What Is Inventory Management In The Supply Chain

What is inventory in supply chain operations?

The term inventory includes all the finished goods, goods in production, merchandise, supplies, and raw materials, used to produce goods; all of which are held in stock by a business with the ultimate aim of using, producing, and selling these goods for profit.

Inventory on the balance sheet.

Inventory is classified as an asset on the business’s balance sheet.

Physical resources on the balance sheet (MRO inventory)

Physical resources such as tools and equipment, required for the production and resale of these items, are usually not included in the stock inventory but are still valuable assets, classified as MRO goods (maintenance, repair, and operations.)

Tertiary inventory on the balance sheet

Packing materials and other consumables such as jars, containers, boxes, wrapping, etc. are usually also not included in the stock inventory but can make up substantial cost-items that need to be managed carefully.

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What is the supply chain?

In its simplest form, the network of people and organisations involved in supplying a product to the end user is called a supply chain.

It involves a complex system, with several role players and a variety of different stages from obtaining raw materials to manufacturing, fabrication, transporting, storing, ordering, distributing, and delivering the finished product to the consumer.

In its most basic form, a supply chain includes mining, the producer of raw materials, manufacturer of products or components, fabricator or assembly plant, warehouse, distributor, wholesaler, retailer or eCommerce business, shipping or courier company, and finally, the customer.

Is supply chain, value chain, and logistics the same thing?

Where the supply chain involves different role players to provide and move products from one stage to the next;

•   The value chain involves all the different strategies and actions to create a marketable product or service and;
•   Logistics encompasses that part of supply chain management that deals with all the steps involved in the forward and reverse flow of goods or services. The supply chain partner responsible for this part is generally referred to as the logistics partner.

What is the relationship between inventory and the supply chain?

Inventory links all the different stakeholders in the supply chain. Their geographical location and position in the supply chain play a decisive role in smooth business operations and customer satisfaction.

A glitch in any part of the supply chain causes a major disruption of product flow, both up and down the supply chain organisations.

For instance:

•   If the producer is late in manufacturing or releasing the product, the logistics partners encounter delays all the way down the chain.
•   If the warehouse does not order sufficient inventory correctly or timeously, it throws the entire process into disarray and unsettles the delivery to the client.

Basic types of inventory in the supply chain

Understanding how much money and other resources are spent, how much stock is required, and what the profit margin is on each type of inventory, helps to price products correctly and to effectively plan the layout of the warehouse.

In most cases, the following types of inventory are managed in groups to calculate productivity and maximise the flow of supply chain inventory management together.

Raw materials

Raw materials can be either direct constituent parts that are extracted or mined, or can be produced as component parts; or indirect materials used in the production process, such as fuel or gas.

For maximum profitability and efficiency, exactly the right amount, of the correct type of stock, should be carried to quickly fulfil customer orders, yet avoid excessive holding costs, tying up cash flow, and obsolescence or spoilage.

Depending on where the producer or manufacturer is in the supply chain, examples of raw materials are:

•   Ore, minerals, wheat, and maize;
•   elements used to manufacture products, such as steel, wood, plastic, grain, and minerals;
•   component parts such as microchips, gears, bearings, or even dough for pizzas;
•   fuel, oil, lubricants, etc. used in the manufacturing process but not actually part of the product.

Work-in-progress

Fabricators, assembly plants, bakeries, tailors, workshops, and so forth, will have partial products, in various stages of production, that are not yet ready to be sold but still form part of the inventory.

Finished goods

Completed goods that are ready to be sold.

Maintenance, repair and operations (MRO)

These are goods, such as machinery, equipment, workstations, shelving, office supplies, consumables, etc. that are essential to conducting business but are not part of the ultimate product.

Packing materials

This type of inventory can be divided into three main categories:

•   Primary packaging such as jars, boxes, sacks, and cans in which the product is presented and sold.
•   Secondary packaging such as cartons, boxes, pallets, crates, and trays in which bulk items are wrapped or boxed.
•   Tertiary packaging used for shipping or delivery such as shipping containers, wrapping, pallets, etc.

What are the main types of inventory flow in every supply chain?

The systems and procedures developed to manage and control the movement of inventory within, and through to the next stage, in the supply chain, are known as inventory management systems or flow.

How inventory flows in and through the supply chain is an important factor in business success.

It is also significant to distinguish between the different types of flow for clarity, proper strategic planning, and efficient execution of processes.

Inventory workflow  

Inventory workflow involves the multifaceted processes in the cycle of sourcing, procuring and selling products.

This includes stock ordering, demand planning, procurement, receiving, inspecting, sorting, storing, moving, tracking, picking, packaging, invoicing, dispatching, delivering, and following up.

An effective inventory management and flow system prevents bottlenecks, stoppages, stockouts, wastage, loss, and obsolescence.

Process flow

Process flow is part of the workflow and encompasses the carefully planned individual steps followed within the manufacturing or processing stage of inventory, including a bill of materials, basic cost, sales and demand forecasting, procurement, receiving, location, transfer and movement, inventory count, dispatch, and delivery.

