What Is Inventory Management Process?

Flow Explained

Working in procurement means tackling responsibilities that cover a lot of different, but
interrelated, tasks. One of the most important, and often most complicated, of these tasks is supply
chain management—and within it, the inventory management process (IMP). The methods you
choose when recording, tracking, and managing your inventory have a huge impact on a wide array
of critical business processes. From production essentials like raw materials to indirect but
important items such as office supplies and marketing materials, all the items in your physical
inventory have a chance to enhance or deplete your bottom line, depending on how they’re
managed.

It follows, then, that effective inventory management is essential to a healthy and competitively
successful business. Fortunately, by working to develop a thorough understanding of the inventory
management process, applying the right inventory management techniques, and investing in useful
tools such as inventory management software, you can optimise your inventory processes for optimal
efficiency, productivity, and profitability.

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Understanding the Inventory Management Process
Any business that relies on physical inventory items of any kind (which is to say, most businesses)
needs a reliable method for recording, analysing, and managing their stock of those items. Creating
and implementing an effective inventory management process—sometimes also referred to as
inventory process management, or IPM—makes it possible to accomplish these goals with maximum
workflow efficiency/efficacy, optimal return on investment (ROI) and minimum expense.

Optimising inventory management is a very important part of cost control, and can have a powerful
impact on supply chain management by affecting cash flow, vendor management/strategic sourcing,
and relationships with vendors and customers alike.

Core inventory management techniques include:

Inventory Control, which is a general term for reducing total inventory management costs
while optimising the company’s ability to meet customer demand and its own goals for
profitability and competitive strength. Many businesses around the world use this term
interchangeably with inventory management.
Stock Review, which compares available stock levels to future estimated needs. Traditionally,
stock review is physical and manual, making it prone to human error as well as both time-
consuming and labor-intensive. However, automation technology is rapidly changing this
standard by allowing inventory managers to set minimum inventory levels and automatically
reorder goods as needed.
Cycle Counting, during which specific portions of inventory are counted (usually with a
physical inventory count) based on a repeating schedule. Cycle counting is also known as cycle
inventory and ensures every item is counted at least once in a given accounting period (usually
a year).
ABC Analysis, a comparative analysis methodology that classifies inventory into A, B, and C
groups based on value and quantity.
“A” Goods are low in available quantity but high in value.
“B” Goods are of both moderate value and availability.
“C” Goods are low in value but high in available quantity.

This approach allows for precise and detailed analysis of usage, and makes it easier to maintain
buffer stock without wasting time and money with needless inventory bloat. For example, goods
from category “A” are more expensive, but sell more slowly than “B” or “C” goods, and so require
much smaller inventories. As with Stock Review, performing ABC analysis with outdated tech tools
can make the process time-consuming and labor-intensive, although modern inventory management
software with advanced machine learning and data analysis tools have the power and versatility to
speed things along.

Just-in-Time (JIT), an inventory system that relies on analytics and precision logistics to

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 ensure materials and goods arrive on demand for immediate turnaround to customers. JIT is
very data-intense, and requires a clear and complete understanding of factors such as seasonal
demand, geographic and political events that might affect logistics, and customer buying
patterns, both in the short and long term. Done properly, Just-in-Time simplifies inventory by
minimizing the need for available goods and raw materials and reducing lead times. However,
it is susceptible to failure without complete information and the data analysis tools required to
manage it.
FIFO and LIFO, which refer to either first-in, first out (FIFO) or last-in, first-out (LIFO)
valuation methods. FIFO and LIFO are the accounting components of inventory management
systems, detailing the actual value of inventory to your company’s bottom line.

The methods you choose to track inventory will vary by industry and the size of your business, but in
general, the inventory management process itself will look something like this from a procurement
perspective:

1. Goods are delivered to the receiving area of the warehouse. These can include:

Raw materials and components (for manufacturers)

Finished goods for resale (for distributors)
Indirect materials that support the daily operations of a business but not production
(businesses of all kinds)

2. Goods are reviewed, sorted, and stored on shelves in special stock areas. Small businesses

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 may not have a separate receiving department, and the warehouse will serve double duty as a
stocking area. Goods may be assigned stockkeeping unit (SKU) codes and tagged with
barcodes for easier tracking.
3. Inventory levels are monitored regularly, with physical inventory counts performed
periodically in addition to whatever automated inventory management measures are in place.
This ensures everyone has an accurate understanding of available inventory and helps
minimise the chance of stockouts, dead stock, missed or duplicated orders, and risk exposure
due to theft and fraud.
4. Orders are placed by customers, either internal or external. For example, a consumer may
place a purchase order for the company’s products, the sales department may submit a sales
order, or a staff member may submit a requisition for office supplies.
5. The order approval is verified against original purchase order, sales slip, internal purchase
requisition, etc.
6. The required goods are pulled from stock areas and sent either to production (manufacturing),
directly to the retailer/customer/end user (finished goods), or routed to the appropriate
business unit/department (internal requests).
7. Records are updated and shared with all relevant stakeholders.
8. Inventory levels are used to restock goods and materials as needed. For Just-in-Time systems,
usage data may be analysed to create more accurate forecasts.

The growing availability of advanced tech tools such as deep data analytics and process
automation—both supported by general artificial intelligence and more particularly by iterative
improvements through machine learning—has made it possible for companies ranging from small
businesses to global conglomerates to develop, implement and streamline inventory control.

“Optimising inventory management is a very important part of cost control, and can have
a powerful impact on supply chain management by affecting cash flow, vendor
management/strategic sourcing, and relationships with vendors and customers alike.”

