Inventory Management

What is an Inventory, and What is Inventory Management?

“Inventory” refers to the finished goods, works-in-progress and raw materials of whatever your company sells and plans to sell, a relatively straightforward definition.

“Inventory management,” however, is much more complex. It is a multi-faceted juggling act that includes but may not be limited to the following elements:

Inventory visibility and valuation
Lead times for replenishment of raw materials and finished goods
Returns of defective goods and materials
Management of available physical space
Management of ordering, shipping, handling and carrying (storage) costs
Forecasting of future prices, inventory levels, and demand

There are five primary reasons businesses keep inventories and need inventory management.

To ensure goods are available, despite supply chain fluctuations, both expected and unexpected
To respond to the ebbs and flows of seasonal or event-driven demand
To take advantage of volume discounts on intermediate goods and materials
To avoid the difficulties and potentially significant additional costs of trying to fulfill every individual demand for goods
To “age” goods that appreciate in value – think beer, cheese or wine.

Inventory Management: A Brief History

Inventory management has existed for millennia, wherever humans have traded with each other. The zero, created as a placeholder for accounting and inventory, was conceived in India during the fifth century. The counting systems for inventory management are at least 5,000 years old.

More recently, inventory management took a great leap forward with the invention of the first automated checkout system. Created at Harvard University during the 1930s, it used punch cards and an early computer – but was far too expensive for most businesses to use.

Forerunners of modern bar-coding systems provided more practical and affordable automation alternatives from the 1940s through the 1960s, when the Universal Product Code (UPC) was created. Another set of technologies was based on World War II era R&D. Radio frequency identification, or RFID, for example, is a critical component of today’s IT-powered inventory management.

Today, small, inexpensive RFID tags wirelessly deliver inventory information to mobile apps on handheld devices or smart scanners located in factories and warehouses. A far cry from employees crawling between and across shelves and driving from location to location with clipboards and pencils – an approach still used at some smaller companies.

Most larger, modern businesses use barcodes, RFID or some combination of the two, in addition to advanced data collection, manipulation and analysis software. Barcode-based systems are widely used in retail, most prominently as the barcode scanners connected to many point-of-sale (POS) terminals at stores, restaurants and other retailers. Much of manufacturing and other industries rely on RFID-based systems, especially where and when it is essential to have immediate access to real-time information about inventory and supply chain connections. Even some sushi restaurants in Japan and the US use RFID tags attached to portion plates to track seafood inventories and freshness.

Why is Inventory Management Important?

The primary goal of inventory management is to provide accurate, comprehensive and current information about the location and status of every critical item in your inventory. A secondary but equally critical goal is to identify missing or malfunctioning inventory and to replace or repair them as quickly and economically as possible.

Inventory Management: Benefits to a Business

Effective inventory management can do much more than track inventory as they move through your business’ supply chain. A variation of the classic Pareto effect, also known as the “80/20 rule,” holds that 20 percent of your business’ products and/or services can account for 80 percent of your sales. Inventory management can provide information to help your business know which of its products and/or services account for most of its sales, and track how that mix changes as seasons or market dynamics change.

In addition, careful analysis of historical inventory information can help you make more accurate forecasts about sales and purchases. Better forecasts can help reduce carrying costs, including storage, insurance, and taxes. Effective inventory management can increase sales, reduce costs and improve margins.

Effective inventory management can also improve your company’s relationships with other contributors to your supply chain. Better knowledge about your inventory, what you need and where you need it can reduce or eliminate erroneous, delayed or premature orders and deliveries. Fewer missteps benefit every participant in every supply chain.

Poor Inventory Management Can Cost Your Business

Inventory management is extremely important to your bottom line. In retail, losses of inventory to theft, fraud or errors in management or documentation are known collectively as “shrink” or “shrinkage.” In the United States, the National Retail Federation’s 2018 National Retail Security Survey found shrink cost retailers an average of 1.33 percent of total sales during 2017. This translates into “a total impact on the overall U.S. economy of $46.8 billion,” the trade association reported.

