The Essential Guide to Inventory Management

1. The Essential Guide to ​Inventory Management Table of Contents: What is the inventory? What are the basic functions of inventory? Types of inventory ● Raw materials ● work-in-process ● Finished goods ● Transit inventory ● Buffer inventory or safety stock ● Anticipation inventory ● Decoupling inventory ● Cycle inventory ● Maintenance, Repair and Operating supplies (MRO) What is inventory management? Why is inventory management important? Inventory/Product Tracking Identifiers for efficient product tracking ● SKU (Stock Keeping Unit) ● Product Serialization ● Barcodes ● Unit of measure Methods of inventory management ● Perpetual inventory management ● Periodic inventory management ● ABC Analysis ● Just-in-time ● FIFO & LIFO ● Economic Order Quantity Model ● Two Bin Inventory Control ● Dropshipping ● Cycle Counting

2. ● Fast-moving, Slow-moving and Non-moving inventory (FSN technique) ● Vendor Managed Inventory Popular processes of managing inventory ● Managing inventory in an Excel sheet ● Inventory management software Challenges in Inventory Management ● Inventory Shrinkage ● Deadstock ● Out-of-stock Best Practices for inventory management ● Maintaining Safety stock ● Demand Forecasting & Planning ● Merchandise planning ● Retail visual merchandising ● Stock Replenishment (include inventory turnover ratio here)

3. Chapter 1 What is inventory? Inventory represents one of the most important assets for a company because its turnover represents revenue for the company. In layman terms, “inventory” stands for a complete list of goods owned or stored either to resell or as a raw material for producing the final product and then, in turn, sell the final product. However, to understand it in a more formal way, let’s look at some of the widely accepted standard definitions of inventory. Standard Definitions As per the ​APICS (American Production and Inventory Control Society) Dictionary​, “Inventory is defined as those stocks used to support production, such as raw material and work in Process, supporting activities, such as maintenance, repair, and operating supplies, and finally Customer Service in the form of finished goods and spare parts.” According to the Author of ​Operations Management, Lee J. Krajewski​, “Inventory is created when the receipt of materials, parts, or finished goods exceeds their disbursement; it is depleted when their disbursement exceeds their receipt.” What are the basic functions of inventory? There are 4 main basic functions that inventory serves in a business. 1. To meet the anticipated demand of the products 2. To safeguard against stock-outs 3. To facilitate production requirements 4. To segment operations

4. Types of Inventory Inventory can be classified into three main categories, namely, 1. Raw materials​ or purchased parts are the raw products that are going to be used for making finished products. However, there are many other facets to raw materials such as different types of raw materials, why are they important, how to calculate how much raw material you need. To know all about this follow the link below. Learn more about Raw Material here 2. Work in progress​​goods​ - the goods that are partially completed are in the process of becoming finished goods. Learn more about WIP goods calculation formula and more here 3. Finished goods​ - the final product manufactured by the industries or companies that is ready to be sold by wholesalers, retailers, etc. Learn more about Finished Goods here However, when you take a closer look, there are various other kinds of inventory (goods) as well that need our attention too. These are: 4. Transit inventory, aka pipeline inventory​ - the inventory that is in the transit from the manufacturer’s place to the retailer/wholesaler shop is called Transit inventory. At times, the transportation of inventory takes days or even weeks in transit. It is the inventory that is continuously moving from one point into another in the supply chain. It consists of the orders that have been placed but have not been received yet, and therefore, it is also to be counted as an inventory. Learn more about Transit inventory here 5. Buffer inventory, aka safety stock​ - Safety stock is used to avoid customer service problems and the cost associated with this. It protects against uncertainties in demand, in lead time and supply variations. The higher the service level you want to

