Chapter 19. Inventory Management Frequently Asked Questions

No, inventory management and material management are not the same.

Material management is the term used to describe planning and controlling materials used to produce goods. It is a manufacturing term.

On the other hand, inventory management is solely concerned with managing and tracking finished goods to be sold.

While you can use Excel for inventory management, remember that Excel is not built for this purpose. 

Many small businesses with limited inventory management experience start using Excel (or even pen and paper) only to find that it’s insufficient as they grow.

Excel can get very complicated and you still need to input a lot of information, which leaves you vulnerable to mistakes.

It is strongly recommended that you move away from using Excel (and pen and paper) when handling inventory and use software built for inventory management because, in the long run, you will be more efficient.

Yes, technically speaking, inventory management can be called a part or a subset of the supply chain.

Merchants are the middlemen between manufacturers who produce goods and the customers who purchase them (though in direct-to-consumer selling, the manufacturer sells directly to the consumer).

When you work in inventory management, it might not feel like you’re part of the supply chain because you are selling the finished product and you refer to manufacturers as ‘suppliers,’ but know that you are part of the chain.

Inventory management straddles both accounting and logistics. If inventory is not managed correctly, it’s problematic for both accounting and logistics.

• In accounting, inventory is considered an asset on the balance sheet, and managing it effectively is essential for accurate financial reporting.
• Regarding logistics, inventory management involves efficiently controlling and tracking goods moving through the supply chain, ensuring optimal levels to meet demand.

In short, accounting emphasizes the financial valuation and representation of inventory; logistics concentrates on the physical control and movement of goods.

A Just-In-Time (JIT) approach to inventory management can be used by many businesses to improve efficiency.

In inventory management JIT is an approach that aims to keep stock levels low to meet demand when required. It reduces excess inventory and holding costs, and enhances overall efficiency by synchronizing inventory levels with demand.

JIT is suitable for all kinds of businesses regardless of the products they sell or whether they are small, medium, or large.

JIT can also be used in many other industries outside of e-commerce and retail, such as manufacturing, healthcare, and even fast-food outlets and restaurants.

The bullwhip effect is an inventory management phenomenon when a spike in customer demand increases a seller’s forecasts, and it has a knock-on effect on distributors’ and manufacturers’ forecasts, compounding along the way up the supply chain.

Part of this increase is related to the safety stock they add as they forecast. When this happens, it can lead to overstocking.

The best software for inventory management should cover a wide range of inventory management needs.

Ideally, the software you choose should offer more than just inventory management. It can include various other services that help you sell your products.

This is helpful because you won’t have to switch between different platforms, services, and tools, and information won’t get lost between them.

Sellercloud’s software overlaps with many other areas, such as order fulfillment and accounting, to name a couple, so any inventory management changes that directly affect these areas won’t get lost or need to be manually entered.

What is also particularly useful about Sellercloud is that it is customizable, so as your inventory management needs change, Sellercloud can be modified to your needs. (Sellercloud has a whole team dedicated to customization.)

Check out Sellercloud’s case studies and testimonials. Book a consultation to see for yourself how Sellercloud can help your business.

There are many different components to an inventory management system. At the bare minimum, an inventory management system should enable you to catalog and track your products as they enter and exit the warehouse.

Emerging features that are becoming a necessity include cloud infrastructure and mobile devices.

Cloud infrastructure enables a business to manage most of its software and hardware through the cloud, removing the need for a server.

Pickers can use mobile devices to go around the warehouse and collect the products they need. It saves a lot of time and ensures that pickers get and scan the right product.

As time passes, what we consider crucial features to an inventory management system will change as some features become obsolete and new features go from beneficial to must-have.

FIFO (First In, First Out) is one of the most popular inventory management methods, and for good reason. For many companies, following this method is a must.

FIFO ensures that you sell the oldest stock first (stock that has spent the longest time in the warehouse), keeping your inventory young and reducing the possibility of it expiring and becoming obsolete. 

LIFO (Last In, First Out) and weighted average are also popular methods. Depending on how your business operates, you may prefer them over FIFO.

In well-organized, established companies, the inventory manager is responsible for overseeing inventory management in a warehouse or facility where inventory is stored.

In large warehouses with many products and a high volume of inventory and sales, inventory managers likely have several employees working under them.

However, depending on the company’s hierarchy, it might not be someone titled ‘inventory manager.’ It could be someone else. They may even have multiple roles.

The CEO could even be responsible for inventory management in young companies that haven’t yet put someone in an inventory manager role.

Various skills are advantageous in inventory management. Here are the top five inventory management skill:

1. Good product knowledge—Know the variations, types of products, and what sells together. But it is also beneficial to know when something is broken or needs to be fixed.
2. Forecast demand—Being able to forecast demand and order inventory accordingly is an essential skill in inventory management.
3. Track inventory—When you track inventory and how it moves around the warehouse, you can improve your inventory management approach.
4. Work well in a team (and lead a team if you’re the warehouse manager)—You’re only as strong as your team.

Work with suppliers and build relationships—Working well with your suppliers makes it easier to negotiate deals and delivery arrangements that work for your company.

Keeping inventory low is better because there’s less risk associated with low inventory levels.

Low inventory means you can change your stock more quickly when new products come along as you’ll have the space to store them.

You’ll also have less finances tied up in inventory, which is risky for the company’s health, and you are less likely to hold excess or obsolete stock.

The problem with keeping inventory low is that you need to reorder more frequently, which can increase expenditure, but for many businesses this is an expense they’d prefer to pay to avoid risk.

It depends on the business and the products they sell, however, for most companies, a reasonable inventory turnover rate is between 5 and 10.

This means that a business will need to sell and restock its inventory approximately every one or two months. Businesses that sell perishable goods have a higher inventory ratio.

Head back to Chapter 2 for more on terms like turnover ratio.

When you have too much inventory, you risk overstocking, which puts you at financial risk as a lot of your finances are tied up in the excess inventory you have.

This excess inventory is at a higher risk of becoming obsolete if not dealt with quickly enough. Meanwhile, you’re losing sales for products you could have been selling in the place of the excess inventory.

Too much inventory is never good.

A sound inventory management system can help businesses eliminate the buildup of dead stock.

One of the best ways an inventory management system can limit dead stock buildup is by offering inventory aging reports.

These reports inform you how long a product has been in your inventory and may notify you when inventory reaches a certain age.

With the inventory management system monitoring inventory age, inventory managers can then take measures to reduce aging inventory before it becomes dead stock.

There is only so much inventory managers can do regarding inventory turnover. Inventory managers cannot increase the demand for products, and likely do not have a say on product pricing.

Inventory managers can help improve inventory turnover by increasing the efficiency of products entering and exiting the warehouse.

This primarily means ordering the correct quantity of products based on demand, which requires forecasting and working with suppliers to improve delivery times and order quantities.

It’s essential to find your optimal inventory level.

properly you are far more likely to be profitable than if you manage inventory poorly.

Firstly, ensuring that you always have the necessary inventory, you won’t miss sales from stockouts or not having space for new inventory, increasing profitability.

You can also minimize inventory waste by monitoring the age of your inventory and taking action to remove undesirable items to make space for new products.

On top of that, you can forecast demand and set points to reorder new products so you always have enough inventory to keep selling, keeping cash flow steady.

Further down the line, effective inventory management positively impacts customer satisfaction as you are less likely to make mistakes.

That impacts profitability because it can mean that customers are more likely to return to you and recommend your store to others.