Each company requires a system of checks and balances to maintain an efficient record of inventories' ins and outs. With inventory management, businesses can keep track of profits, sales, and demand over time, as well as track how long items sit on shelves.
In this article, you will understand the objectives of inventory management and essential techniques. These techniques help businesses to increase profit margins and get on the track of success.
What is Inventory Management?
Inventory management is organizing, storing, and using inventory for any business.
Inventories are used to store raw materials, components, and other completed goods. Companies monitor the supply of goods in inventories, and effective inventory management can reduce overall costs and increase profits.
The concept of inventory management refers to the process of efficiently storing products, inventories, and non-capitalized purchases. It makes them suitable according to their specific shape and location of placement.
There are four categories of inventory management:
1. Raw Materials
A company purchases raw materials for processing into a finished product for its production purposes.
2. Work in Progress Inventory
It refers to the process of transformation of raw material into a finished product.
3. Finished Goods
These are the complete goods that are available for sale.
4. Maintenance, Repair, Operation (MRO) Goods
To produce finished goods, these items are purchased from the distributor for resale in the future.
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What is the Principle of Inventory Management?
Here are five fundamental principles of inventory management:
1. Demand Forecasting
Accurate demand forecasting is one of the important principles of inventory management. It also helps to avoid costly overstocks.
2. Warehouse Flow
The proper sorting, setting of orders, systemic cleaning, standardization, and maintenance of warehouse flow ensure that no money is lost through inefficient processes. This inventory management principle guarantees that no disorganization is present, as it costs money.
3. Inventory Turns
Inventory turns are one of the key metrics used in evaluating how effective your execution of inventory management principles is. It checks the efficiency of inventory products bought and sold within a year.
4. Cycle Counting
One of the important methods of maintaining accurate inventory is cycle counting. Cycle counting allows businesses to keep track of inventory items in different warehouse sections without constantly adding everything up. It helps measure the success of your existing operations and maintains responsibility for potential error sources.
5. Process Auditing
Process audits should occur at each transaction, starting from receiving to shipping all inventory transactions.
What are the objectives of the Inventory Management System?
A management's strategic and financial goals are important. Inventory management systems can assist in achieving these goals. And for that, you must know its objectives. Here, we explain the objectives of inventory management:
1. Material Availability
The primary objective of the inventory management system is to make sure material availability. With sufficient inventory, the production process can continue. Lack of material can cause considerable losses to the market and company profits. It will also reduce sales, which will adversely affect production.
2. Minimum Wastage
A successful inventory management system always helps with minimum wastage, hence minimum losses. Monitoring, controlled checks, and regulation of unmanageable wastage are some of the objectives of inventory management software that help businesses prevent and reduce waste production.
3. Maintaining Stock
Supplies must be available for all stages of production, from raw materials to finished goods. You have to make sure that inventory consists of enough necessary material on hand to meet client demand without cutting corners.
4. Cost-Effective Storage
Cost-effective storage is a way to reduce inventory costs. With the right management techniques, companies can avoid overstock, and duplicate stocking orders and can help to minimise storage costs.
5. Minimum Cost Value for Inventories
An organization may negotiate discounts and other incentives for a lower overall cost when buying regular and bulk products. Additionally, it can also help to reduce inventory carrying costs.
6. Better Product Sales
Inventory management can be used to calculate the volume of product sales. Sales is one of the process's most essential phases. That's why understanding the present sales condition and making future assumptions from the analysis are critical elements in a successful prediction.
7. Better Customer Services
Last but one of the main objectives of inventory management and control is better customer service. With proper inventory management, customers can gain confidence and receive timely delivery and a speedy production process. It will boost the brand image as well.
What are the Techniques of the Inventory Management System?
Businesses today use various inventory management techniques to fulfil demand. Some use one method, while others prefer a unique blend of styles to meet their production needs.
They choose the techniques that can help them track and analyze production processes and inventory better as per their needs. Some of these inventory management techniques include:
1. Just-in-Time (JIT) Delivery
Just-in-Time technique is a plan to improve efficiency and decrease waste. In this, goods are obtained in the quantity needed for the production process, thereby reducing inventory costs.
JIT delivery leads to decreases in costs and improves efficiency and profit margins in the following ways:
- This technique reduces inventory levels and allows companies to keep only those products in demand in storage. And avoiding product storage ahead of time.
- With the efficient waste reduction, the JIT technique also reduced labour costs by correctly managing inventory goods.
- By using JIT techniques, companies manage only inventory products that are in demand, thereby requiring fewer factory spaces.
- Reduced waste products also lead to the stock deduction.
- JIT helps companies to improve productivity by investing in products in demand at present. It reduces inventory spaces from overstocking products before the time or season.
- With systematic inventory production and order management, the quality of goods improves
with the JIT Inventory Management Technique.
2. ABC Inventory Analysis
ABC Analysis lets you describe your product according to their requirement.
There are three types of products based on their quality and sales. It helps businesses to understand their market better. These categories are Category A, B and C
- High-quality products with low sales frequency fall into Category A.
- Products in Category B have a moderate quality and a moderate frequency of sales.
- Low-quality products with a high sales frequency fall into category C
3. Drop-Shipping
With drop-shipping, a retailer keeps the finished products in stock to sell to customers. The drop-shipping process involves selling goods online without maintaining inventory. When the store comes across a product demand, it buys the item from a third party and is shipped directly to the consumer. This method prevents the merchant from seeing or handling the product.
Inventory Management With TranZact
Keeping track of raw materials and finished products requires updating inventory records. As a result, the company can order more raw materials and sell more finished products. With TranZact, you can achieve a smooth production process and material availability.
A real-time inventory update can also help Indian SMEs identify items in high demand and products on hand. No case of stockout of the stockpile will be there anymore.
What do you consider the most essential objective in inventory management? Comment down below and let us know.
FAQs on Objectives of Inventory Management
1. What are the main objectives of inventory management?
Inventory management's main objective is maximizing profit by tracking and updating inventory efficiently. Some other goals include:
- To supply the required materials
- To reduce the chances of having too little or too much inventory.
- To reduce losses, damages, and loss of materials
2. What are the four objectives of inventory control?
The four objectives of inventory control include
- To make sure stock availability
- To reduce wastage
- To help with maximum profitsTo minimise storage spaces.