5. provide, the higher the safety stock will be. In the same way, the higher the lead time and the higher the demand variations are, the higher the safety stock will be. Learn more about Buffer inventory here 6. Anticipation inventory ​- It is inventory used to absorb uneven consumer demand during a certain period of time. Some companies that have a predictable seasonal demand, build up inventory during low demand periods so that when high demand periods come production rate is not affected. Learn more about Anticipation inventory here 7. Decoupling inventory - ​This is the inventory kept in the manufacturing units, wherein the stock of one part of the product is kept in some quantity so that it doesn’t hinder in processing the other part of the product. It is something like safety stock, but the only difference is that this is safety stock for internal purposes so that the demand for a particular spare part is fulfilled while making the finished product. Learn more about Decoupling inventory here 8. Cycle inventory - ​Cycle inventory is also called lot size inventory.​​It varies directly with the lot size. The quantity varies with the elapsed time between orders, the longer the time, the larger the cycle stock. For example, if you order every two weeks, your cycle stock will be equivalent to two weeks' demand. Learn more about Cycle inventory here 9. Maintenance, Repair, and Operating supplies (MRO) inventory​ - These are the products that support the production process of the finished goods such as lubricants, screws and ball-bearings, gloves, packing materials, etc. Office stationery items like staples, pens, and pencils, papers, etc. are also part of the operating supplies. Learn more about MRO inventory here

6. What is inventory management? The term “​Inventory management​” stands for efficient managing of inventory by counting, storing, tracking of all your existing/future inventory systematically. In other words, it is ordering the right quantity of products and keeping track of all the company’s goods and storing them in an appropriate facility for easy retrieval while selling it. “Inventory management is a well-developed science, not a simple common sense.” says the author Tony Wild in his book ‘Best Practice in Inventory Management.’ Why is inventory management important? “The motto of inventory management is to minimize holding costs while optimizing inventory.” In other words, to reduce the stock levels while achieving higher availability of the products at the same time. This motive can be achieved only when inventory is managed systematically. Here are some other salient reasons for the importance of inventory management 1. Enables you to do the planning and forecasting​​accurately Managing your inventory brings sense to all those data around you. Inventory management can help you analyze and well-performers and shelf-eaters. This improves revenue generation and frees up cash flows. Also, it would be great if you can forecast your customer’s purchasing pattern and restock your inventory based on that data. Inventory management grants you access to do stuff like this too. distinguish the products between

7. For example, based on previous inventory statistics, your forecasted product “x” is going to be in massive demand during the sales season. You stockpiled product “x” in your inventory, and it paid off. You will not only generate revenue but can also stockpile your stocks again based on the daily sales pattern of your customers. 2. Improves your delivery time Nowadays, customers demand no less than the best in the market, whether it may be regarding the quality of the product delivered or the time taken to ship the product to its end customer. Late delivery due to out-of-stock or inventory mismanagement cannot once be the cause of one sales loss because it affects your brand reputation. Properly arranged and tracked inventory helps to locate when the order arrives and hence enables you to deliver the product quickly. Opting for inventory management can protect you from mismanagement of inventory and also enables you to increase customer satisfaction by a speedy delivery. 3. Controls your inventory costs Inventory management is all about managing the flow of inventory through your organization. Inventory management helps you better understand which stocks are doing well and which stocks are just eating up your shelf space. The key is to order the inventory as much as needed, not too less and not too much. Due to accurate forecasting done with the help of inventory management systems, you can order the products in the right amount and hence save the costs involved in purchasing extra products and storing them. This also protects you from keeping a less demanding inventory, backorders, excessive inventory, etc. Also, better inventory management helps you understand which products need to be reordered and how frequently from your suppliers. This can help you crack deals with your supplier, thus saving money. 4. Increases your business efficiency and productivity

