Inventory Management Basics: 12 Best Practices To Avoid Modern Challenges

Inventory management is one of the critical and complex processes in the manufacturing industry. It involves planning, organising, and controlling the flow of inventory items from the source to the destination, ensuring the right materials, components, and finished products are available when needed.

While efficient inventory control reduces costs and improves customer satisfaction, poor inventory operations also bring significant challenges to your business. Let's look at the foundations of inventory management and discover actionable practices to optimise your inventory operations.

Inventory Management 101: Process, Types, & Techniques

1. Defining inventory: What are the main types?

Inventory refers to the materials and goods that a business has on hand. It consists of both final goods for sale and materials required for production. Companies monitor and count their inventory to guarantee that they have enough to meet customer demands and prevent shortages.

2. What is inventory management?

Inventory management is the process of controlling a business’ inventories, from purchasing raw materials from suppliers to selling finished goods to customers. It includes storing, shipping, and tracking these items efficiently to make sure that the right products are in the right place at the right time.

In a nutshell, managing inventories involves keeping track of them across your store locations and sales channels, as well as being aware of how much is required and when to order it. If you do it correctly, you can lower overhead costs while preventing issues like overstocking and stockouts.

3. What is the process of managing inventory?

Before creating an inventory management strategy, it's critical to understand and analyse each phase of your inventory management process. This can help you reduce costly errors and select the best inventory management solution for your company.

Let’s take a look at the overview of the process below:

4 Key Challenges In Inventory Management

Most industries face a unique set of challenges when it comes to inventory control, from supply chain complexities to demand forecasting and production variations. These issues can arise in different ways - depending on your business size, but they lead to one of three costly problems such as overstock or lost inventory. Here are some of the main obstacles:

1. Difficulty in demand forecasting

Demand forecasting helps companies adjust their inventory levels and production plans according to the expected demand. However, it can be inaccurate or unreliable due to various factors such as inadequate historical sales data, poor communication across departments (sales, marketing, finance, and production), lack of customer feedback, seasonality, variability, etc. This inaccuracy leads to overstocking or understocking of inventory items, affecting production efficiency and customer satisfaction.

2. Manually inventory management processes

Many businesses rely on manual methods to count and keep tabs on their raw materials, works-in-progress, and finished products, which are efficient and prone to errors. Besides, if you monitor inventory across multiple locations such as sales channels, including online sales, physical stores, and distribution networks, it can result in fragmented data. During busy times like peak seasons, the lack of real-time inventory visibility often leads to issues like stockouts or overstocking.

3. Supply chain complexity

Modern supply chains can be complex, involving multiple suppliers, distributors, and transportation routes. Moreover, some external factors such as natural disasters, geopolitical issues, or supplier problems can result in delayed deliveries, shortages, or quality issues. If you are unable to maintain sufficient safety stock, these supply chain hurdles can lead to stockouts of raw materials and components for production. Coordinating all these moving parts and making sure things arrive on time is a critical challenge.

Read more: Top 3 ERP Systems In Supply Chain Management.

4. Cost management

Cost management in inventory poses huge challenges, involving striking a balance between carrying costs and ordering costs. When there’s too much inventory, it ties up money in storage, insurance, and potential waste if things expire or become unsellable. However, stockouts lead to missed sales and extra expenses from rush orders. Ordering becomes more costly with inefficient practices, as can labour and storage space. The biggest cost of all is the missed opportunities when capital is tied up in inventory instead of being used for strategic investments.

Maybe you’re interested in: Top 5 Cost-Effective ERPs For Startups.

12 Best Practices To Manage Inventory Better

Effective inventory management is crucial for businesses across any industry to ensure smooth operations, minimise costs, and meet customer demands. Here are 13 best practices grouped into three key areas for effective inventory management strategy:

1. Never miss these essential tactics:

• Track product information: Keep track of product details with lot numbers, costs, suppliers, origins, barcodes, and SKUs. This helps with effective purchasing, sales, and inventory control.
• Regular inventory audits: Compare recorded inventory with physical/cycle counts regularly to avoid averting theft, losses, and false financial reporting.
• Standardise receiving procedures: Make sure to handle incoming inventory consistently with standardised receiving rules to simplify the process and minimise mistakes.
• Set reorder points and safety levels: Consider setting reorder points according to lead times, consumption rates, and demand variations.
• Monitor supplier performance: Identify and handle unreliable suppliers. By evaluating their performance, you can reduce risks and guarantee continuous sales or production.

2. Pay attention to demand and supply planning:

• Prioritise inventory: Classify items into A, B, and C groups according to turnover and value. This helps you to prioritise resources on high-value products, avoiding stockouts and lowering carrying costs for slower-moving items.
• Consider the 80/20 rule: Pay attention to the 20% of inventory that accounts for 80% of profits. This allows you to optimise inventory allocation and returns.
• Evaluate sell-through: Track product sales regularly. This way, you can maximise stock levels, avoid stockouts, and take advantage of sales opportunities while meeting customer demands.
• Handle aging inventory: Identify and address slow-moving products. This is a great practice to prevent capital from being tied up and to preserve a healthy product mix.
• Get ready for peak season: Use historical data to predict higher demand and modify operations appropriately. This helps prevent lost sales and stockouts during high-demand times.

3. Utilise technology and its powerful integration capabilities

• Consider a cloud inventory management system: Put in place a cloud system that can assist with automating tracking, reordering, and providing real-time visibility into your stock levels and patterns. Learn more about ERP systems for inventory management in Australia.
• Integrate your inventory software with other systems: For instance, you can integrate your inventory system with POS software, warehouse management system (WMS), or 3PL system to streamline operations. This gives you complete visibility into your inventory and removes data inconsistencies.

Resolving Challenges With The Right Software

Adopting an inventory management solution is a great step if you're looking to maximise productivity while maintaining a competitive advantage. Keep in mind that an effective system can lower carrying costs, enhance financial performance, analyse sales trends, and predict unforeseen challenges.

Odoo is a robust open-source ERP software with built-in modules that integrate key business functions. Odoo Inventory - one of Odoo’s modules, allows businesses to monitor their stock movements across multiple locations and automate their inventory operations with custom workflows. Find out more about how Odoo Inventory can help you streamline inventory management.

Inventory Management - Frequently Asked Questions

1. How do I manage inventory better?

You can get started by maintaining precise accounting records and doing routine physical stock counts. An inventory solution that gives multiple stakeholders real-time visibility can support your business decisions. Moreover, the condition of a stock is something else you should know, particularly if you're working with perishables.

2. What is the role of an ERP in inventory management?

An ERP integrates different business functions with your entire supply chain. The system tracks and provides insights into purchasing, accounting, supply chain, and other operations - all under a single location.

3. What are the best ERP for inventory management in Australia?

Here is the top 4 ERP inventory system for Australian businesses:

• Netsuite Inventory Management: Best for medium to large businesses seeking a scalable solution.
• Odoo Inventory: Best for businesses of all sizes, from startups and small businesses to large enterprises seeking a cost-effective and scalable solution.
• Acumatica Inventory Management: Best for mid-sized businesses with extensive inventory requirements.
• SAP Inventory Management: Best for growing or medium businesses to enterprises.