Any size business that manages any type of inventory can be seriously damaged if it fails to manage its inventory well. Any disruption in the supply chain that cannot be avoided or resolved quickly can damage revenues, profits, sales, customer satisfaction and the reputation of a business. These factors make effective inventory management an essential requirement for the success of any business.

Inventory Management and IT: Critical Connections

Today, IT assets and resources power inventory management, like almost all other critical business functions. Your business, therefore, must have the capabilities to achieve and sustain effective inventory management for the best possible management and protection of your IT estate. This, in turn, makes management of your IT asset inventory critical to your business’ survivability, growth, evolution, and opportunities to thrive.

Inventory Management and IT Asset Management (ITAM)

During the recent past, management of a business’ IT inventory typically meant little more than keeping track of computers and software hosted on business premises. Now, however, your inventory of IT assets can range from premises-based computers, servers and software to subscriptions to cloud-based resources and mobile devices the business or individual employees own, lease or rent.

Since you can’t attach barcodes or Radio Frequency Identification (RFID) tags to cloud-based resources, your inventory-management solutions must somehow include information about the licenses that govern access to those resources. This creates both the need and the opportunity to connect your IT asset management (ITAM) and inventory-management solutions, and the elements of your IT estate that host them.

Inventory Management and Cyber Security

Cybersecurity creates additional needs and opportunities to connect your ITAM and IT management solutions to your inventory-management solutions. Since your IT estate powers all of these, they are possibly vulnerable to hackers and other malefactors. Protecting against accidental and intentional exploitation of those vulnerabilities, within and beyond your inventory-management systems, is absolutely essential.

During May 2017, Inc.com published “60 Percent of Companies Fail in 6 Months Because of This (It’s Not What You Think).” That article is based on research from the National Cyber Security Alliance. The Alliance found almost 50 percent of small businesses have experienced a cyber attack. More alarming, as many as 60 percent of those businesses close their doors within six months of being attacked.

The media has reported that cybercriminals successfully attack even the world’s largest businesses. Those attacks are increasing, as well as their sophistication and ease of use. There are even criminals selling “malware-as-a-service” packages and priced based on the number of systems to be targeted and compromised. The continuing evolution and escalation of cybersecurity threats put increasing pressure on IT asset and cybersecurity managers at businesses of every size and type.

Inventory Management and “Big Data”

The larger and more complex your inventory, the larger the range and number of items you must track; therefore, your IT-powered tracking technologies of choice are generating a huge amount of data. To leverage that data, you need IT-powered tools for ITAM and for data analysis.

Depending on your business needs and IT sophistication, the use of a simple spreadsheet application or dedicated data-analysis software can analyze that data; however, it must first be collected, secured, verified, rationalized and stored. Also, to transform that data into actionable information will require flexible reporting features. You may already have tools with those features for ITAM or other IT management tasks. Using incumbent tools to report inventory-management data is a strong incentive for connecting your inventory-management solutions with those tools via IT.

Inventory Management: Challenges to Your Success

During October 2018, SearchERP.Techtarget.com Executive Editor David Essex asked “a handful of analysts, vendors, and users” for their thoughts on the top challenges facing inventory managers. The respondents “coalesced around five themes, all of which relate to putting quality information in the hands of the most knowledgeable people at the right time.” Those themes are presented here in the words and the order in which they appeared in the original article.

“Integrating demand planning and inventory planning”

Different people, processes, and tools often manage these equally critical, interdependent functions. Effective inventory management requires the systems and information each uses to be interconnected to obtain a complete view of the current reality and to forecast more accurately. Integrating these systems and data and other related applications and functions, however, can be difficult, protracted and expensive.

“Training users of demand planning and inventory management software”

The best demand planning or inventory-management software in the world will never deliver complete business value until those assigned to use it become adept and comfortable with it. These are complex disciplines, and the software used for them often reflects that complexity. It can, therefore, be difficult and expensive both to find trained, experienced users and “grow” them internally.