8. If you are spending a lot of time searching for the products your customers order, then maybe it’s time to invest time into inventory management. Inventory management includes allocating specific locations to specific products, and therefore, you can track the products and their quantities in no time! Systematically managing products not only saves time and efforts but also lets you divert your human resources towards more pressing matters regarding your business, hence, improving overall productivity. In short, ​companies need inventories to operate, and having the right products available at the right time in the right quantities to meet customer requirements is the key to achieving the company’s objectives. And inventory management and control helps in doing just that; that’s why it is crucial. Inventory/Product Tracking Identifiers for efficient product tracking As we have already mentioned earlier that inventory management’s basic function is to track your inventory, some key identifiers enable a retailer/wholesaler to track the inventory. Let’s take a look at it in detail: ● SKU (Stock Keeping Unit) ● Product Serialization ● Barcodes ● Unit of Measure Inventory Trends in 2020 and Beyond Inventory management and technology is a match made on earth! Since technology has touched every other aspect of our lives, why would inventory management be any different. With technological advancement it is now possible to merge everything online & offline – from inventory to customers to business operations to vendors. And, it is happening across, quite religiously. ​But what more to expect in this inventory

9. world in 2020 & beyond? Let’s take a look at some ongoing and upcoming trends in the inventory management field. Chapter 2 Header text on Banner Image: Methods of ​inventory management Subtext on Banner Image: “Techniques when applied properly becomes art” Learn all about various techniques and methods used in managing inventory efficiently in this ultimate collection of guides. As you witness growth in your business, you need to prioritize your inventory management accordingly but how do you select an appropriate method ? ‘One size fits all’ rule cannot be applied for selecting inventory management methods. There are various ways in which inventory can be managed, and it is up to an organization to choose the technique that best suits their business. However, to select the best approach for your business, you need to know all of them in detail so that you can make a wise choice. Let us look at some of the commonly used Inventory Management Methods in detail: ● Perpetual inventory management The perpetual inventory method of accounting inventory, as the name suggests, is about tracking inventory ‘perpetually’ as it moves throughout the supply chain.

10. In this approach, warehouse managers keep a continuous track of inventory balances, which means the stock is updated automatically every time an item is received or sold through every point of sale. Learn More about Perpetual inventory management here... ● Periodic inventory management As opposed to the perpetual inventory system, in periodic inventory methods, the inventory is not tracked each time a sale or a purchase is made. Here, inventory is monitored at the beginning and end of the accounting period. Periodic inventory management is about accounting stock for its valuation after the designated time frame. Warehouse employees take a physical count of their products periodically according to the set period. Learn​ More about Periodic inventory management here..​. ● ABC Analysis ABC analysis​ is derived from the term “The Pareto Principle” named after an Italian economist Vilfredo Pareto, also called the 80/20 rule. This principle suggests that 80% of the total output is generated only by 20% of the valuable efforts. When it comes to stock or inventory management, ABC analysis typically segregates inventory into three categories based on its revenue and control measures required. Learn More about ABC Analysis here... ● Just-in-time Just in time fulfillment (JIT) is an inventory management practice to enhance returns on investments while improving product quality. The method also helps in cutting down the wastages since the receiving goods are obtained only when they are needed in the production process. Hence, as the name suggests, Just-in-time inventory method refers to having the inventory readily available at the right time and in the right place as per the demand but not over stock it creating a deadstock. ​Learn More about Just in time here...

11. ● FIFO & LIFO FIFO or LIFO are the methods that companies use to assess their inventory and calculate profit. The amount of profit a company generates affects their income taxes​. FIFO, the acronym stands for First-In-First-Out. It is an inventory accounting method where the oldest stock or the inventory that entered the warehouse first is recorded as sold first. FIFO is one of the most popularly used in inventory valuation methods. LIFO, the acronym stands for Last-In-First-Out. It is an inventory accounting method where goods produced or purchased most recently are recorded as sold first. Learn more about LIFO - FIFO here... ● Economic Order Quantity Model The Economic Order Quantity is a quantity designed to assist companies to not over- or under-stock their inventories and minimize their capital investments on the products that they are selling. The cost of ordering an inventory touches down with an increase in ordering in bulk. However, as the seller wishes to grow the size of the inventory, the carrying costs also increase. The EOQ is exactly the point that optimizes both of these costs i.e. cost of ordering and the carrying costs which are inversely related. Learn more about Economic Order Quantity here... ● Two Bin Inventory Control As the name suggests, this method comprises two identical plastic bins that are utilized alternately. Both of them are filled with components that are fitted onto the final product.

