What is a Supply Chain

What is Inventory Management?

Inventory management is the process of tracking the movement of your products and monitoring available quantities based on consumer demand. This involves further understanding the correlation between product availability and customer needs. It also means leveraging this information to improve decision-making related to order frequency, quantity, and timing.

Your available inventory is a crucial component in building a successful supply chain, and it requires balance. For example, your customers want to find their favorite products when they are ready to buy them. If your items are not available when customers need them, you run the risk of losing sales. However, having overstock could create unnecessary costs. 

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Successful inventory management involves striking a balance between maintaining an adequate supply of products while avoiding excessive inventory. By achieving this, businesses can save on costs, reduce waste, enhance customer satisfaction, and grow the business.

Inventory management begins by implementing unique identification methods for your products. This ensures efficient tracking of inventory, including its current location, quantity, and your future needs to run your business.

GS1 US has worked with industry leaders for decades to improve inventory management processes by developing and refining global standards and advocating for solutions to create a better, safer supply chain.  

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Why is Inventory Management Important?

Effective inventory management is vital because it ensures the on-time delivery of the right products and quantities to the right location. If you cannot deliver on consumer or trading partner demand, you risk negatively impacting your business. 

However, inventory management is more than just having the right products on hand. You could also strain resources if you have too much. For example, too much inventory can tie up money and storage space. However, too little inventory risks losing customer sales and creating unnecessary delays. 

By having a clear understanding of your inventory levels, you can develop improved production and delivery plans for your products. This level of understanding and visibility into your processes allows you to address any pain points or sources of disruptions. This greater insight ensures for a seamless exchange of data with suppliers and partners. This means you and your teams can respond quickly to any change in demand.

Better inventory management translates to sales when you are able to prevent overstock, improve customer satisfaction, and power your supply chain efficiently. 

Proper Inventory Tracking Allows for Full Transparency 

Inventory management plays a critical role in creating a more transparent supply chain. Using best practices within your operation allows for streamlined product distribution across the supply chain. It allows for better tracking of products and a greater insight into market demand. This real-time information positions you to work both better and closer with partners, distributors, suppliers, and retailers.

Greater visibility into your inventory increases confidence in your brand and creates greater trust with those consuming and receiving your products.  

Watch our short videos to learn how inventory management creates greater supply chain visibility Inventory Management.

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Tracking Raw Materials

Tracking raw materials helps you forecast the quantity of the finished products your customers and distributors expect and need. Having a full understanding of the materials available helps to predict how many final products can be produced in a given time frame.

Without the right quantity of raw materials for your products, you may risk delays across the supply chain. Also, too much inventory can be both wasteful and costly.  

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Production Process

Too much waste along your supply chain is both costly and unsustainable. Therefore, it is more important than ever to create streamlined processes, especially during production. Cleaner and more streamlined processes can cut costs, helping to potentially increase your profits and protect your margins. 

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Completed Goods on Hand

Visibility into your inventory is necessary if you want to understand where your products are and what completed goods are available for distribution. 

Real-time reporting on product availability will help you better track their movement across your supply chain, from manufacturing to distribution. 

It is important to create regular processes, such as taking inventory counts, automated tracking, and real-time data reporting. This can help your business better optimize your inventory for your customers' needs. 

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Operational Costs

When you can effectively manage your inventory, you will be in a better position to reduce overstocking, understocking, or obsolete items. This results in saving on unnecessary costs down the line.

By leveraging best practices in inventory management, you will be in a better position to reduce storage costs, improve fulfillment times, and streamline your overall supply chain.  


How to Keep Track of Inventory: Common Methods

Some common methods of tracking inventory can include things like barcode scanning, radio-frequency identification (RFID), and inventory management software. Below are some common approaches adopted by businesses to help power supply chains with the right inventory.

A just-in-time inventory system reduces the costs of holding excess inventory. Products are created only when they are needed, thus preventing waste and optimizing inventory. Companies use JIT to save money, work more efficiently, and simplify their supply chain. This approach is all about getting the right goods at the right time, while avoiding excess waste.  

JIT relies on accurate inventory data to ensure that the right amount of product materials is available. This helps create a better process as well as lower inventory costs. 

Like anything, there are pros and cons to this approach. JIT can help you save money on inventory holding costs, which can help you become more efficient with better quality control. However, JIT increases reliance on suppliers, which could cause production delays if products do not arrive on time.

Economic Order Quantity (EOQ) helps give insight into the right quantity of goods to order so you can minimize inventory costs. The goal of this approach is to balance inventory costs and avoid inventory shortages.

To calculate this, you can use a specific formula. You'll need to know your annual product demand, the cost of an average order, and the holding cost. This can be used to calculate the Economic Order Quantity (EOQ), where the result is the amount of units to order each time.

Square root of: [2(setup costs)(demand rate)] / holding costs 

Ordering the right amount of products in line with your demand helps minimize inventory holding costs. It also reduces the likelihood of experiencing stockouts. 

Days of sales inventory (DSI) helps you gain insight into how long your inventory has been on the shelf. By calculating DSI, you will be able to pinpoint your sales efficiency and identify which products are harder to sell.

To calculate DSI, you divide your average inventory by average daily sales. This equals the number of days of sales inventory you have on hand. For example, if you have 100 units and sell 10 units a day, your DSI is 10 days. 

A high Days Sales of Inventory (DSI) indicates that your products are remaining on the shelves for a considerable period of time. This can lead to reduced profitability and tie up your investments.

Using DSI to identify slower selling products enables you to make informed inventory decisions. This includes adjusting inventory levels or implementing price changes to boost sales. 

Materials Requirement Planning (MRP) assists in inventory planning by predicting the required quantity of materials to meet production goals.

Using data from sales forecasting and inventory levels, this formula offers insight into the precise quantity of materials and timing needed. It prevents stockouts or overstocking situations. Using the MRP formula you can create a production plan that considers the requirements to complete each product. MRP not only assists in inventory management but also enhances production efficiency by minimizing lead times and enhancing scheduling accuracy. 

Other Inventory Management Systems

RFID Inventory Management

Other inventory management systems include using technology such as radio frequency identification (RFID). *RAIN RFID technology uses radio waves to track and manage inventory in real time. It achieves this by automatically transmitting data to a tag reader, ensuring automatic, unique, and actionable product identification. This creates more accurate information sharing with trading partners along the supply chain. 

RFID tags are attached to products or pallets, and then these tags transmit information to RFID readers located throughout a warehouse or store. They provide visibility and insight into real-time information about inventory levels and products’ locations. 

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RFID technology enables warehouse staff and other individuals to effortlessly locate products and identify if restocking is necessary. Additionally, RFID helps minimize errors that can arise during manual inventory processes. This means your processes become faster, easier, and more accurate, allowing you the time to focus more on growing your business. 

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Barcode Inventory Management

Barcode inventory management uses well-known and globally accepted barcode technology to track and manage inventory. Each product is assigned a unique barcode, which is then scanned at various stages along the supply chain.

Barcode identification assists in warehouse management by providing information about inventory levels and locations. This approach is standardized and industry-accepted way of tracking your products from the moment they arrive to when they are sold. Uniquely capturing product data creates a seamless information exchange between trading partners in all industries, distributing every type of product – from food, to apparel, to life-saving drugs and medical devices in healthcare.

GS1 US has worked with companies of all sizes, in all industries to help power their supply chains and build confidence in their inventory management processes. Learn how you can take your inventory management to the next level.