“Dumping those old spreadsheets and paper”

Old habits and comfortable practices die hard, even in the face of newer, better alternatives, especially for some inventory managers and users (and many avoiders) of almost every modern technology. Resistance to modernized processes or tools can take many forms; however, all of them can contribute to inconsistent, inadequate inventory management if not recognized and resolved.

“Standardizing data”

Your business and its inventory-management initiative are vulnerable to the hoary and oft-repeated admonishment, “garbage in, garbage out.” With inventory management, multiple versions and definitions of the same data can result in inaccurate, incomplete or outdated views of inventories and supply chains. These can lead directly to sub-optimal business decisions that can hurt sales, revenues, customer satisfaction and the perception of your business.

“Choosing software that suits your business”

Every business that sells goods of any kind needs some version of inventory management; however, the specific needs of your business are unique to it. Those needs must define and prioritize the specific inventory-management solutions you choose and deploy. Where are the goods you sell located? Where are your customers? How do you deliver your goods to them? Are most of your sales large or small transactions? These and other factors directly affect what tools you need and their relative importance to your business.

Inventory Management: Best Practices

There are multiple prerequisites for consistently effective inventory management. You may pursue these in any order from the list below, but each item on the list is essential to your inventory-management success.

Bring your leadership on board. Inventory management requires a major, sustained commitment of resources. Executive buy-in and support can ease pursuit of that commitment, and the cultural changes it will require and inspire. Obtaining executive support during the early stage of an inventory-management initiative can also minimize the likelihood of resistance or sudden shifts in direction once your initiative has started.
Know what you have. You cannot manage your inventory until you have a solid baseline of accurate, comprehensive and current information about it. Depending on the size and complexity of your inventory and available management resources, you may need to start with a meticulous, manual audit of your inventory.
Categorize. You cannot manage what you don’t know you have, so you must ensure you can discover and map all of your critical IT assets, and keep that information current. Without a comprehensive knowledge of your IT estate, you cannot effectively protect it from cyber threats, nor can you accurately measure or track how applications, data, and other IT-powered resources are used – or not used – at your business.
Prioritize. All inventory is not created equal. Different elements of your business may benefit from managing different items in your inventory differently, based on each item’s criticality or value to your business.
Choose your management method(s). There are multiple inventory-management methods and techniques. For example, to manage your purchases, you could use economical order quantity (EOQ) formulas or minimum-maximum calculations. You could use continuous review (same quantity for each order) or periodic review (same time for each order). Use your business needs and goals to determine which method or methods are best for your situation.
Choose your deployment method(s). If you choose multiple management methods, then you may also need to consider multiple paths to deployment. Alternatives include a dedicated management staff, consultants and vendor-provided “inventory management as a service.” Evaluate candidate methods closely. If external expertise is involved, then be particularly attentive to relevant experience and transparency regarding costs.
Plan. Ensure your criteria for quality control and order fulfillment are determining factors of your inventory-management plan. In addition, make sure your inventory-management plans are aligned with the needs, expectations, and limitations of your primary distribution and fulfillment channels.
Clean your data. Before moving too far on any particular solution path, ensure your existing data is as accurate, complete, consistent and current as possible. You may need to reformat legacy data before your chosen inventory-management solutions can use it.
Automate. Identify mundane and repetitive tasks that can most easily be automated. Then, automate those tasks, using business policies and processes as guidance. (You may want to start with tasks related to the regular collection of barcode and/or RFID tag data. This is frequently known as automated identification and data capture, or AIDC.) Automation ensures tasks are performed consistently and in compliance with business rules and goals. Automation can reduce or eliminate human errors associated with those repetitive, mundane tasks. It can also free your team members to perform more complex tasks, increasing their value to the business and personal professional satisfaction.
Simplify. Use your chosen inventory-management tools and processes to simplify inventory-related tasks. For example, AIDC solutions can help simplify re-ordering of inventory components, thus shortening or eliminating supply chain time lags, errors, and repair or replace requirements.
Integrate. Wherever possible, integrate inventory management with other IT-powered functions, such as enterprise resource planning (ERP) and IT asset management (ITAM). Do whatever you can to avoid deploying multiple tools to perform tasks for which you already have available features or solutions. This is particularly important where data collection and analysis and reporting are concerned. If your business isn’t already using a configuration management database (CMDB) to consolidate IT management data, then adding the capability to incorporate inventory management data could justify the investment and effort.
Learn from others. Your business is not the first in your industry to face inventory-management challenges, which is actually a positive for you, your team and your business. Trade associations, industry events and publications, online industry groups and forums and even vendor Websites can provide stories/case studies of how other companies have navigated the initiative you are pursuing. Don’t miss the opportunity to avoid repeating others’ mistakes.
Empower. Make sure everyone directly involved in inventory management receives comprehensive initial and periodic remedial training in your chosen solutions and processes. Communicate with them and your key business stakeholders regularly to create a culture of inventory management awareness throughout your business.
Partner. To deliver sustained benefits to your business, your inventory-management initiative must be a high-level, long-term commitment. In addition to delivering the features your business needs, your chosen solution vendors and service providers must be equally committed. You must ensure those vendors have the strength and relevant experience to deliver on their current and future commitments.

