One of the key aspects of supply chain management is inventory management. Considered the center of a business’ trading activities, inventory management involves purchasing non-capital goods, production, monitoring, managing, and controlling the stock in your company.
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Irrespective of its size and industry, Inventory management is important for every business.. It helps you make smarter business decisions, including simplifying inventory and maintaining optimal stocks. Moreover, a good inventory management process enables you to prepare for demand fluctuations.
Let us dive deeper into the inventory management process flow chart and understand its definition, the process, and why you need one for your business.
Understanding the Process Of Inventory Management
The process of inventory management, abbreviated as IPM, is a procedure by which a business can monitor and oversee the purchase and sale of inventory. Through the inventory management process, you can streamline your business’s operations, minimize costs, and maximize the return on investment (ROI) on your goods.
Below is a list of the steps involved in the inventory management process flow.
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Demand Forecasting
Inventory management process starts with forecasting the demand for your products to prevent overstocking or understocking of inventory. Also known as inventory forecasting or demand planning, it typically involves using past data to examine trends and predict upcoming marketing events to stock inventory. It ensures that companies have enough goods to fulfill customer orders while ensuring enough cash flow as well.
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Delivery of Goods
Once you have forecasted the demand for your products, it is time to get them delivered. These include raw materials, components or spare parts, and finished goods. Further, inventory stocking can also have indirect materials that support the daily operations of your business but are not involved in production.
After receiving the goods, they are reviewed, sorted, and shelved in special stock areas. This can either be a warehouse or a stock-keeping unit where the items are coded and tagged for easier tracking.
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Inventory Monitoring
Upon stocking the goods, inventory levels need to be monitored regularly. This ensures that the employees have an accurate idea of the current inventory, helping minimize the probability of stockouts, spoiled or defective goods, missed or repeated orders, or risk exposure due to theft and fraud. Companies use inventory management software to handle and monitor stock levels.
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Order Placing
Customers can place orders in two ways – internal or external. Internal orders can include the sales department submitting a sales order or a staff member placing an order to replenish the office supplies. External orders, on the other hand, comprise goods purchased by those who are neither employees nor involved with the operations of the business in any way.
Upon receiving an order, the required goods are pulled from the storage area and sent either for production or to the consumer directly, in the case of finished goods. And if the employee places an order, the goods might be sent to the appropriate department.
Once the goods have been delivered, the inventory is updated, and the records are shared with the relevant stakeholders.
What Is Inventory Process Management?
We have already looked at the process of inventory management. Let us better understand the meaning of inventory process management.
For every business to run, you need to maintain your stocks. This process of managing inventory includes tracking your requirements, ordering materials, and restocking them again. In other words, inventory management is a technique of controlling, storing, and keeping track of inventory in your company.
It’s an essential component of supply chain management that helps streamline and regulate your business’s operations, organize resources, and, ultimately, maximize revenue.
Further, an efficient inventory management process helps organizations prepare for fluctuations in demand and prevent overstocking or understocking.
Here are some of the key benefits of inventory process management.
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Reduces the Risk of Overselling
Overselling harms your brand’s reputation. While it may seem that selling more than what you have would generate greater revenue, it reduces your brand’s credibility if you aren’t able to fulfill customer orders on time.
But with an inventory management system in place, you can easily configure and synchronize your orders as and when they arrive. It assures that your stock levels will be automatically updated and adjusted every time someone makes a purchase.
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Increases Employee Efficiency
Since an inventory process management system automatically updates your stock levels and helps predict demand, employees don’t have to manually count inventory. This lets your employees focus more on other important aspects, such as closing more sales deals, thereby improving their productivity.
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Improves Brand Loyalty and Reputation
An efficient inventory process can help improve customer loyalty and brand reputation. This is because IPM helps you accurately forecast inventory demand as well as any fluctuations, allowing businesses to optimize inventory levels and maintain a smooth ordering process. It encourages customers to keep coming back and make repeated purchases, therefore, increasing sales and profits.
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Reduces Unnecessary Costs
A successful inventory process system helps you eliminate unnecessary costs and lead to a reduction in inventory write-offs, resulting in lesser chances of over-purchasing.
Having an excess amount of goods or stock in your warehouse blocks your working capital. At the same time, you will have to bear the cost of keeping your products in good condition. It only further depreciates their value and increases the chance of wastage if it isn’t sold in time.
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Helps In Long-Term Inventory Planning
Every organization uses different inventory management methods based on what suits their company model. Some common management processes include ABC analysis, just-in-time management, perpetual inventory system, and more. Whether you have a large inventory to manage or a small business, properly defined inventory processes can help run your operations smoothly.
What Are the Limitations of Inventory Process Management?
Despite its advantages, there are several drawbacks to the inventory management process as well. Let us look at some of them.
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Risk Is Not Completely Eliminated
Although an efficient inventory process management system helps predict inventory levels better, it can only partially eliminate risk. Even if your firm uses inventory process software, if left unchecked or malfunctioned, you might end up overselling or overbuying stock.
Besides, if you are not using an advanced AI-powered inventory management process system, the customer demand forecast might not be that accurate, and it will affect your inventory holding level.
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Complexity of Systems
While inventory process systems help manage the movement of your goods better, it can be complex to understand how to use the software. As a result, it is mandatory for your employees to undergo multiple training sessions and look at tutorials and step-by-step guides. One mistake and your company will be running into huge losses.
