INVENTORY MANAGEMENT 1

CONTROLLING COSTS OF INVENTORY MANAGEMENT MANAGING

AVAILABILITY

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Controlling Costs of Inventory Management Managing Availability

Introduction

One critical aspect of a business is effective and efficient inventory control and

management. Munyaka and Yadavalli (2022) observed that effective inventory management

will maintain a balance between the availability of a product and its demand in the market

and also assess and control the associated costs of inventory management. The decisions

made surrounding inventory management have a significant impact on the financial health

and projection of an organisation and will also affect customer satisfaction and experience

levels. Ramos et al. (2020) noted that savvy and innovative methods of inventory

management within a company’s supply chain will reduce its total inventory costs and

increase its value in the market. Therefore, in this essay, the author will delve deeper into the

strategies used for inventory management, the impact of inventory management on

businesses, the impacts of both insufficient and excessive inventory, and then offer strategies

that a company can use to control its inventory and maintain availability.

Strategies of inventory management

Retailers, stockists, and manufacturers often use different methods to manage their

stock or inventory. One such method is the Just-In-Time (JIT) method of stocking/inventory

management. According to Saha and Ray (2019), the JOT method allows companies to order

inventory just in time to meet market demand. Therefore, the approach has the potential to

save the company money because it does not build up too much inventory, and it is therefore

able to save money on overheads such as storage. Further, it reduces the company’s risk of

losing money if the demand for the product decreases, which also means that with extra cash

at hand, the company can invest in other processes/operations, such as marketing advertising.

However, the success o JIT is highly dependent on the stability and predictability of raw
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material suppliers, meaning that if anything affects the supply of raw materials, the

customers’ orders will not be fulfilled in time due to the lack of extra inventory.

Moreover, some companies prefer the use of ABC analysis due to the variation of

attention needed for different products. Shrouty (2019) noted that the use of ABC analysis

would allow a company to prioritise the most critical products or brands in inventory

management and then assign the appropriate time to monitor each. The connotation A

represents the high-value brands that form a very small part of the total inventory; B is the

moderate-value products with a medium-average apportion of the total inventory; and C is

the low-value products forming a significant apportion of the total inventory. Therefore,

companies will perform numerous spot checks for A-level brands rather than for C-level

products because their understocking would have immense financial impacts on the company

as they represent a higher financial revenue.

Impact of inventory management on businesses

The main objective of inventory management is to help both warehouse managers and

workers keep a record of the stock levels of products. Consequently, this demands that there

should be full transparency of the entire supply chain, allowing the effective monitoring of

the flow of goods from the supplier. Consequently, the benefits of inventory management and

control are both financial and operational. On one hand, Sohrabi et al. (2021) observed that

effective inventory management and control will improve the performance of departments,

preventing theft and loss and also improve the security and tracking of products.

Consequently, this will increase the productivity and performance of the entire company.

Furthermore, managers will use inventory management to plan and monitor sales and

marketing procedures, leading to better service. Subsequently, increased sales will lead to

better financial performance due to increased profitability.

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Inventory management is one of the major and most important aspects of any

profitable company. Ahmed et al. (2021) even concluded that there is a positive correlation

between a company’s profitability and efficient/effective inventory management practices.

Moreover, Becerra et al. (2022) found that, on average, 36% of companies with increased

profitability could attribute the change to improved inventory management practices and the

increased transparency of their operations. Consequently, this indicates that companies with

poor inventory management and control practices lose valuable monetary and time resources,

and, in some cases, it might lead to the entire dissolution of the company. Cesarelli et al.

(2021) stated that the lack of efficient inventory management practices will make a company

lose track of its stock levels, resulting in either overstocking or understocking. In either case,

the result is increased warehousing costs, loss of clientele, missed sales, and the

damage/expiration of products that have stayed shelved for a long time.

Specialists have also advocated for the centralisation of inventory management,

especially for companies selling their products on multiple platforms. Egon (2023) observed

that, especially for companies with e-commerce operations, inventory management could

become stretched and overcomplicated due to the use of multiple channels such as Shopify,

eBay, or Amazon. In such a case, the company may make several detrimental errors and

oversell their product if their tracking is done remotely and separately on each channel.

Furthermore, Fernández et al. (2020) indicated that the probability of human error only

increases as the stock grows. Therefore, it would be more effective to manage inventory

through a centralized system as this will shorten the time needed to identify the need for

restocking and order fulfilment for various products across the different channels.