12. The workers on the production line shall use the first bin until it is emptied. Once the first bin is wholly utilized, they will start utilizing the second bin. The empty one will act as a signal for replenishment. Thus, the manufacturing is continued without stopping the line to fetch the required components. In most cases, these items are used in semi-finished goods which are in the final stage of production. Learn More about Two Bin Inventory here... ● Dropshipping For someone who is new to the e-commerce scene and is planning to venture into it, you may be wondering what is dropshipping. Dropshipping is a retail fulfilment method where an online seller isn’t required to keep stock or store inventory. This business model allows a company to operate without owning a warehouse to store the products it sells or having to ship products to their customers. Instead the retailer partners up with a dropship supplier who either manufactures or warehouses products, has complete inventory control, and ships it directly to the customers. Learn more about Dropshipping here... ● Cycle Counting Cycle count is a subtype of a perpetual inventory management method. It is used for auditing purposes. Apart from internal processes, these audits are also required for financial accounting or taxation compliance purposes. In cycle count, a limited portion of the total inventory is counted at a time to constitute the figures for the entire stock. As a sampling technique, it utilizes data from a small portion to quantify the bigger picture. LearnMore about Cycle Counting here... ● Fast-moving, Slow-moving and Non-moving inventory (FSN technique)

13. Fast moving, the slow-moving and non-moving inventory , aka the FSN analysis, method is about segregating products based on their consumption rate, quantity, and the rate at which the inventory is used. Learn more about FSN here... ● Vendor Managed Inventory Vendor Managed Inventory is one of the most popular business models for managing inventory and there’s no wonder that the world’s largest corporations like Walmart, Tesco and Amazon use this method. Vendor-managed inventory (VMI) is a business model in which the buyer of a product provides certain information to a vendor or the supplier of that product and the supplier takes full responsibility for maintaining an agreed inventory levels of the material, usually at the buyer's preferred location or store Learn more about the Vendor Managed Inventory here Chapter 3 Header Text on Banner Image: Popular processes of managing inventory Subtext on Banner Image: “Hold the vision, trust the process” For managing inventory in an optimum way a right process is required and our essential guide to the processes of inventory management shares all that you need to know about it. A good process provides you good results. It is primarily the process that makes you end right where you are meant to be at the right time. So is true for the inventory management process. A right and modern approach will enable you to manage your inventory, orders, shipping, returns in such a way that you will be able to track your items easily and efficiently at any given point.

14. There are primarily two popular processes for managing inventory. Gone are the days when everything was handled on pen and paper! Technology has allowed us to record all the important data in easy to access digital ways. Let us take a look at them in detail here: ● Managing inventory on Excel sheet “Tracking your inventory can become a complicated task if it’s not managed properly with a proper tool.” Spreadsheets are the simplest way to manage your inventory and related data like stock, sales, purchases, orders, suppliers, and basic level reports for free! With the help of advanced mathematical capacity, excel sheets can comfortably be used to organize and operate different aspects of inventory and business management with ease. You can also use excel with other apps to get through challenging situations in business that require exceptional calculation skills. Create group sheets, use filter search results, and get the information on the changes in inventory instantly. It’s pretty much easy to figure out the flaws and correct them quickly without wasting much time and money. Here is the ready-made template of excel for ​inventory management​, Just click and download the excel. Learn more about using Excel sheet for inventory management here ● Inventory Management Software As mentioned earlier, inventory is the backbone of any commodity business and therefore, managing it properly becomes important. Using excel sheets for inventory management is a fair process for small businesses with limited products but what when you expand your business and start selling online? You need a better tool for obtaining accurate inventory count, stock taking, tracking the inventory in real-time, locating inventory, managing orders, shipping and receiving the orders, etc. that’s when it is crucial to use an inventory management software.

