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Tata Capital > Blog > Loan for Business > What is Inventory Management? Definition, Types and Process

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What is Inventory Management? Definition, Types and Process

What is Inventory Management? Definition, Types and Process

Have you ever wondered how retailers know precisely when to restock popular products? Or how do big companies like Amazon manage to ship millions of different products worldwide? The secret lies in effective warehouse management.

Managing your inventory is essential, whether you run a single retail store or a multi-national company. Stock management or inventory management allows you to align supply with demand and turn products into profits.

So, if you are wondering, “What is inventory management?”, this blog post will address all your doubts and also highlight the types and processes of efficient inventory control so you can effectively provide your customers with the products they need on time.

What is inventory management?

To start, what is inventory management? Inventory management is an important element of the supply chain. It is the process of ordering, storing, tracking, and controlling a company's inventory of raw materials, components, work in progress, and finished products. It ensures a business has an adequate supply to meet demand while minimising excess stock.

Now, you might ask, “What is inventory management really trying to achieve?” The main goals of inventory management are to avoid stockouts, reduce excess inventory, maintain optimal stock levels, and ensure efficient operations and sales.

Types of inventory management

Now that you know what is inventory management, it is time to understand the different types of inventory management. With the varying inventory management approaches available, it becomes essential to determine what is the inventory management type that best suits you. Here are the most popular warehouse management systems:

1. Manual/paper-based

The simplest inventory management relies on paper logs and index cards to manually track stock counts. While inexpensive, this approach is highly time-consuming and error-prone. It only works for very small businesses with limited inventory.

2. Barcode tracking

Barcode systems assign a unique barcode number to each product to enable inventory tracking. Handheld scanners update stock counts in a central database when items are received or sold. This improves visibility and accuracy without significant investments.

3. RFID tracking

Radio frequency identification (RFID) uses wireless tags attached to products that transmit data to nearby scanners. This enables real-time inventory tracking at the individual item level. RFID offers advantages over barcodes but requires more infrastructure and cost.

4. Just-in-time

Just-in-time (JIT) inventory management keeps limited stock on hand to meet immediate demand. Companies can procure materials aligned closely with customer orders. JIT reduces excess inventory but requires excellent supplier coordination and supply chain stability.

5. ABC analysis

ABC analysis is an inventory categorisation method that ranks a company's SKUs by value to focus resources on the most important items. Also called selective inventory control, ABC analysis divides inventory into three categories:

A - Most valuable (top 70-80% of total value)

B - Moderate value (mid 15-25%)

C - Least valuable (bottom 5-15%)

6. Dropshipping

With dropshipping, businesses do not keep inventory. Customer orders are forwarded to third-party suppliers who ship products directly to consumers. This model provides low start-up costs but relinquishes control over fulfillment.

7. Cross-docking

Cross-docking minimises storage by transferring items directly from inbound to outbound shipments. This speeds product flow through distribution centres but requires coordination and timely handling.

8. MRP inventory

MRP determines optimal material ordering and production quantities based on demand forecasts, lead times, current inventory, and bills of materials. It combines forecasting, planning, purchasing, and production scheduling.

So, what is the inventory management approach suited for your business? Ultimately, it depends on your specific business model, operations, and resources.

Process of inventory management

Now that we’ve explored the different types of inventory management systems, the question arises, “What is the inventory management process like?” Effective inventory management relies on following a systematic sequence of interconnected steps.

Here is a breakdown of five essential steps of the inventory management process:

1. Receive and inspect products

The inventory management process begins by receiving and inspecting incoming products from suppliers. This step sets the foundation for subsequent warehousing, order fulfilment, and replenishment activities to run smoothly.

When delivering an order, warehouse staff should first validate that the shipment matches what was originally ordered and expected. This includes verifying that the product quantities, serial numbers, and other identifiers match the packing slip and purchase order.

2. Sort and store products

Products must be strategically located between receiving docks, reserve storage, pick zones, and shipping areas based on factors like turnover rate, handling requirements, and accessibility. Fast-moving products should be near shipping areas to minimise pick times, while less popular items can be stored further back. Perishables require climate-controlled zones, while hazardous materials need special storage.

3. Accept and process orders

The next major phase in the inventory management process is receiving and handling customer orders. Orders typically enter the system through a sales channel like a company website, ERP system, point-of-sale, EDI portal, etc. However received, the order details must flow seamlessly into warehouse management systems (WMS). Advanced integrations between ordering platforms and inventory software or WMS enable real-time inventory visibility and order orchestration.

4. Pick, pack and ship orders

Picking, packing and shipping products to fulfil orders represents the actions that deliver value to customers. To execute this critical step in the inventory management process, warehouse staff must have visibility into inventory locations, product details, order priorities and other essential information.

5. Replenish and reorder stock

The last core phase of inventory management involves replenishing warehouse inventory through reorders and inbound supply planning. To initiate timely reorders, companies should establish reorder points and economic order quantities for each product based on demand, lead times and desired service levels.

Wrapping up

Understanding what is inventory management, its types and processes allows you to optimise working capital, minimise waste, and operate smoothly.

Elevate your business to new heights by implementing cutting-edge inventory management solutions. Tata Capital is here to support your growth with a business loan that provides the necessary funds. