Who would have thought a cup could cause such a frenzy? We’re talking about Stanley cups, the insanely popular reusable tumbler that had people waiting in line for hours to get their hands on a limited-edition model. A mix of social media buzz, marketing, and a quality product has fueled the Stanley craze — and in cases like this, the craze typically leads to inventory shortages.
Knowing precisely what inventory is where and identifying trends to anticipate demand is crucial to ensuring there’s always enough stock to fulfill customer orders. If the inventory isn’t in the store or available online, Stanley risks damaging customer relationships and pushing its customers to seek alternative options from competitors. With a well-functioning inventory management strategy, the company likely prevents shortages and meets customer expectations.
No matter the industry (or amount of product hype) all companies aim to control inventory. Striking the right balance between enough stock to meet demand while preventing excess inventory from depleting cash on hand is key to a sustainable and successful business.
What is inventory management?
Inventory management is the process of controlling and optimizing the ordering, storing, selling, and restocking of a company’s goods or services. It involves procuring raw materials and components, accounting for work-in-progress items, and selling finished goods. The goal of inventory management is to ensure the company has the right amount of inventory at the right time to meet customer demand while minimizing costs related to holding and ordering stock.
Without proper inventory management software, companies may have product shortages that lead their customers to buy from competitor brands. On the other hand, having too much safety stock (just-in-case inventory) risks a drop in demand, spoilage, inventory that needs a price reduction, or, worse, products that need to be destroyed due to safety or compliance issues.
Here’s where the problem lies. Too slow of a restocking process means companies can’t meet customer demand, but holding too much inventory is also a liability since it ties up company cash. Inventory management is all about finding the right balance.
In addition to saving money, a well-executed inventory management strategy helps increase efficiency, mitigate risk, improve financial reporting, and build stronger relationships with suppliers and customers. Of course, each industry must take a different approach, but all companies must do inventory management to remain competitive and profitable.
Types of inventory
Inventory can be classified into a few categories. They are:
- Finished goods: The finished item that will be sold to customers. An example would be a laptop computer.
- Raw materials: The materials needed to create the finished goods. This might be the steel to create the hard disk and frame for the laptops.
- Work-in-progress (WIP) inventory: Items that are in various stages of production but are not yet completed goods. This type of inventory includes raw materials that are partially assembled or processed but still need to undergo manufacturing or assembly. An example would be hard disks, which still need to be installed on laptops.
- Safety stock: Buffer inventory a company keeps to protect against demand spikes, supply chain disruptions, or unforeseen delays.
There are instances where WIP and finished goods may be considered the same. Take the hard disks above. The company may also sell hard disks to authorized computer repair shops around the world — therefore, they would be considered finished goods.
How inventory management works
Inventory management involves coordinating the flow of goods from suppliers to warehouses to customers. Effective inventory management requires consistent monitoring, accurate demand forecasting, and strong coordination with suppliers.
It typically involves five steps:
- Order raw materials or inventory from suppliers, ensuring that the quality and quantity of items meet the company’s needs
- Store the inventory in a warehouse or prepare it for shipment to manufacturing facilities
- Track utilization of raw materials or components by manufacturers to understand production trends and inform future purchasing decisions
- Sell finished goods and adjust inventory level data to reflect how many units are left in stock
- Reorder inventory to start the process again
A smooth and efficient supply chain is critical to inventory management because it ensures that products are available when and where they are needed, without unnecessary delays or costs. When the supply chain functions well, inventory moves seamlessly from suppliers to warehouses and then to customers, minimizing the risk of stockouts or excess inventory.
What is the goal of inventory management?
The goal of inventory management is to ensure that a company has the right amount of inventory available at the right time to meet customer demand while minimizing costs. This involves balancing the need to prevent stockouts, which can lead to lost sales and customer dissatisfaction, with the need to avoid overstocking, which can tie up capital and increase storage costs.
A data-driven and supply-chain-focused inventory management strategy helps companies achieve the right balance between meeting customer expectations without driving up costs. Ultimately, inventory management software is critical for a company’s overall profitability and success.
Why reliable inventory management is important for your business
Reliable inventory management is critical for businesses because it directly impacts their ability to operate efficiently, meet customer demands, and maintain profitability in a competitive global market.
Take the Stanley cups mentioned earlier. The company needs to be able to navigate huge shifts in demand without overstraining or hindering operations. What if they miscalculated the amount of steel, a critical raw material in their cup, needed for the December holiday season? With such little notice, their suppliers may not be able to provide the amount required to meet production needs. How many units would they miss out on selling, and how upset would their customers be? There’s even the potential for negative PR and media attention when a company can’t meet customer expectations, resulting in a negative brand reputation.
Or what if they overstocked a green tumbler that didn’t sell well during the holiday season, and now they have large holding costs for those tumblers in their warehouses? Missing that shift in demand may be due to poor inventory data tracking from the previous holiday season and a lack of market trend data. All of these factors impact the company’s financial health.
A reliable inventory management software system can accurately collect data, streamline processes with suppliers, and facilitate better service levels. Inventory management becomes even more important for companies with complex supply chains and production processes.
Key benefits of efficient inventory management
At the heart of inventory management is the ability to make data-driven decisions regarding inventory that support greater profitability and operational efficiency for the company. Other benefits include:
Improved cash flow
The more inventory a business has, the more cash it has trapped within that inventory. By maintaining optimal inventory levels, businesses can free cash tied up in unsold inventory, improving cash flow and enabling more strategic investments.
Increased operational efficiency
By ensuring materials and products move smoothly through the supply chain, businesses can reduce delays and bottlenecks that typically disrupt production and distribution. For example, raw material or component shortages can be detected early, and an alternative supplier may then be selected to reduce any delays.
Enhanced customer satisfaction
Reliable inventory management ensures that products are available at the right place at the right time, preventing product shortages that can lead to lost sales and damaged customer relationships.
Better forecasting and planning
Tracking inventory from supplier to customer is critical in creating accurate demand forecasts and predicting future inventory needs. Better forecasting allows businesses to plan inventory levels more efficiently, reducing the risk of stockouts or overstocking.
Stronger supplier relationships
Effective inventory management enables businesses to give their suppliers more accurate and earlier forecasts about when they’ll need more materials. That early heads-up and accuracy help suppliers plan their own production more effectively and lead to better operational and financial performance. With the business and supplier working in sync, both parties benefit and feel good about the relationship.
Reduced costs
Too much inventory leads to higher holding costs associated with storage, insurance, and potential obsolescence — especially for perishable or time-sensitive items. Meanwhile, shortages may lead to lost sales, costly rushed shipments, and production delays. Optimizing inventory levels reduces lead times from suppliers, improves inventory turnover, and ensures that products are always available, all of which reduce costs and improve profitability.
Lower risk
By understanding inventory trends, businesses can plan for potential disruptions or changes in demand. For example, semiconductor chips were in short supply from 2020 to 2023, leading to price increases and production delays across many industries. Companies that forecasted this trend and planned their inventory management accordingly were able to build up safety stocks and outmaneuver the shortage with fewer operational disruptions.
Biggest challenges in inventory management
Inventory management involves accounting for many external factors, such as demand, current inventory levels, market trends, and supply assurance, which make decision-making more complex. Knowing when to order more inventory, how much to order, and at what price point to sell it isn’t so straightforward. Let’s take a closer look at the challenges of inventory management.
Data collection
Inventory moves across many locations and entities. Tracking it from suppliers to warehouses to production facilities to retail shelves requires the right technology. Without accurate stock-level data, it’s nearly impossible to correctly predict demand or make strategic decisions that fuel profitability and operational efficiency.
Manual processes
Many small to midsize companies track inventory via spreadsheets, on paper, or in multiple systems, which leads to limited real-time visibility, more errors, and operational inefficiency. And while most enterprises use an ERP or specialty software to automate much of the inventory management process, ensuring it integrates within existing systems and is scalable is a key challenge.
Cost allocation
Properly allocating costs for purchasing, holding, and handling expenses needs to be done for every inventory item or product line for accurate finance reporting and pricing strategies to occur. It can be difficult to keep track of and categorize direct costs (e.g., raw materials, direct labor) and indirect costs (e.g., overhead, labor, storage), especially with multiple inventory categories.
