Inventory is the core of every businesses’ supply chain-encompassing all merchandise and its raw materials prior to selling on markets to earn a profit. Inventory management, i.e. how you manage your inventory says a lot about your preparation for the future, against uncertainty.
Let’s face it; managing inventory brings with it a fair share of trouble which is more noticeable in the absence of an automation platform.For instance, stockouts accounted for $1.8Tn in missed sales in 2020, while Unleashed’s Cashflow report reported that the average business held $142,000 in unsold inventory, well above required demand.
Statistics like these bear witness to why insufficient or excess stock are not ideal situations to be in, because both distort inventory, disrupt sales, create financial losses and increase storage, manpower and warehousing costs. And the worst part of it all, is that it could have been entirely avoided had the business had a platform that anticipates these issues and allows you to remain proactive.
It’s time to take the writing on the wall seriously, so let us dive deep into the interesting world of automated inventory management, starting with;
What Exactly Is Automated Inventory Management?
Inventory management is a process comprising supervising, storing and using components to produce an item. Automated inventory management is simply the practice of performing all these through dedicated technology. Doing so reduces the manual intervention and frantic scramble to track, control and smoothen stock levels.
It plugs in scanning capabilities such as barcoding, QR codes or RFID tags to use in warehouses. This facilitates item identification; making order processing and subsequent fulfillment accurate and prompt.
Automated inventory management uses Enterprise Resource Planning (ERP) systems, warehouse management systems (WMS), accounting and reconciliation systems to keep an eye on all movements going in and out of a warehouse. It’s essential to account for returns separately which eventually makes its way back to inventory subject to passing quality inspection. Clearly, reverse logistics also affect inventory levels and availability.
Rising order volume is a positive sign of business growth. However, it also leaves sellers less time to get personally involved in managing every single aspect. This makes for a compelling cause to use automated IMS as it does the updating and information relaying for you, saving you a trip to the warehouse.
The purpose of inventory management is to
- Ensure stock sufficiency for both current and future demand.
- Establish reorder points and a reasonable lead time.
- Provide detailed insights into trends, projections and predictions.
- Ensure optimal utilization by reshuffling available inventory.
- Minimize costs linked to inventory while maximizing profits.
This requires businesses to balance ordering costs, supplier lead time, holding inventory and buffer inventory in order to meet unplanned demand. In the next section, we’ll look at different types of inventory.
Types of Inventory
Broadly speaking, the three types of inventory are raw materials, Work-in-progress (WIP) and Finished Goods. However there are sub categories that apply.There are several types of inventory that businesses need to manage:
| Raw Materials | Raw materials are the root components making up a product. Managing them ensures optimal levels during the production phase. |
| Work-in-progress (WIP) | includes items that are being manufactured but are not yet complete. Managing WIP inventory helps track production progress and ensures production schedules are met. |
| Finished Goods. | Are completed products in saleable condition. Finished goods inventory is part of stock levels that are fit to meet demand. |
| Maintenance, Repair, and Operations (MRO) | MRO inventory contains equipment and tools used in the production process but are not part of the final output. |
| Pipeline inventory | Also known as transit inventory, it refers to inventory on the way to a retailer or wholesaler from the manufacturer. |
| Safety stock | Safety stock or buffer is extra inventory to fulfill unexpected demand surges. It ensures a business can run undisrupted. |
| Anticipation | Anticipation is designed to meet expected demand surges during a certain season or period. |
| Decoupling | Extra raw materials or WIP goods that are set aside to avoid production interruptions |
| Cycle | Cycle inventory is a portion of inventory that is rotated and replaces old with new stock. It is the minimum stock needed by businesses to maintain a quota. |
Inventory Management Components
The components of inventory management are
-
Demand Forecasting
Demand forecasting is essential to keeping adequate quantities ready beforehand. It gives you data that ensures that you don’t pass up or lose out on sales opportunities. The forecasting relies on historical sales data, trends and product performance reports that rank products by period of performance, price point etc. Sellers can accordingly, estimate quantities for the future and reorder them from suppliers to ensure they make it to warehouses on-time. Demand forecasting finds use in reducing stockouts, minimizing holding costs and delighting customers by having what they want even before they’ve finished the thought.
-
Inventory Tracking
Inventory tracking is the process of continually monitoring and optimizing inventory levels. Inventory encompasses even returns fit for sale, and as such has to be updated as and when orders are returned by the customer back to the origin or vendor (RTO and RTV respectively). Tracking of items is based on their serial number, barcode or SKU that can be picked up and read by a scanning device. In the Base system, for example, warehouse operators can scan products with a paperless warehouse management module to confirm picker accuracy by shelf and lane (i.e. answering the question of correct item putaway and retrieval). With tracking, sellers are on top of deductions and additions to inventory and can look into and correct any discrepancies.
Tracking also enables status updates on the product’s whereabouts as it moves from item->order->shipment stages. Using the same unique identifier, sellers can confirm shipment statuses without needing to wait on a revert from courier partners.
Another aspect to inventory tracking is in quality control. For sellers dealing in expiry-sensitive environments requiring the usage of cold storage, it is imperative to control temperature settings with IoT sensors and humidity regulation to ensure inventory freshness. Additionally, sellers can set expiry thresholds on a system and activate automatic actions to send out batches nearing expiry first. This First-in-First-Out (FIFO) principle prevents wastage and spoilage.