Muchaendepi et al. (2019) observed that it could be challenging for companies to

balance the risks of either overstocking or having insufficient stocks, as this requires the

implementation of complex inventory management systems for their supply chains. Both
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large and small businesses require proper inventory management systems as they can help

keep track of all their supplies and even determine their exact cost. Munyaka and Yadavalli

(2022) also found that effective inventory management systems can allow businesses to

manage the effects of sudden changes in demand without affecting their customers’

experience or altering the quality of their products. The latter assertion was found to be more

prevalent and more relevant for brands or companies that hoped to be more customer-centric.

Impacts of insufficient inventory

Insufficient inventory poses various threats to companies, including missed sales,

longer delivery times, lower turnover, and the loss of customers. According to Ramos et al.

(2020), missed sales will occur when a company cannot immediately fulfill the orders of

customers due to a stockout. The author also noted that the main cause of this outcome is the

lack of effective tracking systems for stock, which leads to the stock out of products/items

that are popular with customers or even a sudden surge in demand for a particular product.

The surge of demand will often occur during peak seasons, such as Christmas or Easter

holidays when there is an increased need to buy gifts for both family and friends. Therefore,

companies that have a reputation for having stockouts of certain products will struggle to

reach their full business potential and, in the long run, will lose market value and revenue.

Furthermore, the notoriety of stockouts makes them less popular with customers and might

even lose the loyalty of their existing customers.

Moreover, the loss of customers is a common occurrence of insufficient inventory.

Shrouty (2019) observed that customers are not easily pleased or awed but are easily

offended by a company’s lack of compliance or lack of stock. Customers expect that

companies will fulfil their orders in time, at competitive prices, and that their desired

products are available every time. Every time a customer’s need for a product is not met or
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realized, their experience and satisfaction are severely impacted, and this reduces their

interest in a business. Eventually, customers will turn to businesses that fulfill all their

expectations, needs, and experiences without any inconveniences. Moreover, Sohrabi et al.

(2021) stated that stockouts lead to the loss of several sale opportunities, which in turn lead to

lower turnover. Lower turnover will undermine the financial stability of a company and also

affect its cash flow, meaning that the company is unable to operate competitively within a

market.

Furthermore, insufficient inventory will damage the image of a company, which in

turn reduces the number of customers. Bad reviews, especially in the age of social media and

social media reviews of companies (such as Yelp!), have meant that companies are always on

their toes when it comes to fulfilling customer needs and expectations. Thus, a company that

receives several negative comments and reviews from different customers due to

understocking will eventually find it hard to acquire new customers or to keep existing

customers satisfied.

Moreover, understocking leads to increased storage costs. Sohrabi et al. (2021) argued

that the more a company has in merchandise, the more it pays or incurs in costs (with the

converse of the statement also being true). However, in the cases where a company does not

have enough stock to be stored in warehouse spaces, it ends up spending more. Authors argue

that an understocked company will end up paying more for storage space it does not need,

and this prevents it from investing the money in other critical parts of its operations, such as

marketing or advertising.

Impacts of excessive inventory

According to Ahmed et al. (2021), excessive inventory will be realized when a

product is in excess in comparison to its market demand by consumers, which means that a
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large quantity of the product remains unsold. Some of the factors that could lead to excessive

inventory are increased/increasing tariffs, poor demand forecasting, over-purchasing, and the

cancellation of orders by customers. In the most recent times, Becerra et al. (2022)

commented that the COVID-19 pandemic led to a temporary close of stores, thereby delaying

shipments and also leading to shutdowns of product manufacture. Consequently, this led to

an increase in inventory for many brands and products, posing significant threats to their

companies’ financial well-being.

Therefore, many authors have agreed and found that the main impact of excessive

inventory is the huge financial risk that it places companies. Cesarelli et al. (2021) suggested

that while there are some benefits to having extra inventory, such as allowing a buffer for

cases when there are unexpectedly higher demands by consumers, the disadvantages of

overstocking often outweigh their advantages. In the past, excessive inventory led to the

decline and eventual toppling of several companies in the United States of America. For

instance, the price wars between retail giants Kmart and Walmart led to adjustments in

inventory management policies and strategies. While Walmart shifted to just-in-time

approaches, Kmart chose to use its less-streamlined approaches, which in time disallowed

them from aligning their inventory levels with the customer demand. The company thus faced

delayed shipments and incorrect demand forecasting 1990s, leading to excessive inventory,

while its competitor, Walmart, was able to manage its inventory and manage its stock prices

significantly.

Subsequently, excessive inventory will affect the profitability of a firm. Egon (2023)

indicated that inventory will be bought and then result in a profit, and the possession of too

much quantity of inventory will result in the working capital being tied to or on goods.

Furthermore, inventory will lose value over time due to factors of degradation through

expiration or damage, not to mention the decline of demand for such goods, which means that
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the company will eventually lose revenue. Moreover, Fernández et al. (2020) reiterated that

once working capital is tied up on goods, it means that the money cannot be recirculated and

be used on other aspects/operations of the business, which means that the business’ potential

growth is slowed down.

