Some companies face different inventory-related challenges as they try to manage their inventory. Inventory management can be a burden, especially if you don’t know the whereabouts of your items, or if you have too many items in your inventory. This is why companies need an inventory system to address these challenges.
The challenges in inventory management
Before we discuss what these challenges are, you need to know what inventory management is. Inventory management is the organization of the storage, costing, receipt, and outbound shipment of materials and goods. At a high level, there are two types of inventory: direct inventory and indirect inventory.
Direct inventory refers to the raw materials, subassemblies, and components used to manufacture the final products. They are classified as work in progress, raw materials, or finished goods. Indirect inventory, on the other hand, refers to the materials that aren’t directly used in the final product. This type of inventory includes furniture, office supplies, and other goods that the company’s employees use. It can also include maintenance, repair, and operations supplies used in maintaining and repairing a company’s plant and equipment. For example, spare parts and maintenance supplies like lubricants for a manufacturing company are all considered indirect inventory.
Responsibilities for inventory management
Your responsibility for inventory management depends on the business type, business function, and the type of industry. The manufacturing function is responsible for managing raw materials, subassemblies, and parts. But before manufacturing, the company’s planning function first determines how much inventory is needed, depending on the number of finished goods the company aims to produce. The production managers and operations managers monitor and manage both work-in-progress and raw materials inventory to find out whether they have materials available to meet the production plans or not.
Parties down the supply chain can also manage the inventory. For example, when finished goods come out from the factory, they get transferred into distribution centers and warehouses for sale and delivery to consumers. Logistics managers then track the orders every day and manage the shipping of finished goods as they move in and out of the warehouses and while they’re in transit to their final destination.
Goods in transit add another layer of difficulty when it comes to inventory management, especially when the ownership or title transfers to a third party.
What are the challenges in inventory management?
Inventory can have a significant financial impact. It represents an asset on the balance sheet, but at the same time, it can be a financial burden. When the item is sold, it represents an expense item. But when this happens, the company pays its suppliers. Before the item is consumed or sold, inventory represents tied-up cash that can’t be used. Now, excess inventory (work-in-progress, raw materials, or finished goods that never get purchased) are written off at the end of the cycle as an expense that directly affects your company’s net income.
Below are the different challenges you may face as you manage your inventory:
- Not knowing your inventory. Being unaware of your inventory levels can negatively impact the supply chains. Companies need to ensure they have full visibility of their inventory all the time, so they will know when the stock needs to be replenished. You need to know what’s in stock, what is going to be ordered, the quantity and size of the order, and what items need to be replenished. It may seem hard, but it’s important to ensure profitable business operations.
- Customer demand. The demands and needs of customers constantly change, and they need distributors to be more flexible with their orders. Because of this, you have to compete against other companies to keep up with your customers’ needs. Your company needs to learn and understand the needs of the customers, to assure them that you will meet their needs and expectations as you manage your inventory to keep up with their needs.
- Inefficient processes. Many companies still use an outdated inventory system and manual processes. By upgrading standard operating procedures and implementing new technology, you’ll become more efficient when it comes to inventory management.
- Managing people and space. Taking full advantage of your warehouse space requires precise employee management and your space. Mismanaging either of them can result in issues like improperly sorted and stored materials and inadequate storage space.
- Limited visibility. An inventory system will allow companies to see their expenses, inventory, cash flow, and revenue in one central location. The ability to make better decisions depends on the visibility of your inventory. Thus, working with the right inventory system is necessary.
- Increasing competition. This is another challenge in effectively managing your inventory. The emerging markets provide advantages like lower material costs, labor costs, and currency values. Because international shipping is available, it’s time you make sure that your supply chain works as efficiently as possible.
Why is using an inventory system important in inventory management?
Using an inventory system, inventory managers can make better decisions that will minimize risks, optimize costs, and maximize the ability to generate revenue. The goals of an inventory management system are to:
- Ensure great customer experience. When you’re able to fulfill orders quickly that exceed customers’ expectations, your business will thrive. But if inventory management issues interfere with meeting your customers’ needs, then your business will suffer.
- Preserve working capital. Inventory is the second largest item on your company’s balance sheet, next to cash. Companies that tie up too much working capital in their inventory won’t be able to make other investments that can further their business objectives.
Businesses today have unprecedented visibility, thanks to inventory management systems, digitized POS systems, and social media monitoring. A lot of companies still use spreadsheets, but with today’s technology, this is counterproductive and unnecessary. To compete in this economy, you need to align planning and inventory management into just one platform.
Look for an inventory system that will unite other crucial systems like financials, reporting, procurement, and manufacturing. If you have a connected enterprise, you’ll have better visibility across your company, so you can plan more effectively.