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Inventory Management - refers to the process of ordering, storing, using, and selling a company's
inventory. This includes the management of raw materials, components, and finished products, as well
as warehousing and processing of such items. There are different types of inventory management, each
with its pros and cons, depending on a company’s needs.

Inventory management helps companies identify which and how much stock to order at what
time. It tracks inventory from purchase to the sale of goods. The practice identifies and responds to
trends to ensure there's always enough stock to fulfill customer orders and proper warning of a
shortage.

Benefits of Inventory Management

The two main benefits of inventory management are that it ensures you’re able to fulfill incoming or
open orders and raises profits. Inventory management also:

 Saves Money:
Understanding stock trends means you see how much of and where you have something in stock so
you’re better able to use the stock you have. This also allows you to keep less stock at each location
(store, warehouse), as you’re able to pull from anywhere to fulfill orders — all of this decreases costs
tied up in inventory and decreases the amount of stock that goes unsold before it’s obsolete.

 Improves Cash Flow:

With proper inventory management, you spend money on inventory that sells, so cash is always moving
through the business.

 Satisfies Customers:
One element of developing loyal customers is ensuring they receive the items they want without
waiting.

Inventory Management Techniques and Terms

Some inventory management techniques use formulas and analysis to plan stock. Others rely on
procedures. All methods aim to improve accuracy. The techniques a company uses depend on its needs
and stock.

1. ABC Analysis:
This method works by identifying the most and least popular types of stock.
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The ABC analysis divides inventory into three categories, with “A” items being the most important and
“C” items being the least important. The ABC analysis can be used to help make decisions about which
inventory items should be given priority in terms of stock levels and reordering.

2. Batch Tracking:

This method groups similar items to track expiration dates and trace defective items. Batch Tracking is

a system that allows you to group and monitor a set of stock that share similar properties. With Batch

Tracking you can:

 Track the expiration of items.

 Trace defective items back to the batch that it belonged.

3. Bulk Shipments:
This method considers unpacked materials that suppliers load directly into ships or trucks. It involves
buying, storing and shipping inventory in bulk. Bulk shipping is the transportation of goods in
large quantity, usually not packed but loaded directly into a vessel. Such goods are
grains, petroleum products, iron ore and more . These type of goods are referred to
as bulk cargo .
4. Consignment:
When practicing consignment inventory management, your business won’t pay its supplier until a given
product is sold. That supplier also retains ownership of the inventory until your company sells it.
Consignment is an arrangement in which goods are left in the possession of an authorized third party to
sell

5. Cross-Docking:
Using this method, unload items directly from a supplier truck to the delivery truck. Warehousing is
essentially eliminated. Cross-docking is the practice of unloading goods from inbound delivery vehicles
and loading them directly onto outbound vehicles.

6. Demand Forecasting:
This form of predictive analytics helps predict customer demand.

7. Dropshipping:
In the practice of dropshipping, the supplier ships items directly from its warehouse to the customer.
Dropshipping is a business model that allows you to sell products online without having to own or
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operate the physical location where those products are stored and processed. This means you can start
an ecommerce store and sell a wide range of products without handling inventory and fulfillment.

8. Economic Order Quantity (EOQ):

This formula shows exactly how much inventory a company should order to reduce holding and other
costs. (EOQ) is a calculation companies perform that represents their ideal order size, allowing them to
meet demand without overspending. Inventory managers calculate EOQ to minimize holding costs and
excess inventory

9. FIFO and LIFO:

First in, first out (FIFO) means you move the oldest stock first. Last in, first out (LIFO) considers that
prices always rise, so the most recently-purchased inventory is the most expensive and thus sold first.
FIFO and LIFO are methods used in the cost of goods sold calculation. FIFO (“First-In, First-Out”) assumes
that the oldest products in a company’s inventory have been sold first and goes by those production costs.
The LIFO (“Last-In, First-Out”) method assumes that the most recent products in a company’s inventory
have been sold first and uses those costs instead.

10. Just-In-Time Inventory (JIT):

Companies use this method in an effort to maintain the lowest stock levels possible before a refill.

11. Lean Manufacturing:

This methodology focuses on removing waste or any item that does not provide value to the customer
from the manufacturing system.

12. Materials Requirements Planning (MRP):

This system handles planning, scheduling and inventory control for manufacturing.

13. Minimum Order Quantity:

A company that relies on minimum order quantity will order minimum amounts of inventory from
wholesalers in each order to keep costs low.

