Inventory Management: Basic Terms and their Application

Those who aren’t tech-savvy are generally confused by the heavy inventory management terminologies used. Today we are going to decouple all the essential terms and understand their applications in inventory management. If you’re new to inventory management, don’t forget to read: Inventory Management 101: Small Business Guide.

Major Constraints in Inventory Management

Inventory: Defined as the complete list of items bought with the company’s working capital such as property, goods in stock, or the contents in a building. 
Operational Expenses: The firm’s expenditure in the sale of the inventory in stock. In simple words, the total cost of selling the merchandise purchased and stored by the firm.
Throughput: The output from the sales made, which compensates and generates capital, and lead time for the working capital expenditure in the whole supply chain process.

These trios are the heart of inventory management. They are essential to profit and generate more working capital to initiate better management and compensate for effective inventory management. Sustaining a firm’s growth is possible only if at least two of these constraints are managed in an informed and correct manner. 

Inventory Terms

Inventory Control: This involves accounting and the act of physically counting the stock ledger and ensuring they match the actual data values. The counting of inventory assets and site control fall under this category. 

Stock Take Policies: These involve the processing and recording of the amount of inventory the firm holds. This policy applies to inventory managers responsible for managing the stocks. They do not manually take down the data in the databases, but automation software like grofleX plays a crucial role in reducing effort and time, increasing productivity. The necessity of such software is seen in accounting because of the reduction in mistakes and the short duration of undertaking such mechanical tasks, which take hours for a human.

Kanban: It is an inventory management technique involving Just-In-Time and lean manufacturing processes. It is, in short, a scheduling system for organizing the supply chain. Managers use this process to track the inventory’s progress, providing a clear view of the entire supply chain.
Perpetual Inventory System (ERP): Enterprise Resource Planning refers to the various software and technologies used to plan and manage the supply chain and manufacturing effectively. It is a real-time process mediated by advanced software like that of grofleX.
Dead Stock Management: Inventory with no turnover, which has undergone no sales, is termed dead stock. Forgotten and neglected dead stock in the warehouse is the direct result of poor warehouse management. Dead stock management must be implemented with proper technologies to reduce the excess useless stock.

Inventory Planning: With the suddenness of the pandemic, the firms which had the perfect planning for unforeseen events are the ones who have gained an edge. Planning according to the future demand forecast and stocking accordingly falls under inventory planning. 

ABC Classification: Classifying the inventory based on priority is one of the most effective inventory management techniques. This includes giving more priority to the stocks yielding more profit and giving the least priority to the one forecasted to be dead stock. This reduces the overstocking of unwanted stocks and rich storage of the most profitable inventory in the warehouse.

Age Reserve Planning: Inventory reserve is a contra asset of a firm’s balance sheet and ledger files, made in anticipation of forecasting inventory potential to be dead stock. This extra list of Inventory Reserve Planning will greatly help the firm curb the loss in working capital due to overstocking. 
Supply-Demand Planning: Self-explanatory name involves carefully analyzing all the trends in the supply-demand ratio using automation software and managing inventory accordingly. Analyzing Inventory levels is a must for this step. This is almost similar to Economic Order Quantity (EOQ)

Inventory Management Processes: This is the complete integrated management system of the supply chain, keeping in mind the above two processes. It incorporates advanced software for inventory management, automation technologies, and other software like IIOT and AI. 

Strategic Stocking Levels: A stocking strategy enables moving inventory to the active inventory category, ensuring the firm stocks the right inventory and optimizes the process. This means there are no discrepancies of over or under-stocking due to the lack of transparency or good centralized communication between the levels of the business. 
Integrated Business Planning: This is a process of maximizing profit/cash flow while minimizing risk using financial and operational optimization technologies. This uses strategy and mapping technologies like that of grofleX, which provides a detailed strategy chart of each inventory and the specifications of the article in the same place. In other words, each inventory is tracked real-time using the software for creating the scope of reorder point. 
Inventory Optimization: Taking the supply and demand volatility into account, the most effective balancing of capital investment and service-level goals over large quantities of stock is called inventory optimization. This smoothens the functioning of the supply chain, and inventory optimization helps increase the percentage yield with the expenditure of the same working capital. 
Strategic Sourcing: The approach by a business to consolidate the purchasing power to find the best possible sales deal and the best return for the inventory. This takes place at the final part of the supply chain, i.e. the sales and marketing department. It is given so much importance because the return on investment made so much on the inventory and management software is decided based on strategic sourcing. 
Sales and Operations Planning: This process involves all the levels of a business working together through a centralized system. The smooth functioning of the supply chain depends solely on this step, and good software like that of Imprezz provides a well-integrated communication system. Firms must focus on creating a single production plan and adhere to it carefully, right from sales orders/to purchase orders. 
Inventory Carrying Cost Strategy: Inventory carrying cost is the gross net amount spent on storing the inventory. It includes intangibles like depreciation and lost opportunity cost and the cost of storing finished goods in the warehouse. This strategy revolves around warehouse management and dead stock management.

Inventory Management Indicators

Managing inventory is not a single-step process. There are several indications that provide an idea about the efficiency of Inventory management in a firm. Reducing such indicators, which are liability, is the key to implementing a great inventory management strategy. These unproductive burdens are mentioned below, and companies must take extra care to remove them from the supply chain.

Spoilage: Spoilage are goods harmful goods which cannot be moved further lest it harms the consumer. Reducing spoilage must be made an integral part of an efficient supply chain. 
Dead Stock: Products that are no longer in demand and are waiting for an ambitious customer to buy them. This dead stock must be reduced, lest huge losses due to overstocking can be incurred by the firm. Good Warehouse Management Software like that of grofleX is the correct choice. People generally confuse it with safety stock, but it is an asset rather than a liability. 
Ageing Stock: Stocks whose current price is no longer appealing to customers are called aging stocks. Providing lucrative deals helps manage aging stocks, leading the customer to buy these stocks in bulk. Aging stocks are like a time bomb. The more the delay, the cheaper it must be sold. What must be taken care of is none of the stock becomes aging stock, and the solution is simple. Use Business analytics tools like grofleX, which keep track of each article in detail. 
Unproductive Cash Usage: Creative ways must be devised, which ensure the burden of carrying extra inventory is lifted from your shoulders. It can be achieved in several ways:
Drop-shipping: A passive method where the third party, i.e. the vendor, ships the inventory directly on your behalf, hence reducing storage costs of raw materials. 
Consigned Inventory: The third party, i.e. the suppliers, retains the inventory ownership till the consumption of the supplies by the customer. This reduces the chances of stocks getting converted to aging stocks. 
Cross-Dock: The technique in which the finished product doesn’t even set foot in your warehouse, but there is a direct transfer of goods right from the inbound trailer to the outbound trailer, making the handling cost negligible.

The importance of the inventory management system is already illustrated in the blog: Inventory Management 101: Small Business Guide. Yet, this blog instigates another line of thinking: should we focus on inventory management or inventory minimizing? This debatable topic needs a detailed analysis from your end, including what kind of business you are running, the logistical and storage cost accosted with your product, and many other factors.  To learn from experts, try reading: A Complete Guide To Inventory Management.