15. Inventory management software is efficient in not just handling inventory related tasks but it can automate the entire eCommerce operations process. You can conveniently manage back-end operations of selling your products across multiple channels, multiple locations and in multi-currency by using one single software. To learn more about Inventory Management Software sign up here Chapter 4 Headline text in banner image: Inventory Management​ Challenges - A Guide to overcome them Subtext in banner image: “Don’t let challenges limit you.” Read this guide to learn about the common challenges of inventory management and how to overcome them. One of the challenges in today’s times is understanding your customer’s needs and making well-informed decisions by tracking and managing your inventory. Several problems arise while managing inventory, and here are some of the commonly found challenges in inventory management. Our guide not only sets out to explain these challenges but also provides practical solutions to overcome the inventory management challenges. Knowing them will help you to understand how to avoid them in your business. ● Inventory Shrinkage Inventory shrinkage is a phenomenon where there is less inventory available due to unforeseen circumstances such as theft, damaged product, or expired products. This is one of the biggest problems that a supply chain manager has to deal with and since this kind of shortage in inventory is caused by unknown factors. However, inventory shrinkage can be avoided by following a few simple steps discussed in the article. ​Learn More about Inventory Shrinkage here..​. ● Deadstock

16. If you’ve been into retail business, you must have faced the issue of having a pile of inventory that never gets sold. This unsold inventory lying with you for a longer period of time without any near future chances of getting sold is called deadstock. Deadstock is a burning problem for not just small businesses but also big giants like H&M. Thankfully, there are ways to get rid of such stock and they are discussed in our essential guide here. Learn More about Deadstock here... ● Out-of-stock inventory One of the worst nightmares for any retailer is being out of stock of a particular inventory especially when it is in great demand. Being out of stock at the time when the product is in great demand means loss of revenue earning for the company and also decreasing the credibility of your company. We have spilled some beans in our guide here on how to avoid getting your inventory out of stock. Learn More about Out of Stock inventory here... Chapter 5 Headline text in Banner Image: Best Practices for inventory management - A guide Subtext: “Optimize your inventory so you can maximize your profits”

17. Our guide consists of worldwide accepted best practices for efficient inventory management. As discussed earlier inventory management is an essential task while running a manufacturing or a retail unit. There are a certain set of practices that a successful wholesaler or retail house practices across the borders and these very profitable practices are discussed in detail in our best practices for ​inventory management​ guide. For optimizing your inventory and minimizing your holding costs, you should practice some of the best industry practices. Here are some useful ones for you to follow: ● Maintaining Safety Stock Every retailer stocks inventory according to its customer’s average demand. Now, sometimes there can be a rush of sales. Meaning, you are soon going to be out-of-stock faster than you can replenish your inventory. It is during such situations that we need a safety stock. Safety stocks thus help in preventing stock outs when there is a high variation in demand and supply. For instance, in this current situation of Coronavirus pandemic, the suppliers are not able to provide the required product in the given time frame or in the right quantity expected by the retailer. Now in such situations if the retailer has kept safety stock then it will help him to make sales and keep his customers happy. However, there are various facets to safety stock such as how much safety stock to keep? How to calculate the amount of stock required? To know all this and much more follow our link given below. Read More. ● Demand Forecasting and Planning Demand Forecasting is the scientific process of estimating the future demand for products in terms of quality, quantity, and driving factors. The use of end results generated from forecasting is done to calibrate the business processes and set targets for the sales teams.