Inventory flow metrics

Inventory flow metrics are also part of the workflow and involve aspects such as forecast analytics, capacity, the number of flow units (such as the number of customers or amount of stock); demand and supply planning the optimum number of units required for fulfilment; flow time; and throughput.

Cost flow assumption 

Cost flow assumption is used primarily to determine the reporting of profits, taxes, etc. This is an accounting method, also known as COGS, used to calculate the cost of inventory and the cost of goods sold, and can be used to determine the order in which inventory is moved.

Methods include FIFO (first-in, first-out); LIFO (last-in, first-out); AVCO (average cost); and specific identification of items sold.

What is the difference between inventory management and supply chain management?

What is inventory management?

 Inventory management plays a crucial role in the success of a business and inventory management strategies comprise the following inventory management techniques:

Strategic planning

Strategic planning encompasses the process of defining your warehouse management strategy and direction.

All decisions on procuring inventory and allocating resources are made within this framework to attain your strategic goals.

Strategic planning extends to all systems and control mechanisms, including systematic accounting and inventory management efficiency, to successfully implement this strategy.

Systematic accounting

The accounting process delineates systematic and detailed recording of all financial transactions, efficient inventory management, and inventory costs throughout the business process, from procurement to successful delivery of all inventory.

Systematic accounting also involves careful analysis and interpretation of the recorded data to measure and present a complete financial picture of the business’s success, cash flow, and profitability.

It is important to do this in a manner that is clearly understood by all involved in the decision-making and management of the business. This presentation can be done in the form of statements, reports, charts, or graphs.

Monitoring inventory

Ensuring you always have the right products and enough inventory in stock to fulfil customer orders quickly and efficiently, requires inventory visibility, economic order quantity, and careful monitoring of inventory. Keeping careful inventory records helps you to develop an understanding of what your most successful products are, the timing of turnover, expiry or spoilage, and stock levels required to meet customer demand, fulfil orders, and create customer satisfaction.

Tracking Inventory

Proper inventory management requires continuous inventory tracking. Inventory tracking is the process of monitoring the movement of items from the time the product is ordered until it is successfully delivered to the customer.

An important inventory management process is to track and maintain accurate real-time records of stock and inventory levels; storage and location of items in the warehouse; tracing movement throughout the business process; turnover of sales; obsolescence, spoilage, and stock losses; anomalies; and customer demand.

Real-time inventory optimisation and tracking allow you to make informed management decisions about ordering quantities, restocking, pricing, choice of logistics partners, fulfilment procedures, customer communication, and rectifying unprofitable practices.

Optimising inventory

Successful inventory management takes into account the supply-demand balance.

Tying up too much cash in inventory is just as bad as not having enough stock to quickly fulfil orders and meet customer demand.

Too much inventory of certain items, poor inventory forecasting, misjudging the market demand, excess inventory, ineffective business processes, inefficient tracking, and generally poor inventory management will lead to lost sales, poor cash flow, lost inventory, poor utilisation of warehouse space, and low profitability.

It is of crucial importance for supply planning to balance the company’s inventory for optimal stock level to meet customer demand in the most cost-efficient manner. Order management and demand forecasting take into account factors like market trends, seasonal or cyclical demand, cash flow, holding costs, customer demands, availability of raw materials, supply chain complexities and reliability, and much more.

What is supply chain management?

Closely related to, and interlinked with good inventory management, supply chain management optimises the smooth movement of inventory, all the way from product creation to delivery to the end-user. The role of supply chain managers has often been compared to that of the choreographer in a play, ensuring everything works together synergistically.

Supply chain management requires integrated, detailed and multipart planning and synchronised execution of strategies and procedures to profitably source and procure materials or products; track inventory; properly manage and control all risks; social and environmental issues; legal and regulatory aspects; corporate responsibility; changing markets and demands; sustainability of products and supply chain; information; resources; transportation and logistics; collaboration; storage; and communication.

Supply chain optimisation requires intimate knowledge of the capacity, constraints, lead and lag times of suppliers and logistics partners; tariffs; and possible delays due to industrial action, disasters, seasonal bottlenecks; and so forth, will all play an important role in effectively planning a supply chain management strategy.

Software solutions to effectively manage inventory in the supply chain

Inventory and supply chain management are complex systems with many variables and processes that can become almost impossible to track with a manual inventory system.

Technology to the rescue! Advanced cloud-based warehouse management software solutions like ProSku, ProWMS, ProERP, and ProSCM, which have all been developed and maintained by market leader Principal Logistics Technologies, provide integrated, user-friendly, and secure, control systems on a single platform that improves efficiency, competitiveness, and profitability, and all but eliminates wastage and inefficiencies.

Principal Logistics Technologies software systems are kept up-to-date with all the latest developments to integrate all the functions of warehouse and management systems, including inventory and supply chain management.

Book an Initial Discussion

We’d be happy to discuss how our solutions can help optimise your warehouse operations, reduce OPEX and support its revenue goals. You can contact us online or call us at +44 (0) 161 888 2580 (UK) or +353 (0)1 683 3333 (Ireland) to discuss your requirements. 

You can also email us at info@principalsystems.com