-
Reorder Point and Safety Stock
Reorder points refer to the level at which supplies should be reordered to reduce chances of running out. You can calculate reorder points based on the time taken to receive new orders and the average daily usage rate.
Safety stock is a buffer that is kept to fulfill unplanned demand. Identifying these thresholds lets you add a sliver of certainty to uncertainty, helping to avoid stockouts.
-
Inventory Turnover
Inventory turnover is a performance metric that gauges inventory sales and replacement. It can be calculated thus
Turnover= Cost of Goods Sold/ Average Inventory Level
A high rate indicates faster selling- a generally positive sign. Conversely, a low turnover rate may mean overstocking or slow-moving inventory which can increase your liabilities.
Being in the position to monitor inventory turnover can curtail inefficiencies and enable businesses to make informed decisions concerning future utilization.
Inventory Management Best Practices
Best practices are actions that support automated inventory management and in turn, making it easier to bring operations, costs and risks under control. Here’s the rundown on inventory management best practices:
-
Regularize inventory audits and cycle counts
Routine audits and cycle counts can catch discrepancies sooner. While audits give an overview of inventory levels, cycle counts can compare manual to automatic outputs and help warehouse operators discover and correct mismatches. Regularizing it discourages shrinkages arising from theft and misplacement.
-
ABC Analysis
The ABC matrix of inventory management follows the 80-20 principle; i.e. 20% of the most valuable items account for 80% of profits. It classes inventory into three distinct categories that are defined by their value and turnover rate. This helps businesses to prioritize where to focus and what to fix first. It is a measure of inventory optimization that prevents shortfalls of critical items and surpluses of underselling products. The classification is such that
- A- items are high value with that move at low sales frequency. Example: hi-end electronic components for laptops.
- B-items: are of moderate value and frequency with standard monitoring.Example: out of season clothing.
- C-items: are of low-value and high sales frequency, requiring casual monitoring and simpler controls. Example: Office staples.
-
Use forecasting models
Applying sortation filters to forecasts lets you tweak and adjust inventory accordingly. It helps you break down consumer behavior and match it to demand swings in order to stock only what’s necessary and fast-moving.
Take the purchase order prediction facility within the Base inventory, for example. It not only allows new Purchase Orders to be created but also accommodates modifications to existing purchase orders by way of adding more products. Once configured, all the seller has to do is fill in a form and the system calculates the required product quantities for all items. And all this is done based on previous product sales and quantities, saving considerable time.
-
Chart a decent lead time
Lead time refers to the time between ordering products from a manufacturer to listing its availability for the shopper. So it technically starts from the moment a customer places an order. There are several times within this lead time to account for; the manufacturing and production time, transportation and logistics and ground coordination.
This is why creating a sensible timeline helps you plan the demand pipeline. It is a practice perfected over time, and can help you to match your expectations to reality.
-
Reshuffle unused capital
Costs linked to holding inventory and procurement can impact profit margins. By reducing the amount of capital tied up in slow-moving inventory, funds automatically are re-released for strategic spending to balance supply to demand. Using methods like dropshipping (keeping the inventory on the supplier end rather than seller end), JIT (Just-in-Time) manufacturing can confine capital
-
Automate warehouse operations
There’s always a flurry of activities in a warehouse, which automation can simplify.
Warehouse management systems (WMS) aided by a robotic or AV fleet and barcoding capability can not only locate items for an order quickly and bring down its search time, but can also greatly reduce risks of injury to personnel at the time of retrieval.
Put simply, you can use drones to locate shelves or racks that are high up and pose a danger to human pickers for manual retrieval. In its place, you can send a robotic fleet to complete the picking. With a pick-pack AI assistant, you can generate shipping labels to affix onto products and expedite on-time shipping.
-
Sync Multi-Platform Inventory on One Panel
Omnichannel inventory management lets you tap into the potential of both offline and online channels which can be tracked in one place through automated inventory management systems.It lets you access a panel to track listings,update offers, order statuses and shipment statuses pan-channel. You can even build a business intelligence dashboard to periodically check in on channel performance. When you know which ones are making you money and which ones need more attention, you’re better equipped with the right actions to take to optimize stock levels, match counts to available, reassess the buffer, determine thresholds and reset trigger points.
-
Automate returns management
Returns are inevitable, in some sectors more than others (e.g clothing and footwear). Plugging in a reconciliation tool to handle the returns flow authenticates refund, replacement and exchange claims raised by customers. It can also deduce if extra deductions have been levied by marketplaces or couriers for pick up and dispute them to ensure you’re not overcharged. A returns form within Base lets sellers categorize returns by their reasons, enabling them to lower return rates with remedial actions.
In Conclusion
With Automated IMS or inventory management systems, you’re not just managing inventory. Built for multi-purpose operational management, systems like Base lets you get started with its own internal inventory or by importing your existing inventory or dropshipper into the portal.
This way, you need to look at only one panel to handle multiple functions, and have a clean inventory that can meet both current and future demand.
Curious to watch automated inventory management in action? Experience it through the Base system with a full-fledged trial for 30 days!