14. Days Sales of Inventory (DSI)

This financial ratio indicates the average time in days that a company takes to turn its inventory,
including goods that are a work in progress, into sales. DSI is also known as the average age of
inventory, days inventory outstanding (DIO), days in inventory (DII), days sales in inventory or days
inventory and is interpreted in multiple ways.
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Indicating the liquidity of the inventory, the

figure represents how many days a
company’s current stock of inventory will
last. Generally, a lower DSI is preferred as it
indicates a shorter duration to clear off the
inventory, though the average DSI varies
from one industry to another.

15. Reorder Point Formula:

Businesses use this formula to find the
minimum amount of stock they should have
before reordering, then manage their
inventory accordingly.

16. Perpetual Inventory Management:

This technique entails recording stock sales and usage in real-time.

17. Safety Stock:

An inventory management ethos that prioritizes safety stock will ensure there’s always extra stock set
aside in case the company can’t replenish those items.

18. Six Sigma:

This is a data-based method for removing waste from businesses as it relates to inventory.

19. Lean Six Sigma:

This method combines lean management and Six Sigma practices to remove waste and raise efficiency.

Importance of inventory management on supply chain

Inventory management is vital in the supply chain because a company must balance customer
demand with storage space and cash limitations. Inventory management provides visibility into the
supply chain (procurement, production, fulfillment, etc.) so managers can coordinate lead times for
deliveries with production timetables.

https://www.youtube.com/watch?v=rIJwIrGRYAk
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Four types of Inventory

1. Raw materials
Raw materials are all the items that your business uses to manufacture finished products. The total cost
of a manufacturer's components, subassemblies, and supplies in stock that are not currently in
production.
These materials can be sourced, produced by your company, or procured from a supplier. Raw materials
can be further classified into two categories:
 Direct raw materials
 Indirect raw materials
Direct raw materials
Direct raw materials are the components that are used directly in the final product. These
materials are easy to quantify and account for per unit or per batch basis.
Indirect raw materials
Indirect raw materials are the components that are not part of the final products but are used
during the production process. Indirect raw materials are harder to identify and account for since they
can’t be traced to specific batches or units. However, these are essential for the production process.
2. Work-in-progress (WIP)
All the materials that your factory floor has started working on, but the product isn’t quite
finished yet, consist of your work-in-progress (WIP) inventory. Work-in-process inventory is materials
that have been partially completed through the production process. These items are typically located in
the production area, though they could also be held to one side in a buffer storage area.
It can comprise direct and indirect raw materials — the only thing to note here is that the
product is not complete and is a work in progress.

3. Finished goods

All the items ready to be sold are considered part of your finished goods inventory.
Finished goods inventory is the total number of manufactured products that are available, in stock, and
ready for purchase by vendors, retailers, and consumers. With that said, finished products are often a
relative concept, since a seller's goods may actually become another buyer's raw materials inventory.
These include things such as heavy machinery, furniture, cars, and jewelry. Your kitchen appliances are
also examples of durable goods. The house that you live in is another one, and when they are ready to
be sold they are finished goods
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4.Maintenance, Repair, Operations (MRO)

Comprises the consumable materials, equipment and supplies needed for maintenance, repair and
operations activities. MRO includes items that are used in a production process but — unlike raw
materials — are not incorporated into a company's finished products
As the name suggests, maintenance, repair, and operations (MRO) inventory is essential to keep
your factory operational. MRO inventory is strictly for your consumption and is not available for
customers to purchase.

Other inventories

1.Transit, transportation, or pipeline inventory — is a shipping term that refers to the finished goods
that have been shipped by a seller, but have yet to reach the buyer. As the name suggests, inventory
items are in 'transit' to their destination as well as their respective recipient.
2. Buffer inventory (also known as safety stock, supply chain safety net, or contingency stock) refers to a
surplus of inventory that is stored in a warehouse in case of an emergency, supply chain failure,
transportation delays, or an unexpected surge in demand.
3. Anticipation inventory or speculation inventory refers to extra finished products or raw materials a
business purchases to meet an anticipated jump in demand.
4. Decoupling inventory is the term used when product manufacturers set aside extra raw materials or
work in progress items for all or some stages in a production line, so that a low-stock situation or
breakdown at one stage doesn't slow or stop operations.
5. Cycle inventory is the products, materials or raw ingredients that a company keeps to fulfill its
minimum production quotas. Cycle inventory is crucial to the company's operations because regular
business operations use or "cycle" the inventory frequently. Managing cycle inventory effectively helps

ensure the business can meet customer demands and continue to produce high-quality products.