Why is Inventory Management Important?
Why is inventory management in business important? Inventory management can make or break a business. Inventory is often the largest item in the current assets category on a balance sheet. Issues with inventory can contribute to business losses, even failures. Proper management of the supply chain, on the other hand, can allow a business to thrive. Good inventory management strikes a balance between the amount of inventory coming in and going out. It controls the timing and costs of non-capitalized assets and stock items, allowing a business to reach optimal profitability.
Striking a Balance Between Overstock and Stockout
Inventory management in businesses is all about balance. When a business invests in more inventory than it can sell (overstock), it creates a deficit in the budget. Not enough inventory, and you compromise customer service. Often, the business has to deduct the costs of the excess inventory from profits. It cannot sell the inventory, and it cannot get a refund from the manufacturer. The goods will sit in storage or be disposed of and counted off as losses.
A certain percentage of loss is reasonable and expected in business, but inventory greatly in excess of projected sales can hurt a company’s bottom line. Goods you can’t move are goods wasted.
Failing to have enough inventory and finished products on hand to meet customer demands (stockout) can also hurt a business. You may lose a sale if you don’t have enough inventory to fill a customer order. Having to frequently backorder items or tell a customer you’re out of stock can make them move to other suppliers that do have what they are seeking.
Inventory and customer service have a close relationship; the best way to ensure consistent customer satisfaction and minimized waste is good inventory management.
An efficient inventory management system accurately forecasts how much inventory you will need based on sales activity. This way, you can place orders accordingly to prevent overstock and stockout. You must understand how much demand consumers have for a product as well as the product’s depreciation rate.
For example, if you sell perishable items, your inventory management strategy must account for expiration dates. You must also consider the costs of storing items – the expense of keeping inventory on hand, counting, and handling it. There are dozens of factors that go into successful inventory management.
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Good Inventory Management = Controlled Costs of Operation
Inventory management saves you money and allows you to fulfill your customers’ needs. In other words, it enables successful cost control of operations. Knowing what you have, what is in your warehouse, and how to manage the supply chain properly is the backbone of business.
Inventory management allows you to make smart business decisions and close sales in confidence. It gives you real-time information about what sells well and what isn’t – in other words, what to order more of and what to cut back to maximize profits.
A deep understanding of customer demand for what you sell is the key to proper inventory management and control. Once you understand how your customers buy, you can begin to make smart buying and storing choices. Inventory is expensive to acquire, but businesses do so with the expectation of selling it for a profit. Inventory sitting on a shelf, however, locks up its value. You may encounter working capital and cash flow issues, because you expected to turn it into profit but haven’t. Good inventory management solves these complex problems.
Tying up too much money in your inventory will bring your company down. Not spending enough can hurt your customer service. You can find the perfect middle ground with proper inventory management.
When it comes to improving your business performance, data is a good thing. But having too much data can be even worse than not having enough—you’ll get so buried in reports that you’ll miss the most important indicators of your business health.
Related: How to Improve Your Business Performance with Distribution KPIs
Inventory management is a very important issue for most organizations.
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