Inventory Management 101

This article contains general information and is not intended to provide information that is specific to American Express, or its products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.

Managing inventory is an important part of operating any type of business that sells products to other businesses or to consumers either online or in a retail setting.

One key goal is to manage the business’ cash flow as raw materials, components, and essential supplies are received and finished products are sold. Other goals might include tracking inventory levels, controlling costs, and discouraging theft by any who may have access to the business’ supply chains or premises.

What is inventory management?

Inventory management is an ongoing process of tracking the raw materials and other components a company uses to produce its products, the individual units of finished products when they’re completed and ready to be sold or shipped to customers, and other items that are essential to produce, package, and deliver the company’s products to customers.

The inventory management process may include specific steps to track materials and components when they’re ordered, stored, and used, and finished products when they’re completed, warehoused, sold, and shipped to customers.

Inventory is all about products and what’s required to produce them and provide them to customers. It does not typically include items like paper napkins for the staff lunchroom, or assets, like factory machinery.

What are the 4 types of inventory?

The four basic types of inventory are raw materials, partially completed products, finished goods, and other supplies that are required to produce and sell the company’s products.

Partially finished products are sometimes called “work in progress” or WIP inventory. Supplies that are essential but not part of the completed product are sometimes referred to as “maintenance, repair, and operation” or MRO inventory. Examples of MRO include office supplies, cleaning supplies, tech gear, and personal protective equipment, such as earplugs, safety glasses, or hard hats.

A sophisticated inventory management system could also include additional categories or subcategories. Examples include additional packaging materials, materials or products in transit, and unsold products that may not be salable but are kept in storage.

What is an inventory management system?

An inventory management system is a set of bookkeeping records for tracking different types of inventory. The records may be paper-based or maintained in a digital format within an inventory management software program.

Inventory management software may also be used to generate real-time reports, invoices, purchase orders, receipts, and other documents related to inventory tracking.

Why is inventory management important?

Inventory management enables businesses to monitor and control costs related to the production and sale of their products. It may also deter employee theft and waste associated with finished products that can’t be sold because they’re damaged or outdated or due to other reasons.

What are some of the methods of inventory management?

There’s no one method of inventory management that’s best for every type of business. Different methods might work for some but not all businesses.

One of the most common inventory management methods that small businesses may consider is first-in-first-out (FIFO). In simple terms, the products that are created or acquired first are the first sold or distributed. This method can be especially useful for businesses who sell perishable goods, as it encourages them to get the inventory that has been held the longest out the door first.

What are the stages of inventory management?

Inventory management involves multiple stages from ordering and receiving materials to storing and shipping finished goods. These stages may differ from one type of business to another, but the basics are likely to be the same or similar.

Ordering products

How business owners purchase merchandise will likely define how they order it and the quantities they’ll need to reorder.

Smaller businesses might want to ensure they don’t order or reorder more than they can pay for and store at any given time. Forecasting product sales may help managers determine how much they need to order and when to maintain adequate stock levels.

An inventory book or software program may be used to record items ordered and any changes to those orders. Tracking stock levels to determine which products sell quickly and which languish unsold could help a manager lower their costs of keeping inventory in stock and improve profitability.

Receiving shipments

Shipments are a crucial time when inventory may be lost through theft or record-keeping errors.

Packing slips should be reviewed to ensure that the numbers and types of goods received match the numbers and types of goods ordered. If there are variances, businesses can file claims with a supplier or shipping carrier.

Received items should be carefully inspected before the shipping carrier leaves the company’s premises, again in case there is a need to file a claim for damages.

Storing materials and finished goods

Raw materials, components, supplies, and finished goods must be stored in a secure place, such as a local warehouse or regional distribution facility, until they’re needed.

An inventory management system, whether computer-based or as simple as a paper map with numbered bins, may be used to track goods.

Minimizing losses

Losses often occur as a result of theft. But clerical mistakes during the production and sales cycle may also lead to inventory “shrinkage.” Loss prevention techniques could help to mitigate these problems.

Security systems are another tool for inventory management. These systems may include security tags on merchandise, security cameras to deter theft, controlled access to inventory storage areas, and careful monitoring of products returned by customers.

Taking regular inventory

Inventory management might also include periodic counts of physical items that are in inventory. These counts may help managers understand loss trends and resolve any issues related to unsold merchandise.

The inventory process may be ongoing or scheduled on specific days when employees count existing inventory and check its condition. This process may also include identifying opportunities to liquidate older, unsold products through clearance sales or promotional pricing.

What inventory management means for small businesses

Putting the right inventory management systems in place typically helps set a foundation for success as a business grows and may minimize losses due to theft and record-keeping errors. Inventory financing, through a business line of credit (and related loans) or an individual small business loan, may help a business cover the costs of creating or improving their inventory management processes.

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