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Inventory Process Software Is Expensive
One of the major disadvantages of inventory management systems is that they are expensive. Due to their enterprise focus, small- and- medium-scale businesses find it difficult to afford inventory process management software. Fortunately, there is a finite amount of free and open-source inventory management software accessible for small enterprises and startups.
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Quality Control Issues
Inventory process management can help you control the inventory levels in your business but can’t guarantee anything regarding the quality of the products. As a result, it is easy for companies to dispatch defective or wrong items along with good quality ones. This is due to the fact that inventory management systems are primarily based on controlling and monitoring goods and not on their production.
How to Implement Inventory Process Management For Your Business?
If you are keen to adopt an inventory management process for your business, here are the following steps.
Step 1 – Understand Your Budget
One of the first and foremost steps before implementing an inventory process management system is to review your company’s budget. This is important since it determines the scope of the inventory process management for your business and how much you can invest in raw inventory.
There are two methods of reviewing the budget. The first is using a manual budgeting and activity-based costing system, where you check for the price of each raw material required. The second method involves using specialized budgeting software where you can automate the process of assigning prices to the raw materials and let the program manage your budget in a time-saving and effective manner.
Step 2 – Plan Your Warehouse
Once you have figured out how to use your inventory process management system, it is time to determine the location of your warehouse. The warehouse is where you will be storing the raw materials, components, and finished goods. The type of warehouse decides where the raw products with the highest demand will go, how often they need to be transported, and the lead time you can give your clients.
Using an inventory process management tool, you can automate such tasks, manage the status of your existing inventory, and simplify the process of transferring the goods from one storage house to another.
Step 3 – Create a Preliminary Order Of Your Products
Based on previous demand for your products, you should create a preliminary order for your goods. This will help you understand which products are in high demand and those that sell fast, easing the creation of cycle counting and reducing the risk of overstocking or understocking.
Step 4 – Choose the Right Inventory Management Software
You may choose the best inventory management techniques, but without a proper system, you will have difficulty controlling your inventory levels. Depending on your business’s size, industry, and needs, you should choose the appropriate inventory management tool.
Below are a few steps to help you select the best inventory management software for your company.
- Select a price range: While there is no dearth of good inventory process management software, you should keep in mind your financial constraints. Hence, before you choose software, make sure to have a budget in mind.
- Understand your company’s needs: Before purchasing an inventory process system, ensure you know what you will use it for. Do you want the software to make predictions on your inventory? Do you want to use it for customized product pricing? Will the software be used for tracking orders or micromanaging activities in your warehouse? You should ask these questions before buying an inventory management process tool.
- Determine the integrations you require: Depending upon the needs of your business, you need to determine whether you require any integrations to your inventory process software. These integrations can include a CRM Software, payment gateway, ERP Software, order management tool, etc.
Developing a Winning Inventory Management Process
Let us learn how to create a winning inventory management process for your company.
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Create a System to Get Accurate Information On Your Inventory
The first step toward successful inventory management is to build a system that helps you understand, document, and organize your inventory data. This helps you identify and distinguish between fast-moving and slow-moving products, which products are high in demand, and which ones sell faster.
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Create a Unique Process Customized to Your Business
To reduce excess costs and wastage of inventory, it is best to create an inventory management process flow that caters to your business. The process should be such that there are no constraints and has available capacity while helping accurately forecast demand. What’s more, the inventory process management platform should boast effective communication tools to help you contact supply chain operations partners.
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Track Current Industry Trends
To ensure that you stay ahead of the competition, track any changes in the industry on a regular basis. Make sure that your business can adopt new technologies trends such as AI, cloud solutions, automation, machine learning, predictive analytics, blockchain, AR/VR, data analytics, and so on.
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Prepare for Fluctuations In Demand And Supply
Markets are volatile; you need to be prepared for any fluctuations in the demand and supply of your goods. To make your inventory cycle resistant to any volatility, you need to have an inventory management system that is flexible, adaptive, and can accurately forecast future trends.
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Deploy an Integrated Inventory Management Software
Implementing inventory process software is the complete solution for managing all aspects related to inventory. It builds a workable system that maintains cross-functional teams and assists in centralized inventory tracking, stock auditing, barcoding, multi-location inventory management, demand forecasting, hedging your business against contingencies, and ensuring smooth inflow and outflow of goods.
Wrapping Up
The inventory management process is a practice that is vital to every organization. It helps predict inventory fluctuations, forecast demand and supply, reduce costs, and maximize ROI. What’s more, the process of inventory management allows you to regulate all the steps involved right from when an item enters your store till it has been dispatched. To make your inventory management process more efficient, it is best to invest in a specialized inventory software solution.
Frequently Asked Questions
The inventory process flow is defined as the system of unique control methods companies use to regulate product activities within their operations. It involves a range of functions right, from sourcing raw materials to stocking finished goods.
The first step in the inventory management process is performing demand forecasting and future planning for each item in the inventory.
Inventory control refers to the process of ordering, storing, and utilizing a company's inventory. These include storing and processing raw materials, spare parts, finished products, and their administration. The first step in the inventory control process is location prioritization and accessibility. This implies that not only should your warehouse or inventory storage area be accessible but that the inventory stored is well-organized and accessible as well.
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