool which streamlines inventory management, reduces risks, and improves efficiency in the inventory management process.
Contents

What is Inventory Management?

Inventory management involves sourcing, storing, and selling items. This includes everything from raw materials to finished goods. It helps businesses keep track of their stock, from raw materials to finished goods.

The goal is to maintain an ideal inventory level that is enough to meet customer demand without overstocking. By doing this well, a company can avoid waste,save money and ensure products are readily available for customers.

How Inventory Management Works

Inventory management works through a series of processes designed to monitor and control inventory levels, orders, sales, and deliveries. It’s important to understand how it works so you can make changes that speed up the entire process and make it more efficient.

Let's use a construction company as an example to understand the workflow.

1. Planning and Forecasting

The construction company must first analyze previous project data and future project requirements to accurately forecast the materials and resources needed. This involves considering factors like project size, location, duration, and seasonal weather conditions which may affect construction schedules.

Planning helps identify the type and quantity of inventory, including steel, concrete, tools, and machinery, required for upcoming projects to prevent project delays. Forecasting lets you keep just the right amount of stock: not too much so you lose money, and not too little so you miss out on sales.

2. Purchasing and Receiving

Based on the forecast, the company places orders with suppliers for the necessary raw materials and equipment. The purchasing department negotiates terms and delivery schedules to ensure timely arrival of resources.

Upon receiving, the team inspects the materials for quality and quantity to ensure they match the purchase orders. This process ensures stock levels remain accurate and that the right products are available for or use.

3. Storage and Warehousing

Received materials are then stored in a designated warehouse or directly on the construction site, depending on the project's needs and storage facilities’ capacities.

The company uses inventory management software to catalog and track the location and status (e.g., assigned, reserved, in-use) of each item. To keep losses low and ensure materials are always available, it's important to organize them well and protect them from theft and damage.

This gives you a constant, real-time view of what’s in stock. Use technologies such as barcoding and RFID tags to make this process more efficient; these tools update your inventory levels automatically, eliminating manual errors. With precise knowledge of your inventory at any time, you have the capability to make informed decisions on when to reorder, which ensures the availability of popular items.

4. Reordering

Setting reorder points for construction materials acts as a safety net to prevent stockouts. Calculate this number through an evaluation of your sales rate and the lead time necessary for restocking.

For example, review your sales records from the past year and note the duration required for new stock to arrive. This process allows you to set these reorder points accurately.

Such a proactive strategy guarantees the maintenance of sufficient stock to meet anticipated customer demand without the risk of overstocking.

5. Order Fulfillment and Shipping

For construction companies, order fulfillment involves allocating stored materials and equipment to specific projects as requested by the project managers.

The logistics team organizes the transportation of these items from the warehouse to the construction sites, ensuring they arrive in the needed time frame to keep the project on schedule. This might involve coordinating with various transportation providers and handling the necessary permits for large machinery or hazardous materials.

6. Controlling and Reviewing

Throughout the construction project, the company must continuously monitor and adjust its inventory levels. This includes conducting regular audits and physical counts of materials and equipment, comparing these counts against inventory records to identify discrepancies.

The review process helps identify inefficiencies and implement improvements in procurement, storage, and logistics. It saves money by avoiding too much or too little stock and ensures customers get what they want fast.
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Core Benefits of Inventory Management

These include:
Cost reduction. Proper inventory management helps minimize the costs associated with overstocking and understocking, which can significantly affect the financial health of a business.
Efficiency and productivity. Streamlining inventory processes through automation and systematic approaches improves operational efficiency and productivity.
Customer satisfaction. By using forecasting, tracking, and restocking features you make sure products are ready when customers need them, preventing shortages and improving customer satisfaction.
Insight and forecasting. Inventory management provides valuable data that can be used to forecast demand, make informed purchasing decisions, and plan for future growth.
Risk management. Managing inventory helps identify slow-moving or obsolete items, reducing the risk of loss due to expired or outdated stock.

Techniques for a Better Inventory Management Strategy

Inventory management has many forms. Some methods use mathematical formulas and in-depth analysis to plan stock levels, while others follow tried-and-true procedures. Each strategy improves stock control accuracy and is customized to fit a business's specific needs and inventory.