Demand forecasting
Consumer preferences are changing faster than ever, leading to unexpected demand spikes or sudden slumps. Inventory managers must analyze factors to predict demand accurately, including seasonal fluctuations, market trends, and unexpected disruptions. Companies need advanced analytics, historical data, and supply chain modeling tools to overcome these challenges.
Perishable inventory
Perishable stock carries a higher risk of obsolescence because it requires specific storage and cannot be used or sold after a certain time frame, making cost allocation difficult. Traditionally, first-in, first-out (FIFO), and last-in, last-out (LIFO) methods are used for goods, but perishable goods require inventory management that prioritizes expiration dates. Allocating costs must align cost calculations with actual product movement tied to expiration dates rather than a simple purchase order sequence.
Common inventory management methods and techniques
There are several inventory management methods, and depending on the industry or products involved, businesses may use one or a mix of several to achieve their goals. Although not an exhaustive list, here are five common methods and how they work:
- Just-in-time (JIT) inventory management: A strategy where inventory is ordered and received only when needed for production or sales, minimizing the amount of inventory held in storage and reducing holding costs. Since the ordering and arrival process is so time-sensitive, JIT relies heavily on accurate demand forecasting, strong supplier relationships, and efficient production schedules. It’s best for businesses with predictable demand, like an automotive manufacturer.
- First in, first out (FIFO) method: An inventory accounting technique where the oldest (first in) is used or sold first. Businesses may struggle with logistical challenges to enforce that older inventory is physically accessed first, making accurate inventory tracking even more critical. This method is best for perishable goods, pharmaceutical drugs, fashion, or technology since it ensures items are used before they spoil or become obsolete.
- Last in, first out (LIFO) method: As the opposite of FIFO, last in, first out uses or sells recently produced items first. This method has strict legal requirements and is only allowed under certain conditions. It’s best suited for industries with non-perishable goods, like oil and metals, where prices fluctuate frequently.
- Material requirements planning (MRP): Similar to JIT, MRP seeks to ensure materials or products are available for production when needed, with the goal of suppliers delivering on time so there’s just the right amount of inventory. It relies heavily on demand forecasts, bills of materials, and production schedules to plan for the right amount of raw materials or components. MRP is best for manufacturing businesses with complex production processes, such as electronics or aerospace.
- Multi-echelon inventory optimization: This method optimizes inventory levels at each stage of the supply chain — such as multiple distribution centers, warehouses, and retailers — rather than individual locations in isolation. Demand is synchronized across various points, and advanced analytics are applied to optimize stock levels at each echelon. By minimizing inventory at each point, companies can better control holding costs, transportation costs, and lead times. This method is best for businesses with complex global supply chains, like retailers, consumer goods, and e-commerce.
The latest tools and tech in inventory management
To efficiently manage inventory, businesses rely on various tools and technology to streamline operations, improve accuracy, and optimize stock levels. Here are some of the most commonly used tools.
Radio frequency identification (RFID)
RFID is a tracking technology that provides real-time information on inventory. Each inventory item or group of items is assigned tags. Once new shipments arrive or are shipped out, a mobile device scans the tags and feeds that data into a centralized system or inventory platform to provide real-time information on the inventory across locations.
Barcodes are similar to RFIs and work in almost the same way. The major difference is that barcodes don’t allow multiple items to be scanned simultaneously, making RFIDs a more efficient method for inventory tracking. The biggest benefit of RFID and barcodes is that they help the business cycle count much more efficiently and accurately. Cycle counting is a method of physically counting a subset of inventory at a specific location at specific intervals to confirm a company’s inventory records are accurate without needing a full inventory audit.
Warehouse management systems (WMS)
Businesses use WMS to manage the day-to-day operations within a warehouse, from receiving and storing inventory to packing and shipping products. These systems provide real-time visibility into where items are stored within the warehouse, streamline the process of preparing and shipping products, and optimize warehouse worker productivity.
