Inventory management is all about having the right items on hand at the right time to meet customer demand while controlling costs and minimizing waste and loss. Companies with best-in-class inventory management practices don’t guess how much stock to buy, and they keep a steady flow of raw materials, work-in-progress items and finished goods moving from manufacturing to consumer, over a variety of distribution channels.
But no one stays best in class by resting on their laurels. Companies need to stay on top of trends in inventory management, understand the drivers behind them and determine whether it makes sense to be an early adopter — or let someone else work out the bugs.
All companies — and especially those in inventory-intensive industries, such as manufacturing, retail and food service — must avoid tying up more cash in inventory than necessary while minimizing waste and shrinkage. Successful companies accomplish this using inventory models.
What Is Inventory Management?
- Inventory management is the process of acquiring, storing and selling or using the four main types of inventory: raw materials; works in progress (WIP); finished goods; and maintenance, repair and operations (MRO) stock.
Main Inventory Types Explained
- Raw materials: This category includes both nonperishable materials, such as sand, wood or wool, or raw fruits, vegetables, grains or meats used to make processed foods.
- Work in progress: WIP are goods that are in progress but not yet ready to sell, such as sheets of glass, window frames, fabric or flour.
- Finished goods: Finished goods are ready-to-sell items, such as a window, suit coat or loaf of bread. Finished goods may be either intermediate items headed for another manufacturer, such as fabric to a clothing maker or bread to a sandwich shop, or a consumer good destined for a retailer or direct-to-consumer (D2C) sale.
- Maintenance, repair and operations: MRO items are items needed to keep the production line up and running, like tools or spare parts, or consumables to get products to their destinations, like paint or packaging.
What is the importance of inventory models in managing inventory?
An inventory model is the system a business uses to determine the optimal way to produce its goods. The inventory model or models in use govern areas including, but not limited to, how frequently to order raw materials or MRO stock with the goal of not having too much or too little on hand, deciding how best to track and store items awaiting production or transit and how to fill customer orders quickly and with high accuracy. Factors when selecting a model include the industry, any special considerations around the production lifecycle and which model leaders think will best maximize the investment in goods and raw materials.
Understanding inventory models will help businesses maximize resources, manage costs and deliver quality goods to customers on time and is first step in effective inventory management. That’s because each model has a specific technique to help leaders determine how much stock to have on hand. For instance, companies with more complex manufacturing and supply chain processes use methods such as just-in-time (JIT) and materials requirement planning (MRP) to balance inventory. Popular models like economic order quantity (EOQ), economic production quantity (EPQ) and days sales of inventory (DSI) are also useful.
While smaller businesses tend to track inventory manually using spreadsheets, larger corporations benefit from using either specialized enterprise resource planning (ERP) software or a specialized inventory management application.
Once a company has settled on a model, it’s time to seek a competitive advantage. And that requires some out-of-the-box thinking, advanced planning and leveraging advances in technology and process.