Muchaendepi et al. (2019) also found that excessive inventory will not only have an

impact on a company’s bottom line but will also affect its sustainability. As noted earlier,

excessive inventory may lead to damage to some products, which, in the end, are thrown

away as waste in landfills. In the past two decades, more research on climate change has

shown how companies have had a significant effect on this phenomenon and how their

unstainable activities have led to global warming. Ramos et al. (2020) observed that over

two-thirds of consumers have admitted to boycotting companies and brands that fail to share

their personal beliefs and values of environmental sustainability. As such, companies have an

increased incentive to manage their inventory better to avoid waste through excessive

stocking, meaning inventory management has become part of companies’ environmental

impact/change initiatives.

Strategies to control inventory and maintain availability

Ramos et al. (2020) suggested that in the age of technology, companies should adopt

digitalized platforms to control their inventory while maintaining availability. For instance,

the author suggested that the first step to managing excessive inventory is the adoption of the

right inventory technology that will allow effective supply chain management. Furthermore,

the adoption of such a technology would also lead to a reduction of overhead costs, reduce

waste and carbon footprint, and effectively increase the sustainability of the company.

With the use of a centralised system of record-taking and management, brands and

products have the potential to gain better visibility and loyalty in the market. Furthermore,
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Saha and Ray (2019) noted that the utilisation of this system’s historical data would allow

brands to implement data-driven insights leading to more effective market strategies that

enable the brands to optimise any excessive inventory through sustainable means. Moreover,

the use of the platform will allow the company to understand the right time to reorder some

products and the right volume to order without increasing the possibility or probability of

overstocking.

The use of Minimum Order Quantities (MOQs) can also be essential in reducing

inventory costs and improving inventory management. Shrouty (2019) observed that MOQs

allow wholesalers to experience the advantages of economies of scale because the more they

order, the cheaper the price for individual units. Nevertheless, this can pose some challenges

to the wholesaler; since many large wholesalers operate on limited cash flows and excessive

capital, they might find it hard to place large orders requiring instantaneous payments.

In the cases of overstocking, companies should also consider getting rid of their

deadstock first. Sohrabi et al. (2021) noted that in many cases, wholesalers will buy goods in

bulk due to good deals but are then unable to turn a profit by selling the products

immediately. No matter, Ahmed et al. (2021) suggested that some businesses should bundle

the deadstock as gifts with products that customers popularly purchase. This will not only

increase the rate at which the deadstock reduces, but it will also lead to increased sales of

popular goods. Shrouty (2019) even suggested that companies could donate such products to

charity as this allows the company to receive tax deductions from the government.

Alternatively, the wholesaler could return the deadstock to the supplier if the supplier has a

return policy. However, the downside to this strategy is that it might cost the wholesaler some

money in terms of the return policy penalties that some suppliers might implement.

Conclusion
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Inventory management, as evidenced by several analyses, is one of the most important

aspects of a business. It not only affects the performance and productivity of a company but

also increases its profit margins by managing the overheads incurred through the storage of

inventory. Nevertheless, balancing and control of inventory management expenses while also

ensuring the availability of the product proves to be a core challenge for firms across various

industries. Insufficient or excessive inventory will have detrimental effects on companies

spread across the financial health of the firm and the fulfilment of their customer satisfaction.

Consequently, companies must employ a string of strategies to ensure that they are

effectively stocked at all times to meet the demands of the market at all times and in all

seasons. The analysis has revealed that good inventory management and control practices can

be achieved through the use of computer software that utilises data analytics. Subsequently,

the use of such software will ensure the financial health of the company, improve its brand

image, and increase its environmental sustainability.

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References

Ahmed, E.R., Alabdullah, T.T.Y., Ardhani, L. and Putri, E., 2021. The Inventory Control

System’s Weaknesses Based on the Accounting Postgraduate Students’

Perspectives. JABE (Journal of Accounting and Business Education), 5(2), pp.1-8.

Becerra, P., Mula, J. and Sanchis, R., 2022. Sustainable inventory management in supply

chains: Trends and further research. Sustainability, 14(5), p.2613.

Cesarelli, G., Scala, A., Vecchione, D., Ponsiglione, A.M. and Guizzi, G., 2021, February.

An innovative business model for a multi-echelon supply chain inventory

management pattern. In Journal of Physics: Conference Series (Vol. 1828, No. 1, p.

012082). IOP Publishing.

Egon, K., 2023. An In-depth Overview of Inventory Management Systems (IMS).

Fernández, M.I., Chanfreut, P., Jurado, I. and Maestre, J.M., 2020. A data-based model

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