Inventory Management: What’s Next?

You must begin your journey to optimum inventory management with your most critical and/or challenging inventory items, such as high-value finished goods, difficult-to-source raw materials, segments of your supply chain or others. Whatever they are, initiating the right management of those most critical and challenging inventory items sets a positive precedent for follow-on efforts.

The next step should be careful, comprehensive documentation of those initial experiences, both positive and negative. You should use these experiences to refine your approach to your future inventory-management efforts. To borrow an approach popular among entrepreneurs in Silicon Valley and elsewhere, you want to “fail fast.” Develop an initial plan and choose your tools, execute it and learn from any and all mistakes and missteps, and then iterate again quickly.

As your business improves and expands its inventory management, ensure you are optimizing integration with your ITAM and other relevant IT management efforts. Such integrations could be challenging, depending on the features and flexibility of your solutions in these areas. The effort, however, can result in significant benefits for all of your connected management initiatives.

Optimum inventory management applied to your IT estate can improve ITAM. Improved ITAM can improve the cybersecurity of the entire IT estate, as well as the delivery and management of IT and business services. A more secure, well-managed IT estate can lead directly to additional improvements in inventory management.

Inventory Management: Fundamental to Your Business’ Success

You and your colleagues have multiple options and choices available to you to manage your inventory as well as possible. How well your business manages inventory directly affects sales, revenues, profits, costs, the satisfaction of customers and partners and the perception and reputation of your business. Your inventory-management choices, therefore, are highly critical, and your colleagues, customers, partners, executives, and influencers will scrutinize them closely.

You must implement the best possible processes, services, and tools for inventory management. You must build upon your initial successes to optimize management of every item in your inventory and of the supply chain that moves your inventory to your customers.

Your inventory-management initiative will likely include several solution providers and may include outside experts as well. Your chosen partners must demonstrate an understanding of your business’ unique needs. They must also provide credible evidence they have the solutions, expertise, and ecosystem to help you achieve your goals.

Freshworks: Your Partner for IT-Powered Inventory Management

Freshworks offers a variety of cloud-based solutions to help you manage your IT estate, engage with and support your customers, convert your Website visitors and connect your teams and partners. Freshworks solutions and experts can support, accelerate and improve your inventory management efforts, as your business and its supply chain grows and evolves.

Freshworks would welcome the opportunity to discuss your IT and inventory-management challenges and possibilities. Learn more about Freshworks and its solutions for IT management and other business functions online, or contact Freshworks. Let us show you what we know, what we’ve done and what we can do with and for you.