What is inventory management?

Inventory is the goods or materials a business intends to sell to customers for profit. Inventory management, a critical element of the supply chain, is the tracking of inventory from manufacturers to warehouses and from these facilities to point of sale.¹ The goal of inventory management is to have the right product in the right place at the right time. This requires inventory visibility — knowing when to reorder, how much to order and where to store stock. The basic steps of inventory management include:

One

Purchasing inventory

Raw materials or components are purchased and delivered to the warehouse.

Two

Storing inventory

Inventory is stored until needed. Raw materials are moved to production facilities to be made into finished goods and returned to stock areas until ready for shipment.

Three

Profiting from inventory

The amount of product for sale is controlled. Finished goods are pulled to fulfill orders. Products are shipped to customers.

Three reasons why you need a better view of your inventory

What is inventory visibility?

Multichannel order fulfillment operations typically have inventory spread across many places throughout the supply chain. Inventory visibility is knowing what inventory you have and where it’s located. Businesses need an accurate view of inventory to guarantee fulfillment of customer orders, reduce shipment turnaround times, and minimize stockouts, oversells and markdowns.

Why is inventory management important?

Inventory can be a company’s most important asset. Inventory management is where all the elements of the supply chain converge. Too little inventory when and where it's needed can create unhappy customers. But a large inventory has its own liabilities — the cost to store and insure it, and the risk of spoilage, theft and damage. Companies with complex supply chains and manufacturing processes must find the right balance between having too much inventory on hand or not enough.

What is an inventory management system?

Spreadsheets, hand-counted stock levels and manual order placement have largely been replaced by advanced inventory tracking software. An inventory management system can simplify the process of ordering, storing and using inventory by automating end-to-end production, business management, demand forecasting and accounting.

The future of inventory management

Globalization, technology and empowered consumers are changing the way businesses manage inventory. Supply chain operators will use technologies that provide significant insights into how supply chain performance can be improved. They’ll anticipate anomalies in logistics costs and performance before they occur and have insights into where automation can deliver significant scale advantages.² In the future, these technologies will continue to transform inventory management:

Artificial intelligence

Intelligent, self-correcting AI will make inventory monitoring more accurate and reduce material wastage.

Internet of Things

Data from IoT sensors will provide insight into inventory location and status.

Blockchain

Disparate parties will be connected through a unified and immutable record of all transactions.

Intelligent order management

Supply chains will master inventory visibility with improved demand forecasting and automation.

Quantum computing

Unprecedented computational power will solve previously unsolvable problems.

Explore five trends that will shape the supply chain of the future.

Key features of effective inventory management

Inventory tracking

Inventory tracking
Know exactly where inventory is across the supply chain

Transfer management

Transfer management
Move product to where it's most valuable

Purchasing

Purchasing
Create and manage purchase orders
 

Order management

Order management
Customize pricing, send quotes, track orders and manage returns

Reporting and analytics

Reporting and analytics
Evaluate patterns in processes to forecast future demand and sales

Shipping capabilities

Shipping capabilities
Automate shipping to reduce errors like late deliveries or incorrect packages

Source

1. “Inventory management,” Margaret Rouse, Tech Target, October 2017

2. “Automation in logistics: Big opportunity, bigger uncertainty,” Ashutosh Dekhne, Greg Hastings, John Murnane, and Florian Neuhaus, McKinsey & Company, April 2019