Enterprise resource planning (ERP) systems
ERP systems are the heart of a business. These integrate all areas of business operations, from finance to HR to customer relationships, into one centralized system. By tracking inventory with finance, sales, production, and other functions, ERP systems provide a unified view of inventory across the entire organization.
There are some capability limitations, however. Many companies integrate advanced software into their ERP system to create an efficient, more automated inventory management strategy. Take Coupa, for example, which integrates into any ERP. It empowers companies to see real-time, on-hand inventory levels and automatically replenishes stock at the right time to reduce delays and excess inventory costs.
Supply chain modeling
Managing inventory is about more than just the here and now. It’s also about the future. In today’s turbulent market, where raw material shortages or route disruptions are becoming the norm, businesses must identify the best ways to secure their inventory without damaging profitability. They need the right tools to achieve inventory optimization.
Supply chain modeling simulates various supply and demand scenarios, helping businesses balance inventory holding costs, stockouts, and customer service levels. It also improves demand forecasting by using historical data, market trends, demand drivers, and AI to predict future patterns. Businesses can prepare for uncertainties and adjust inventory levels accordingly. For example, a retail company may use Coupa’s Supply Chain Design and Planning to determine how much stock to keep in regional warehouses and retail stores based on projected demand and lead times from suppliers. This leads to better service levels and reduced holding costs for unnecessary inventory. A semiconductor chip manufacturer might also model the effects of a precious metal shortage and find backup alternative suppliers to secure critical inventory supplies.
The future of inventory management
As businesses continue to adapt to a rapidly changing global landscape, new trends and technologies are emerging to help them keep pace. Automation and AI are taking center stage in inventory management, helping organizations increase efficiency, improve accuracy, and create more resilient supply chains.
AI can analyze vast amounts of data, provide insights into forecast demands, optimize stock levels, and automate routine tasks like order fulfillment. These systems can automatically adjust inventory reorder points and quantities based on real-time data, reducing manual intervention. In the future, dynamic, automated ordering will ensure stock levels are optimized across multiple locations without the need for human input in inventory planning.
AI is also driving more sustainable business practices. Many organizations are using advanced supply chain modeling technology, like Coupa’s Modeler, to incorporate sustainability into their inventory decisions. With a few clicks, they can see how to reduce overstock, minimize waste, and optimize transportation. That’s how Microsoft cut its carbon emissions by 40% while still maintaining service levels during demand peaks.
These technological developments are becoming more significant advantages for companies willing to invest in them.
Case study: Odyssey strategically manages complex inventory with Coupa
Odyssey is a global logistics provider that helps clients in various industries keep their cargo moving and their businesses growing. Since the company handles intermodal, rail, ground transportation, warehousing, freight forwarding, and other services for clients, keeping track of this kind of inventory is often a complex and challenging task. Odyssey leans on Coupa to simplify and strategically manage it all on one platform.
For example, when a multi-week bridge closure impacted transit for a client, Odyssey used Coupa’s modeling tool to quickly test shifting demand to another facility to ensure on-time delivery. Identifying potential bottlenecks in the supply network and proactively creating alternative plans empowers Odyssey to optimize inventory and save billions of dollars.
How to improve your inventory management with Coupa
Inventory management is about much more than just getting the right products at the right place. It requires a holistic approach that incorporates supply chain design and planning to drive profitability and long-term success. By ensuring your customers have access to the products they love, you can easily balance stock levels with service and sustainability.
Coupa can make it a reality. With the industry-leading Supply Chain Network Optimization software, powered by LLamasoft, Coupa helps you:
- Automatically optimize your inventory levels with powerful AI that harnesses historical operational data.
- Forecast demand more accurately by tracking and analyzing stock-keeping unit (SKU) allocation, inventory productivity, positions, safety stock levels, service levels, and market trends.
- Incorporate sustainability into your inventory decisions by providing insights into how to consolidate shipments or choose less carbon-intensive transportation modes and routes.
If you’re looking for an uncomplicated and automated inventory management system, Coupa has you covered there, too. Our Inventory Management software provides real-time stock level visibility and automates inventory fulfillment when levels hit a certain level. It’s a hands-off way to always have what you need when you need it.