Find the inventory management strategy that best matches your company's needs by exploring our overview of the popular strategies.

1. Perpetual Inventory System

A perpetual inventory system continuously updates inventory levels as transactions occur, providing real-time insights into stock levels. This method relies heavily on technology, such as inventory management software, to track every addition or removal of stock.

For example, if your construction project uses a perpetual inventory system, each time a worker takes out materials like timber or screws, the system automatically updates the inventory count. This real-time tracking means you always know exactly what you have on hand, which helps prevent stockouts and overstocking. It also permits more accurate plans and reorders, ensuring your project advances smoothly.

2. Safety Stock

Safety stock is a buffer of extra inventory kept on hand to guard against unexpected demand spikes or supply chain disruptions. This ensures that you don’t run out of critical materials, which could halt progress on a construction project.

Imagine your project is in a remote location where delivery times are unpredictable. You should keep a safety stock of essential items like cement or bricks to ensure that even if there’s a delay in your supply chain, your project can continue without interruption. The amount of safety stock you maintain should be based on the variability of demand and lead times for replenishment.

3. Vendor-Managed Inventory

Vendor-managed inventory (VMI) is a system where your supplier takes responsibility for managing your inventory levels. The supplier monitors your stock and automatically refills it when levels fall below a certain point, often through direct access to your inventory data.

VMI means your supplier keeps an eye on your stock for you. When it's low, they send more without you having to ask. This makes the workflow easier for you, keeps your supplies coming, and lets you pay attention to other project tasks.

4. Economic Order Quantity (EOQ)

Economic order quantity is a calculation to find the best amount of stock to order. It aims to cut down on total costs by balancing two main expenses: the cost of keeping stock and the cost of ordering more. This helps you find the point where costs are the lowest.

Imagine you need to order cement regularly for your construction project. If you order too much at once, you’ll incur high holding costs as you pay for storage. If you order too little, you’ll face frequent ordering costs and potential delays. EOQ helps you calculate the optimal order size, balancing these two costs. This ensures you order the right amount of materials at the right time and avoid excess inventory and stockouts.

5. Batch Tracking

Batch tracking involves managing inventory by batches or lots, which allows you to track specific groups of products throughout their lifecycle. This technique is particularly useful for quality control and traceability.

In a construction project, if you receive concrete in batches, batch tracking would involve tagging each batch with a specific identifier. If there’s a problem with the quality of concrete in a particular section of your project, batch tracking allows you to quickly identify which batch was used and trace it back to the supplier or production process. This method is invaluable for maintaining quality standards and managing recalls or quality issues effectively.

The Inventory Management module of FirstBit ERP allows for efficient batch management of your stock, enabling seamless processing of order batches. This feature offers enhanced control over inventory quality and facilitates precise tracking.

6. ABC Analysis

ABC analysis is a method of categorizing inventory into three groups: A, B, and C. ‘A’ items are the most valuable and often represent a smaller portion of the inventory but a large portion of the value. ‘B’ items are of moderate value and importance, while ‘C’ items are the least valuable and often the most numerous.

For example, in a construction project, “A” items include high-cost items like heavy machinery or specialized materials that are critical to the project. “B” items can be more common but still essential materials like standard tools. “C” items are everyday consumables like nails or screws. By focusing more on managing “A” items, such as by keeping them under close supervision and ensuring timely reordering, you can ensure that the most critical aspects of your inventory are always well-managed, while less effort is spent on lower-value items.

7. First-In, First-Out (FIFO)

FIFO is an inventory management technique where the oldest stock (first-in) is used first (first-out). This method is particularly useful for perishable goods or items with a limited shelf life.

In the context of construction, consider materials like paint or adhesives that may have a shelf life. Using FIFO ensures that users consume materials in the sequence they arrived, which reduces the risk of waste due to expiration. For example, if you receive a batch of paint in January and another in March, FIFO dictates that the January batch should be used up before you start on the March batch, ensuring that older stock is always used first.

