What is Inventory Management? Benefits & Challenges

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What is Inventory Management? Benefits & Challenges

Every business that sells goods requires storage needs inventory management. It is a crucial part of fulfilment order management and business operation in general. But what is inventory management, and why your business needs it? What are its challenges, and how to solve them? Let's take a closer look at this definition in this article.          

What is Inventory Management?          

Inventory management is the process of managing the level and flow of goods in a business's inventory, from purchasing, storing, ordering to selling. Inventory management also includes the management of input materials to finished products. Inventory management is an essential part of fulfilment management. It helps to streamline the sales process and speed up the delivery.          

Related article:

Inventory Management System Definition, Features and Guide 2022

What Is A Warehouse Management System (WMS)?

Why is Inventory Management Necessary?          

Inventory management ensures your business processes are efficient and uninterrupted and profits are optimized. The best sales process leads to the highest customer satisfaction.          

If your inventory management is not practical, it can lead to many operational inadequacies. Raw material shortage, out-of-stock, warehouse overload, missing orders, and delayed delivery are just a few risks your business faces without inventory management.          

In contrast, good inventory management will help you control everything best, from production to sales, from warehousing to shipping. Thanks to effective inventory management, businesses can also reduce costs and increase sales.          


Inventory Management Process          

How does Inventory Management Process work?          

The most straightforward inventory management process will start with tracking the amount of goods on the stock in a warehouse, ensuring there are no shortages, and moving products to customers. However, as the business grows, inventory management is also more complex and upgraded with more features.          

Inventory management not only controls the quantity of finished goods but also includes raw materials (for companies that manufacture their own products). The inventory management system must also understand what's happening everywhere in real time for businesses that own multiple warehouses and points of sale. For larger businesses, inventory management systems are often integrated with ERP (Enterprise Resource Planning) and multi-currency calculation tools.          


Inventory management process step-by-step          

The fundamental inventory management process typically includes the following steps:          

  1. Purchasing: Suppliers deliver raw materials or manufactured products to your warehouse.          
  2. Storage: Goods are checked, sorted, and kept in the warehouse. The inventory management system will control the quantity of goods in stock as well as their location in the warehouse.          
  3. Ordering: Customers place an order, and you confirm the availability of the order          
  4. Selling: Once confirmed for delivery, the goods will be tracked, picked up, packed, and shipped to the delivery department. The inventory management system will record the number of goods left in stock and request restock if necessary.          

Inventory management methods         

To know what is inventory management and get the best uses of it, you have to have a basic understanding of its methodologies.  

ABC analysis: This method divides goods into 3 groups:          

  • Class A: High-value and low-quantity goods          
  • Class B: Medium-value and medium-quantity goods          
  • Class C: Low-value and high-quantity goods.           
    This method will help you control high-value products and ensure they are always in stock. At the same time, you also manage goods that bring little value and cost much storage.          

Economic order quantity (EOQ): This method will calculate the quantity of goods a business should purchase in one go, just enough to fulfil large orders efficiently. This method helps businesses repeatedly avoid purchasing, optimizing costs and storage.          

Minimum order quantity (MOQ): The lowest possible quantity of goods the supplier is willing to sell to the business. Usually, items with high production costs will have low MOQ and vice versa.          

Just-in-time (JIT): This method allows businesses to purchase goods based on demand and predictions drawn from customer behaviour data. This method helps businesses maintain sufficient inventory, reducing costs and warehouse space. However, JIT can bring risks if it encounters inaccurate demand forecasts or disruptions to the supply of goods from suppliers.          

Safety stock inventory: This is inventory stored with the intention of emergency use by the business. This method is a backup plan for businesses when a force majeure event occurs, causing a shortage of goods compared to customer demand at the time.          

First-in, First-out (FIFO): This method prefers selling older inventory to ensure that stock does not expire.          

Last-in, First-out (LIFO): This method prioritizes new inventory sales, taking advantage of the highest selling prices for new products with higher production costs. This method is often applied to high-traffic items to ensure that older items are still selling before new inventory is brought in.          

Benefits of Inventory Management          

Cost saving          

Proactively controlling inventory will help businesses divide costs for purchasing and storage more effectively. Businesses do not have to spend much money on excess goods and do not have to spend a lot of warehouse space to store.          

Save time          

Keeping adequate inventory levels prevents out-of-stocks from occurring, resulting in long lead times due to waiting for shipping. Besides, keeping too many goods also causes a loss of time in arranging and picking required goods.          

Better customer satisfaction          

The better the inventory management is, the faster the order fulfilment process is. Every customer loves fast delivery and is annoyed with slow progress or out-of-stock.          


Challenges of Inventory Management          

Warehouse management          

For the flow of inventory to be effective, businesses need to have a warehouse that meets the quality and capacity for the required quantity of inventory. Besides, locating goods in the warehouse by human force is sometimes a significant problem.          

Satisfy customer needs          

Most businesses purchase inventory based on estimates of consumers' purchasing power and buying habits. However, the shopping demand of customers always has unexpected variables.          

Professional inventory management system platform          

The lack of a professional inventory management system is the biggest reason your inventory control fails. An efficient system will save the business time, cost and effort in management and improve performance.          

How to Improve Inventory Management Process?          

Evaluate your inventory          

Don't forget to check the quality of your inventory when purchasing. Many businesses often neglect this step, resulting in the quality of goods not meeting the storage time, causing businesses to find ways to weep out, cluttering the fulfilment process.          

Optimizing other management systems          

Besides inventory management, other platforms such as order management systems (OMS) and warehouse management systems (WMS) are also important.          

Choose the right inventory management service provider            

Technology is a factor that plays a significant role in the success or failure of this system. It would help if you took the time to research carefully in advance to choose a professional service with modern technology and good customer support. Custom management software is also a good choice, especially for growing businesses.          


You now have an overview of what is inventory management, as well as some key takeaways about it. We hope you find the IMS solution that works best for your business . Don't hesitate to contact us for a more in-depth consultation today.   



Công Nguyễn

Công Nguyễn


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