The arrangement of and relations between the parts or elements of something complex.
Inventory management forms the structure for an organization like a chassis frame does for a vehicle. The chassis frame is the base of a car. It acts as a platform which interconnects different components like the gear box, engine, wheels, and axles. All of these components are bolted to this frame to hold the car together. The chassis frame keeps the engine secured and the wheels aligned. In the absence of a chassis frame, neither the engine nor the wheels can fulfill their objective.
Similarly, inventory management secures the major components of your organization, like Marketing and Finance. Each of these components has different specific goals. Inventory management keeps marketing goals secured by ensuring the right items are available at the right time, and it keeps your finances aligned by controlling the flow of stock.
It's a common mistake to separate inventory management from marketing strategy. They may seem unrelated, but a lot of marketing activities actually rely on successful inventory management. To give you an example, if an organization decides to distribute a thousand free samples of their new item to three major retailers (A, B, and C) as a promotion, then they'll need to get the right item to the right place at the right time. So, how does inventory management help?
Let's assume that the items need to reach three different retailers at the beginning of next month. The first inventory management practice tactic would be to list the schedule of operations in a format like this:
This type of schedule is very helpful for planning your next actions. From this schedule, you get a fair idea about which delivery has to be made first, when you need to start manufacturing or order from your supplier, and how you will make adjustments if there is a delay in any part of your plan. If you want to get more detailed, making separate tables for manufacturing, transportation, sourcing, and so on can help you drill down into the specifics and create a more foolproof system.
Inventory forms a crucial part of accounting and also has an impact on the company's financial goals. Since inventory management deals with day-to-day activities, refining the inventory process can help cut down on costs for the organization. It can also release excess funds that can then be used for other purposes. Let's go through some of those areas and try to identify how inventory management makes an impact:
Cash flow refers to the in-and-out movement of cash in your organization. It is calculated based on three major types of activities: operating, financing, and investing. Cash flow gives a clear picture of the company's cash holdings and is regarded as a very good indicator of the liquidity of an organization. Cash expenditure in inventory is included under operating activities, because inventory is used in the day-to-day operation of the firm. The cash flow of a company can be severely affected if a lot of cash is spent on buying stock that's moved to production at a very later stage. This affects liquidity and can lead to negative cash flow. Tools like re-order points and the safety stock formula can help an organization avoid such situations by ordering items at the right time and minimizing their holding cost.
Working capital is defined as the difference between the company's current assets and its current liabilities. Current assets include inventory and receivables from customers. Current liabilities include payables and other short-term obligations. Unlike with cash flow, a low working capital is beneficial for an organization because it means that you are receiving timely payments from your customers and not spending too much of your funds on inventory. If a lot of funds are parked in inventory, then the company might need to look for other sources of capital to manage its daily activities. Inventory management solutions like Just-In-Time ordering (JIT) and the Economic Order Quantity (EOQ) can help solve such issues.
One of the most important reasons for following good inventory management practices is to maintain a reliable record. In day-to-day business, items can get damaged in transit or lost due to extraordinary circumstances like theft or fire. Not accounting for such losses makes your financial data inaccurate. If the amount of inventory loss incurred isn't adjusted in your Cost of Goods Sold (COGS) and also on the asset side of your balance sheet, your statements will show inflated profit and improper asset valuation. One of the best ways to avoid that is to use inventory management software, which makes recording inventory and item adjustments easier and less time-consuming.
Your inventory management application can have a big impact on the IT infrastructure of your organization. A good inventory application which integrates with other systems can help you establish a holistic IT solution to fit your business requirements and manage your inventory and accounting needs concurrently. This kind of integration helps build a more reliable database, as data entered in one application gets updated in the others on a real-time basis. Similarly, an application with open API offers a lot of scope to integrate separate applications and customize the process of managing an operation.
Just like the chassis of a car supports the important components of a vehicle by forming a strong structure, inventory management supports the three vital functions of an organization: Marketing, Finance, and Information Technology. A good inventory management strategy aligns itself with the organization's marketing goals, supports its financial viability, and designs its IT infrastructure.
This importance is even more pronounced when your organization is on a growth stage. With the increase in scale, inventory management can get overwhelming and difficult to control. In such cases, the best results can be achieved with the help of good inventory software.