What is Inventory Management?

Inventory Management

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Inventory makes the world go round. Stockpiles of raw materials, components, sub assemblies, finished goods, returned goods, and reclaimed and refurbished materials enable all aspects of industry to function and all aspects of the economic engine to run.

Trillions and trillions of dollars of inventories exist all over the world in every conceivable form and in every conceivable channel. Inventory levels will determine whether any company will survive or die. Too much inventory can result in cash flow problems that lead to bankruptcy. Too little inventory can result in an irretrievable loss of business that can lead to business failure.

Given its incredible importance we’d like to explore what may seem to be a simple, yet complicated and truly strategic, question.

What is Inventory Management?

Inventory Management Defined

Just as we found in “What is Supply Chain Management? 10 Different Definitions!” there are several different views, perspectives or interpretations of what Inventory Management is and what it involves. Here are relate several definitions of Inventory Management.

Investopedia states that Inventory Management is “the process of ordering, storing and using a company’s inventory. This includes the management of raw materials, components and finished products, as well as warehousing and processing such items.”

Tradegecko articulates that “Inventory management is a systematic approach to sourcing, storing, and selling inventory—both raw materials (components) and finished goods (products). In business terms, inventory management means the right stock, at the right levels, in the right place, at the right time, and at the right cost as well as price.”

Wikipedia relates that “Inventory management is a discipline primarily about specifying the shape and placement of stocked goods. It is required at different locations within a facility or within many locations of a supply network to precede the regular and planned course of production and stock of materials.”

Searcherp defines it as “Inventory management is the supervision of noncapitalized assets — or inventory — and stock items. As a component of supply chain management, inventory management supervises the flow of goods from manufacturers to warehouses and from these facilities to point of sale. A key function of inventory management is to keep a detailed record of each new or returned product as it enters or leaves a warehouse or point of sale.”

The Management Study Guide says “Inventory management is a very important function that determines the health of the supply chain as well as the impacts the financial health of the balance sheet. Every organization constantly strives to maintain optimum inventory to be able to meet its requirements and avoid over or under inventory that can impact the financial figures. Inventory management requires constant and careful evaluation of external and internal factors and control through planning and review.” 

The Definitions Critiqued

As I consider the definitions conveyed earlier, along with many others not included here, there seem to me to be severe shortcomings relative to what is really involved in proper Inventory Management.

Most of these definitions focus almost entirely on the physical acquisition, storage, and movement of inventory. And there is no question that this activity is AN element of managing inventory. But overall these definitions are corroborative of an archaic and antiquated view of Supply Chain Management as being a back office function with support level necessity only.

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While it is true that this administration of inventory is a part of what Inventory Management is, the function is truly much more strategic, impactful, and important than such narrow definitions convey. The last definition we quoted by the Management Study Guide is the only one which touches on broader values and contributions such as “the health of the supply chain”, “financial health”, “external and internal factors”, and “planning and review”.

Inventory management is more than just about knowing how much of any material or part or component or finished good that you have on a warehouse shelf, in work in process, in finished goods or in transit. It is more than ordering material. It is more than minimizing stock-outs. And it is more than counting parts.

Inventory Management requires strategy, leadership, planning, system and business process optimization, strategic supplier relationships, logistics leadership, and a comprehensive channel management strategy. This is much, much more than just the physical ordering, receipt, storing and movement of goods.

To help understand why Inventory Management is so much more than all these activities it is necessary to understand what impact inventory levels have on any company.

All Inclusive Inventory Management Impacts

Having inventory means that you have cash tied up in these goods. For many companies inventory can be the single largest balance sheet asset. Unless you have respectable inventory turnover performance a lack of cash flow, because cash is tied up in inventory, can drive your company to bankruptcy. Inventory can also require borrowing cash for funding which creates an expense that detracts from profitability.

Excess and obsolete inventory can result in scrap and write-offs that also diminish profits. And excessive inventory can negatively impact returns on invested capital (ROIC). Bad inventory management can wreak havoc on the financial viability, and survival, of your company.

If you don’t have enough inventory you can shut down your production lines, distribution processes and other channels. Any disruption, even for hours, can cost millions of dollars. And having too much inventory can choke your warehouses and channels rendering them unable to move the correct inventory to where it is most needed.

Inventory levels also have a direct impact on your company’s ability to meet customer demands and support revenue realization and growth. If you don’t have the inventory you need on hand, as required, you can lose sales, lose customers and damage your company’s brand and reputation.

The effective positioning of inventory can give you a competitive advantage. Think about online shopping for instance. In the age of E-Commerce if you don’t have your product in stock customers will go to your competitor’s website in the time it takes to click a single button. Proper inventory positioning can accelerate your time to market generating revenue and putting you in a market leading position, all competitive advantages.

All of this physical inventory doesn’t move around by itself either. There can be enormous costs in infrastructure and resources to handle, store and move this material. If inventory levels are out of control they will result in extra expenses which will also hurt profitability.

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And inventory management is not just about getting new products to customers. Supply Chain is circular so proper Inventory Management includes reverse logistics processes, returns, recycling, refurbishment and sustainability. All of these effect the customer experience, financial performance, and environmental impacts.

World Class Inventory Management

Anyone working in Supply Chain will be involved with inventory in some capacity. Many times in my career I have either been responsible for Inventory Management or I have been asked to lead an effort to improve inventory performance.

Early in my career I was asked to reduce our inventory levels because of the amount of cash we had tied up and to reduce the risk of obsolescence. Through a series of initiatives, inclusive of putting in place strategic just-in-time delivery partnerships, we were able to make great reductions in inventory dollars levels and great increases in inventory turnover.

Later in my career I was asked to lead a global initiative to dramatically reduce inventory in a record amount of time. The company’s inventory levels were so high that we had to borrow cash to fund it, resulting in enormous costs and impacts to profitability and return on invested capital (ROIC). Further our inventory turnover had been perennially the worst in our industry.

By taking a breakthrough approach to achieve transformational results we reduced inventory levels by 33% and increased inventory turnover levels to become industry leading in a 9 month period. This only happened by taking a holistic, comprehensive, game changing approach to inventory which goes far beyond what the traditional definitions of Inventory Management would suggest.

To learn more about our achievement of World Class Inventory performance check out our Ebook “Inventory Management Beyond the Mystery” or some of our articles like “Achieve Breakthrough Results! Go From Worst to First.”

Conclusion

As we stated previously most of the current definitions of Inventory Management are insufficient for what is truly involved.

Inventory Management requires strategy, leadership, planning, system and business process optimization, strategic supplier relationships, logistics leadership, and a comprehensive channel management strategy. This is much, much more than just the physical ordering, receipt, storing and movement of goods.

Understanding this distinction should also include comprehension of who is involved in Inventory Management. Traditional definitions suggest that the only people involved are really just those in Procurement and Warehouse Management.

A much more enlightened view of Inventory Management recognizes that it really requires Supply Chain, Finance, Marketing, Procurement, Planning, Warehouse Management, Channels (eg. Retail), Manufacturing, Suppliers, Product Development and more.

To truly manage inventory strategically through the entire life cycle of your products and your company all of these functions, and innumerable business processes are involved.

Don’t get caught in the old world view of Inventory Management. It’s really all about Inventory Leadership!

Originally published on April 27, 2021.

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