Benefits of an Efficient Inventory Management System

To implement an IMP effectively, you need an inventory management system, or IMS. This is simply
a formalised set of processes, designed to help your team achieve optimal performance in key areas
including:

Order management.
Inventory control (IMP).
Multichannel sales (depending on your industry and customer base).
Centralised and comprehensive reporting and data analysis.
Inventory forecasting.

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 Purchase order creation and management.
Warehouse management and synchronisation.

Done properly, every step of the inventory management process is ripe with potential for value.

Consider these benefits:

Improved Process and Staff Efficiency

With an inventory management system in place, your team will spend less time on low-value,
tedious, and time-consuming inventory tasks and more time using their skills to innovate and build
value. This is especially true with help from process automation, which eliminates the need for
human intervention while simultaneously removing human error.

Less Waste and Lower Costs

When you have absolutely accurate inventory information available in real time, you can optimise
inventory levels more effectively. This reduces inventory holding costs, inventory write-offs, and
helps reduce the chances you’ll overbuy, too.

Bloated inventory levels can cost your company a pretty penny over time, especially if you’re
dedicated storage space, time, and expense to items with low demand.

On the other side of the coin, that same accuracy of inventory data will insulate you against
overselling as well. You’ll be able to meet demand as it comes and maintain a positive reputation
with customers and vendors.

More Effective Long-Term Inventory Planning

Whether you’re a manufacturer, a distributor, or a service-based business managing indirect

inventory needs, having a transparent and comprehensive view of your inventory levels will make it
much easier to refine your overall inventory management, as well as production, sales, and supply
chain planning.

Potential Inventory Management Challenges

Naturally, even the most well-optimised inventory management system is still one created by
humans, and therefore susceptible to potential problems.

Keep in mind these common inventory management headaches when developing your own system:

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The IMP Can Be Complex

There’s a lot of moving parts involved with inventory management, and while formalising your
approach to each component will go a long way toward minimising miscommunication, risk, and
errors, it’s a serious gamble to dismiss the need for your whole organisation to commit to not just
understanding, but using, your new IMP. You’ll likely need a generous lead-up period to help
everyone get accustomed to both the new policies and whatever tools you’re adding to their
workflows.

Doing so is much simpler if you combine inventory management techniques with modern inventory
management software, but even so, it’s a good idea not to underestimate the time and training your
team, vendors, and customers may need to get on board with your new and improved inventory
process.

Risk Remains a Factor

Formalised processes and automated workflows are powerful tools for reducing risk due to errors
and inefficiencies. But keeping risk at bay means monitoring your inventory management process
with an eye for both iterative improvement and potential errors—particularly if you’re working with
inventory management software that doesn’t have advanced data analytics or process automation
supported by self-learning artificial intelligence.

In addition, it’s critical to connect your IMP to your quality control and supply chain management
solutions. This integration will provide you with the additional context necessary to guard against
production or sourcing missteps that can negatively affect your reputation and bottom line.

Implementing Inventory Management Software Can Be Resource-Intensive

In addition to the potential investment, your company may require significant time and effort to
achieve buy-in from the C-suite and the company as a whole. If you’re implementing inventory
management as part of a larger procurement solution or making the move from manual processes to
automated ones, you may need to invest in additional training and education before you can “go
live.”

Developing a Winning Inventory Management Process

No two companies have exactly the same inventory management needs, but every business can
benefit from a few best practices when building their inventory management process.

Know your budget. Choosing an IMP solution that connects with procurement, enterprise
resource planning (ERP), and accounting software will let you connect the financial dots and
make best use of FIFO/LIFO as best fits your financial goals.

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 Store and Ship Smart. The type, scale, and number of warehouse facilities you need will
depend heavily on your industry and company size. A frozen foods distributor will have very
different requirements than a steel manufacturer, for example. In addition, if you’ll likely
require multiple storage locations, choosing a comprehensive inventory management solution
can make it much easier to coordinate shipping and warehouse management by creating a
centralised, shared database.
Choose Inventory Management Software That Fits Your Needs. There’s certainly no lack
of options when shopping for inventory management solutions. But in inventory, as in life, not
all paths lead to the summit of success. That’s why it’s important to find and implement
inventory management software that meets your needs without introducing needless expense
or complexity to an already complicated process.For example, a cloud-based, comprehensive
procurement solution such as PurchaseControl not only provides a robust inventory
management module, but the artificial intelligence, data analysis tools, and process
automation capabilities you need to integrate inventory management into your entire software
environment. In choosing an inventory management system, be sure to look for:
Process automation, supported by artificial intelligence. (Smarter automation makes it
much easier to free your team from menial tasks while improving accuracy and reducing
costs, waste, and delays.)
Full data transparency for more accurate and complete data analytics, better decision
making and invoice forecasting, and more valuable strategic insights.
Full integration with your existing software environment, including sales, marketing,
accounting, and the entire procure-to-pay (P2P) process, as well as supply chain and
supplier relationship management.
A proven track record of longevity and performance.
Confirmed success with, and endorsements from, clients of various sizes from your
company’s industry.
Training and educational tools to help achieve any cultural changes needed to support
the procedural changes in your IMP.

Better Inventory Management is Possible

Some days, it might seem that managing the goods you use to create your own products is a bigger
obstacle to overcome than actually selling them to your customers. But while inventory management
can be challenging, it doesn’t have to be frustrating. Investing in the right inventory management
software and using it to execute a well-developed inventory management process is a surefire way to
ensure you have the inventory you need, when you need it, while cutting wastes, expense, and
inefficiency out of your workflows.

PurchaseControl Gives You Total Inventory Control As Part of a Complete Procurement Solution.
Find Out How

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