Everything from a business’s revenue to its reputation comes down to one key element: inventory management. Knowing how to manage inventory is essential for balancing supply chain costs with consumer demand, but there are many logistics methods for managing and replenishing inventory in a warehouse.
The right inventory management method for your business depends on several factors, including what goods you are selling, how consistently you receive bulk orders, and what forecasting methods you use. Let’s explore how inventory management works, and the most common strategies for how to manage inventory.
Why Does Inventory Management Matter?
A lot of the most important work happens behind the scenes. Think of it like a stage play: while the actors and sets are the public face of the production, if the stagehands don’t perform their parts well the whole thing can fall apart. The curtains closing too early or too late, the lights illuminating the wrong actor, the microphones malfunctioning—all of these errors on the part of the backstage team will be felt across the entire company and by the audience, who is pulled out of the experience by awkward production.
Inventory management works similarly. When all goes according to plan, consumers won’t notice what is happening behind the scenes and businesses will see fulfillment and replenishment run smoothly as designed. But if inventory is not effectively managed, everyone will feel the effects through slower lead times, frequent out-of-stock items, and customer service inboxes packed with frustrated customers.
When a business knows how to manage inventory, they will instead experience satisfied customers, faster lead times, lower warehouse costs, and high-level transparency of product movement into, out of, and within the warehouse.
How Inventory Management Works
Although methods for managing inventory vary, they all exist to ensure four basic events can happen successfully:
1. Inventory is Delivered
The business orders inventory from suppliers or directly ships it to the warehouse to be stocked and prepared for consumer orders.
2. Inventory is Stocked
The warehouse inspects the incoming inventory and stocks it, ideally with a combination of inventory management software and physical counts of inventory to guarantee accurate tracking and reduce the risk of overstocking or stockouts.
3. Inventory is Ordered
When inventory runs low, new inventory is ordered from the business or its suppliers. This is where it’s important to understand how to manage inventory, to ensure successful and timely replenishment.
4. Inventory is Replenished
New inventory is delivered to the warehouse and stock is replenished, maintaining the movement of new inventory through the supply chain and to the consumers in a timely manner.
How to Manage Inventory: Five Methods
While inventory management generally follows the cycle of stocking, ordering, and replenishing, there are different methods by which this can occur in a warehouse. Here are five of the most common ways to manage inventory.
Just-in-Time (JIT) Inventory Management
JIT Inventory Management replenishes inventory on an as-needed basis, rather than ordering in bulk on a scheduled basis. While this method reduces the risk of overstock or dead stock sitting in the warehouse for an extended period of time, it may also result in longer lead times and an increased risk of out-of-stock issues.
Economic Order Quantity (EOQ)
The goal of EOQ is ultimately to reduce inventory setup and holding costs in a warehouse by ordering large batches at low frequencies based on expected customer demand. But the challenge with this inventory management model is that it assumes a constant consumer demand, which may not be a reliable assumption in every industry, especially for businesses in which demand is fluctuating or seasonal.
Safety Stock Inventory (SSI)
Businesses opt to use an SSI method when concerned about running out of stock or having supply and demand issues. This strategy involves maintaining an emergency stock that remains static in the warehouse unless needed to make up for supply chain complications. While this can cost more in holding fees and take up extra space in a warehouse, it can be a useful fallback for unexpected increases in orders.
Day of Sales Inventory (DSI)
DSI bases inventory management on the average time (in days) it takes to replenish stock and how quickly it sells after being stocked. This calculation allows businesses to determine when to order new inventory to maintain stock levels using inventory averages. While the average age of inventory is an excellent calculation, especially as a starting point, it may not be a reliable metric on its own as inventory moves more dynamically in most cases.
Demand Forecasting
Spoiler alert: demand forecasting is our personal favorite method of inventory management because of how it utilizes historical and real-time data to actively forecast demand and replenish stock on a reliable, continual basis. When combined with the latest inventory management software technology, demand forecasting makes it possible for companies to accurately anticipate demand before it occurs, maintaining the right stock at the right time.
How to Manage Your Inventory the SMART Way
Inventory management is complex, involving several moving parts and predictive analytics to try and maintain the perfect inventory levels. Smart Warehousing utilizes the latest technology and automation to sort, organize, and maintain inventory in our dynamic warehouses across the country. Start shipping the Smart way and request a quote today.