Inventory Management 101
Inventory Management System in Nigeria
If you’re looking for an inventory management run down, you’ve come to the right place. This is one of the most important things a business should get right – inventory management directly affects your bottom line and can be the difference between business success and failure. So, let’s not waste anymore time!
What is inventory management?
Your inventory is anything you have purchased for the purpose of selling. This includes raw materials if you are manufacturing items in house, as well as finished products. Inventory management can be explained as the management or control of these materials in relation to supply and demand.
What are the benefits of inventory management?
Proper inventory management will ensure maximum profits (more on this to follow) and smoothly run operations. If you’re tracking and managing your inventory correctly, this is how you’ll benefit:
- You’ll always know when stock is low so you can order more.
- You can track damage and loss.
- You can pick up errors in large shipments and always know that you’ve received exactly what you ordered.
- You can track theft and work on strategies to minimise it within your organisation.
- You can create reports that highlight purchasing trends, allowing you to better manage stock in the future.
How does inventory management affect your profits?
Good inventory management is crucial for maximising business profits and is usually a very careful balancing act. Ordering too much or too little can be damaging to your profits in a number of ways. Here’s how:
How an OVER supply of stock can cost you money
- A large amount of stock takes up space and will be costing you money in storage and maintenance.
- You may end up selling the stock at a heavily discounted rate in order to move it.
- The capital you spend on big orders can’t be used to invest in other things, or to simply collect interest in your bank account.
How an UNDER supply of stock can cost you money
- Ordering too little means you may run out of stock and miss out on potential sales.
- Not meeting the demands of your customers can cause them to lose confidence in your service.
- Customers may turn to your competitors for the product you couldn’t provide, which risks future sales, too.
- Generally, the larger the order of stock, the cheaper it is for the business. If you’re placing multiple small orders of the same product, you could lose out on bulk buying discounts.
Which industries use inventory management systems?
Inventory management is used across the retail, hospitality, manufacturing, and shipping industries. Basically any business involved in the delivery of a physical product to a customer should be using an inventory management system.
Inventory management methods
So, how exactly do businesses execute good inventory management? There are a variety of ways to tackle it and some don’t even require that you store your product onsite. As usual, each method will suit different businesses for different reasons. Here are some of the most common methods used today:
- Just in time (JIT): This method is popular due to its ability to reduce storage costs. As the name suggests, orders are put through for new stock right before it is needed. The downside to JIT is that if your supplier is delayed and can’t deliver stock on time, it could disrupt your production process.
- Accurate Response: Accurate response relies on good forecasting to dictate orders. This is great if you have the right data, a good analyst and a fairly predictable sales cycle. However, this method can be risky if you have not been operating long and data is not conclusive.
- Drop shipping: If you have a drop shipping agreement you’re able to pass on orders to a manufacturer or wholesaler and have products sent directly from their warehouses to the customer. The obvious benefit here is not worrying about storage and other related costs associated with keeping goods onsite. The downside is not having complete control over the order.
- Back ordering: This involves the purchasing of goods only after an order has been placed for them. Obviously, this will only suit certain kinds of businesses where a wait will not interfere with customer satisfaction.
- Bulk ordering: Bulk ordering your stock allows for less frequent orders and savings on shipping. However, you will also have to cover the cost of storing a large volume of materials or product.
Inventory management systems and software
It’s almost impossible to keep track of large amounts of inventory without a good inventory management system. This is such a big topic that we’re dedicating a whole article to choosing the right system for your business, which will be released next week. Hope to catch you then!