18. Here are some of the most significant reasons to include demand forecasting as a core business process: ● It helps in devising sales and marketing plans along with their respective budgets. ● They also lay down the foundation for the master budget of the company. ● The data available from these exercises will give insights to the required plant capacity to meet the targets. ● It also contributes to the pricing strategy. ● It suggests the type of equipment required, production processes, types of products, and components along with the volume of production. ● It also helps in devising procurement strategy by understanding the consumption of various raw materials and supply chain management. To learn more about the methods and strategies on demand forecasting, please refer to the link given below. Read more ● Merchandise Planning Retailers of modern times might not ask this question because they know how vital merchandise planning is; however, for the beginners or the ones who think that it is not that important, here are some of the reasons why you should plan your merchandise. ● Merchandise planning can help you stock your warehouse in a way that increases the inventory turnover ratio. ● It decreases inventory carrying costs as there is less unwanted inventory in the warehouse and hence less labor, less maintenance cost, less loss through obsolescence as most of the stock is sold, less depreciation of inventory, etc. ● Brings value addition to the company as your customer very rarely goes empty-handed and has enough options to compare products to make a purchase.

19. However, these are just a few benefits, to know detailed benefits of merchandise planning, please click the link below. Read more ● Retail Visual Merchandising Simply put, visual merchandising means a visual display of the store. When you enter the store, you’ll most likely first get attracted to visual displays at the store. This can include aspects like window displays, décor style, fixtures, and many others that give a visual identity to the store. Visual Merchandising always attracts more customers. So, showcase your best products, make it attractive and beautiful, bring in those people who are window shopping, and show them your store! You can increase your Brand Value with appropriate visual merchandising. The more attractive your store looks, the more customers prefer visiting the store. This way, your brand value increases as well as awareness. No wonder, in a short time, people have started knowing your name! You know, right, when customers walk-in, it clearly shows that they have an inclination towards your products. Well, when your brand is increasing its value and customers are increasing, there is no surprise that your sales will also grow. To read more about the visual merchandising techniques, Do’s and Don’ts, please click the link below. ● Stock Replenishment In layman’s terms, stock replenishment is a general practice to make sure that the right quantity of the products are available at the right time with the vendor or shopkeeper on the picking shelves. Did you know that as per ​a study conducted by Harvard Business Review​, “72% of stock-outs were due to faulty in-store ordering and replenishing practices—retailers ordering too little or too late, generating inaccurate demand forecasts, or otherwise mismanaging inventory”

20. Such alarming percentage indicates that inventory replenishment must be conducted in a timely fashion as well as in a systematic way. In short, a properly done Stock replenishment helps in eliminating stock-outs and overstocking – both of which can prove to be very costly in Supply Chain Management. To learn more about the replenishment or restocking strategies click on the link below Read more ● Inventory Turnover Ratio Inventory Turnover Ratio is key to efficient stock replenishment. ​If you’re having trouble understanding all the weird formulas floating around for calculating the inventory turnover ratio, then this is a must-read for you. You will Learn how to calculate inventory turnover ratio in the easiest and yet accurate way possible in this article. ● Product Bundling Retailers combine several products in one package and make it a better deal via several types of attractive offers. This is called product bundling. Usually, a retailer will bundle a slow moving item with the corresponding fast moving item so that he can minimize his loss of stocking the slow moving item. When product bundling is used correctly, it can boost your sales and improve your conversions. You can combine it with other marketing strategies, and it’s not actually costly. Since it’s an effective strategy on so many levels, it’s worth trying. You can read more about about the bundling strategy, how you can benefit from it, and the examples to help you understand the difference between a well-combined product bundle and a bad one by clicking the link below

21. Read more Essential Resources: Online courses: https://www.udemy.com/course/inventory-management-h/ https://www.oxfordhomestudy.com/courses/supply-chain-courses-online/inventory-m anagement-certification-online Related Articles: https://www.referenceforbusiness.com/management/Int-Loc/Inventory-Types.html https://books.google.co.in/books?hl=en&lr=&id=5jQ8DwAAQBAJ&oi=fnd&pg=PP1&d q=inventory+management&ots=tOujA5ojeM&sig=3LBguj_sh5xWRoPiuFfhdO7El1Y#v =onepage&q=inventory%20management&f=false Videos: What is Supply Chain Management https://www.youtube.com/watch?v=Mi1QBxVjZAw Just in time by Toyota https://www.youtube.com/watch?v=cAUXHJBB5CM