FirstBit ERP has a FIFO inventory management approach, ensuring that older stock is used or sold before newer items, thereby reducing the risk of inventory obsolescence and waste.

8. Just-In-Time (JIT) Inventory

Just-in-time inventory is a method that minimizes inventory levels by receiving goods only as they are needed for production or sales. This approach reduces the costs associated with storing excess inventory and minimizes waste.

For instance, if you’re managing a construction site that requires steel beams, using JIT means you would coordinate with your supplier to deliver the steel only when the project reaches the stage where it’s needed. This way, you avoid having large quantities of steel sitting idle on-site, reducing storage costs and the risk of damage. JIT requires close collaboration with suppliers and precise planning but can significantly improve efficiency and reduce waste.
Сhoose the right strategy for inventory management with FirstBit ERP

Integration of KPIs

You can use key performance indicators (KPIs) to improve inventory management in your business. These are:
Sales KPIs enhance your competitive edge in the market and empower your sales team to secure more agreements and work together effectively. Align these key performance indicators with your company's objectives, utilizing them to refine and boost the efficiency of your sales force.
Receiving KPIs is a mix with other work performance measures, especially in storage areas. They help check how well we accept and quickly deal with new stock.
Operational KPIs reveal the effectiveness of your company's operations. Enhancing internal procedures and measurements results in higher customer satisfaction.
Employee KPIs or workforce KPIs, are vital in assessing team performance. Improved results in these metrics directly contribute to enhanced business operations. Boosts in staff productivity and efficiency enable the transfer of cost savings to consumers.
FirstBit ERP system enhances KPIs tracking in inventory management by automating and centralizing data collection. This approach provides real-time visibility into inventory metrics, such as stock levels and turnover rates. It improves decision-making, reduces excess inventory and shortages, and ensures efficient order processing. Thus, you optimize inventory management, leading to cost reductions and increased customer satisfaction.

Overcoming Challenges

Inventory comes with its fair share of challenges. Whether you're a small business owner or part of a corporation, the obstacles can range from managing stock levels to predicting consumer demand.

1. Inconsistent Tracking Across Channels and Locations

A significant challenge arises when inventory is not tracked consistently across various sales channels and storage locations. This inconsistency can lead to inaccurate stock data, fundamentally undermining sales and replenishment strategies. Businesses may find themselves unable to fulfill orders promptly, or ordering too much stock, thereby inflating unnecessarily.

Implementing an integrated system that syncs inventory data in real-time across all channels and locations can mitigate this challenge, ensuring that stock levels are accurately reported and managed.

Solution: By choosing to integrate a construction ERP system with an inventory module, you directly tackle the problem of inconsistent tracking across different locations and channels. This solution offers you a bird's eye view of your in real-time. This means no more guessing about stock levels or whereabouts.

Whether you're dealing with materials at a job site or products in different warehouses, you'll have up-to-date information at your fingertips. This visibility helps in making informed sales and replenishment decisions, reducing the risk of stockouts or overstocking.

2. Inaccuracies in Inventory Data

Inaccurate inventory data can have far-reaching consequences, from unsatisfied customers due to incorrect order fulfillments to the erosion of trust in your brand. Such discrepancies often result from manual entry errors or outdated inventory systems. Streamlining inventory management with automated solutions that reduce human error and provide real-time data can significantly enhance accuracy and improve customer satisfaction.

Solution: The challenge of inaccurate inventory data affects customer satisfaction and order fulfillment rates. By implementing ERP solutions that automate data collection using barcode scanning and RFID technologies, you minimize human errors.

These technologies capture and update your inventory data accurately and quickly. This ensures that orders are fulfilled correctly, improving customer satisfaction and trust in your services.

3. Fluctuating Market Demands

The dynamic nature of market demand poses a continuous challenge, often causing overstock or stockouts. Businesses struggle to predict market trends accurately, leading to either excess inventory that ties up capital or missed sales opportunities due to stock shortages. Adopting predictive analytics and flexible inventory strategies can help businesses better align their stock levels with fluctuating market demands.

Solution: Fluctuating market demands leading to overstocking or stockouts can be navigated with an inventory management ERP software equipped with forecasting tools. Predictive analytics, machine learning algorithms, and historical data analysis enable you to anticipate future sales trends.

