What is inventory management?
To offer a basic definition, inventory management is the management of your manufacturing inventory, or production inventory. These are all the supplies and materials on hand in your warehouse or storage space meant for the manufacturing of products. Retailers and wholesalers have inventories that only include items ready to sell, or merchandise inventory.
However, before diving into the details, it’s always best to get to grips with the fundamentals. Otherwise, you’ll end up following others like a blind sheep.
At best you’ll always be one step behind the leaders, and worst-case scenario they might take you over a cliff.So, in this case, we must understand not only what inventory really is, but also the aims and objectives of solid inventory management for small businesses.
Once we unpack these a bit, the inventory management definition should come into focus.
Defining inventory — it’s more than your finished products
There are many definitions of inventory out there. Some offer an interpretation that refers to inventory as the sum of all items used in your business.This includes anything related to the operations of your business, such as safety or office equipment.
We believe it’s more helpful to think of inventory as the sum of all items used in your business that are intended for sale.That means looking at all the bits that go into getting your products made.
When it comes to materials directly related to your manufacturing process, it includes items ready to be sold as well as items you intend to sell in the future.You could break down the types of inventory into the following:
- Raw materials — components that can be used to create products
- Work-in-progress — items in the process of becoming finished products
- Finished goods — products that are completed and ready to be sold
Let’s look at the example of making candles (fun fact: you can do this yourself).Raw materials would be wax, wicks, and colors.Work-in-progress would be colored or shaped wax.
And of course, the finished good would be a fully formed candle with a wick on top, ready to burn for a cheesy romantic dinner.Unfortunately, these progressions aren’t always so simple and linear.
You could have all kinds of different waxes being used to make a variety of candle shapes.
That’s one of the main issues that manufacturers often have – dealing with the constantly moving pieces of raw materials as well as the finished products themselves.Inventory can be like a sneaky shapeshifter that always finds a way to slip out of your grasp before you get a full hold on it.
This is why understanding that inventory is dynamic and fluid is the first step to attaining good inventory management.Because then it becomes clear that keeping track of your stock is not something you can force. You need to look for the right tools that can help you tame it.
It’s the whole reason that recording and tracking inventory digitally became the staple as soon as it was possible. Inventory management software helps you keep your inventory information up to date and free from human errors.
The difference between inventory and stock
The question of whether there is any difference between inventory and stock has been the root of much unnecessary confusion. Many business owners, retailers, and manufacturing experts use both terms interchangeably. Some note that inventory is used more in US English, and “stock” in UK English.
Honestly, this is mainly a matter of personal preference and shouldn’t lead to trouble.
But minor distinctions can be made, so you should be aware of those too. It could come in handy if you have to explain or describe your inventory management practices accurately. One area that you can be more specific with is how you distinguish the types of inventory your business deals with.
Some dictionaries define stock as referring to the finished goods you have ready for sale. This is why the term in-stock is commonly used in retail.Whereas inventory can refer to finished goods as well as raw materials and works-in-progress.
So, it’s a good idea to mention the type of inventory you are talking about if there is room to cause uncertainty. Here are the main forms of inventory:
- Raw material inventory
- Work-in-progress inventory
- Finished goods inventory
- MRO (Maintenance, Repair, Overhaul)
- Assembly items
Remember, the word inventory can be replaced with the word “stock” in these terms and still be perfectly valid. It just makes life easier to be a bit more specific sometimes.
Inventory management vs. inventory control
So, we found that inventory and stock are mostly the same, now for inventory management and inventory control. Because like inventory and stock, these two terms are often used interchangeably. But unlike with inventory and stock, equating inventory management and control is inaccurate.
Inventory control is one part of the broader discipline of inventory management. Think of inventory control as a slice of delicious inventory management pie, andis about knowing where your inventory is and making sure it travels to the right place for efficient and timely manufacture of finished goods.
Inventory management is concerned with the above, but also how fits it into the bigger picture. This includes costs like purchasing raw materials, carrying costs of inventory, and inventory processing overheads.
You could say that inventory control is the organization and logistics of your inventory. The operational mind if you will. Whereas inventory management is about how inventory fits into your overall business plan and success metrics. It makes sure production is efficient enough to be profitable.
Both are essential and should be understood as best as possible.
What is the aim of inventory management?
If you want to do something well, it can help a lot to have some targets that you can visibly see. You wouldn’t want to walk along a rickety old bridge with your eyes closed, would you? Well, the same goes here.
Having aims when managing your inventory can make stacks of difference to the end goal. And we know how much harder inventory management is than walking blindly over a terrifyingly deep canyon.
Here are the common aims of manufacturing inventory management to keep in mind:
- Improve the accuracy of your manufacturing and order fulfillment cycle
- Keep your inventory organized, using space to its full effect
- Cut down on waste like inventory carrying costs and transport time
- 4. Save time and money by improving organization and lowering production time
You get more out of what you focus on, so place your crosshairs on the positives – reading the best resources and emulating those manufacturers you aspire to be like.With these objectives in mind, we can sum up a useful inventory management definition:
Inventory management aligns all inventory types to the efficient creation of finished products and delivery to customers’ satisfaction.
The overall aims of inventory management are universal, but your business will be aligned towards different goals than your neighbor.That definition spells out the end goal that every manufacturing business owner should have when it comes to inventory management.
Can you hazard a guess as to what it is?
The effects of good manufacturing inventory management are saving time, money, and resources (including human energy) thus lowering stress levels all-round.However, these are positive side-effects of good practice, not the end goal.The end goal is 100% complete customer satisfaction.
Don’t underestimate the effect customer satisfaction has on your business. Reviews and word of mouth contribute to a reputation, and it’s hard to shake a bad one.Constantly having this goal in mind will make it a lot easier to focus on optimizing your inventory to achieve your business potential.