What is Inventory Management and Why Is It Important?

What is inventory management?

The process of tracking, maintaining, and monitoring a company’s stored goods (inventory) is known as inventory management. Inventory management is critical for supply chain management in internet, omnichannel, and brick-and-mortar enterprises, including ordering and restocking inventory, storing it, changing the frequency of delivery, order quantity, and inventory forecasting for the final point of sale.

Why is inventory management important?

Managing inventory correctly is essential, especially for ecommerce enterprises. Here’s why.

1. This feature ensures you never run out of stock

The first step in inventory management is determining how much inventory you need at all times. Too much inventory can result in ‘dead stock,’” or inventory that cannot be sold because it is out of date. If you have too little, you will run out of stock, fail to meet client needs, and miss out on potential sales.

Using a reorder point formula, you can ensure that your inventory doesn’t fall below a necessary level by keeping an eye on it. (I’ll get to this later.)

2. It’s a good option if you want to save money on space

Too much inventory may result in a significant amount of money being spent on storage space. Inventory is a variable cost that is determined by the amount of space your beginning inventory takes up at any one moment. You’ll pay more for inventory storage if you have more product on hand than you need. Being wise about inventory levels can assist you in reallocating those resources.

3. It prepares you for the unexpected by providing a degree of preparedness

It’s in your best interests to be ready. Do you have a plan if one of the following supply chain problems occurs tomorrow?

  • You suddenly sell out of a product for no apparent reason
  • You underestimate your storage requirements and run out of room
  • Incoming goods from the factory are delayed
  • You run into a cash flow problem and are unable to buy more inventory

Strategic inventory solutions can assist you in avoiding these sticky situations. The ability to track inventory over time and prepare for potential inventory issues will help you handle problems that would otherwise have a significant impact on your firm.

4. It shows how customers behave over time

Keeping track of what sells like wild fire versus what gets covered in metaphorical cobwebs might provide important insights into your consumers’ interests. You may evaluate inventory levels before and after special events or product releases to determine the effectiveness of previous campaigns.

5. It makes predictions about the future

Yes, somewhat. Inventory management aids in good inventory forecasting, which can assist you in anticipating and preparing for demand. You may use past production trends on a monthly, seasonal, or SKU-by-SKU basis to better prepare for future sales and demand. Remember to include any planned marketing campaigns or new product releases when preparing your budget.

6. It aids in the tracking of expenses incurred during the selling process

Inventory accounting is the process of tracking and recording changes in the value of inventory over time as they pertain to manufacturing and costs of goods sold. You can’t properly value your assets or goods sold, and you can’t budget for the inventory you’ll need to purchase, if you don’t have a reliable method of monitoring the value of your inventory.