By understanding what your customers are likely to buy in the future, you can adjust your stock levels accordingly, preventing the wastefulness of overstock and the missed opportunities of stockouts.

4. Inefficiencies in Manual Documentation

Relying on manual processes for inventory management is not only time-consuming but prone to errors. As businesses grow, these processes become unsustainable, magnifying inefficiencies and increasing the risk of significant errors. Transitioning to automated inventory management systems can streamline operations, reduce errors, and improve efficiency, making the processes scalable as the business expands.

Solution: Manual documentation not only slows down operations but is also prone to errors, which can escalate as your business grows. Implementing an ERP system that digitizes and automates documentation processes reduces these manual errors significantly. It keeps your operations running smoothly and efficiently, scaling up as your business grows without adding extra burden or increasing the risk of mistakes.

5. Complex Supply Chain Challenges

Managing a complex supply chain with multiple suppliers and logistics challenges can lead to inefficiencies and product delivery disruptions. This complexity requires sophisticated coordination and communication to ensure smooth operations. Implementing a robust supply chain management solution that offers visibility and control over the entire supply chain can help identify bottlenecks, improve supplier relationships, and enhance logistical efficiency.

Solution: Dealing with a complex supply chain becomes much more manageable with modern ERP systems that include a supply chain management module. This solution provides visibility and control over your entire supply chain, facilitating efficient communication with suppliers and making logistics planning more straightforward. It addresses inefficiencies and potential disruptions by allowing you to proactively manage relationships and logistics operations, ensuring timely and consistent product delivery.

6. Excessive Inventory and Storage Issues

Maintaining too much inventory not only ties up valuable capital but also increases storage costs and the risk of obsolescence, particularly for perishable items. This challenge necessitates a delicate balance between having enough stock to meet demand and minimizing excess that can lead to wasted resources. Employing inventory optimization tools that help in forecasting demand and establishing optimal stock levels can significantly reduce the risks associated with excess inventory.

Solution: The problem of excessive inventory clogging up storage space and tying up capital can be solved with software that includes tools for maintaining optimal stock levels. This software helps you accurately predict demand based on various data, allowing you to order just enough inventory to meet your needs without overdoing it. This not only keeps your operations running smoothly but also minimizes the risk of having unsold stock that can become outdated or spoil, saving you money and space.

One reason your inventory management is not sufficient can be inadequate software as well. To address that, you can adopt an integrated, cloud-based inventory management platform and leverage vendor expertise and training services at implementation.
Overcome inventory management challenges with FirstBit ERP

Tackle Inventory Management Hurdles with the FirstBit ERP System

FirstBit ERP system allows you to monitor warehouse records, improve operation planning, and analyze inventory.

Storage and Purchasing

Keep track of all the inventory that your warehouse currently has. Place orders accordingly to prevent overstocking.

You can specify the item storage parameters and replenishing parameters.
Storage and Purchasing Parameters in FirstBit ERP

Batch management

FirstBit provides a comprehensive solution for inventory management, catering to a wide range of products including auto spare parts, steel items, and heavy-duty machinery. Our platform facilitates efficient management of your stock in batches and streamlines the processing of order batches, ensuring seamless operations.
Batch list in FirstBit ERP

Negative Stock Management

Negative inventory refers to having less than zero of a specific item in stock. There are numerous potential causes of negative inventory.

With FirstBit ERP, you can enhance the accuracy of the cost of goods sold by avoiding the issue of negative inventory by analyzing the order and shipping dates.

Serial Numbers Management

Today, serial numbers are integral components of inventory management of every business. Products such as vehicles, watches, and consumer electronics, among others, often carry lifetime serial numbers, enhancing their traceability and security.

Track the complete history of each serial number. Supplier details, Customs information, Sales, Exchange, and Return transactions.
The Serial Numbers (usage) dialog box in FirstBit ERP


Construction Content Writer
Anna has background in IT companies and has written numerous articles on technology topics. Now, building up her expertise in construction and legal regulations, Anna expands the horizons of our blog and delights her readers with insightful articles.
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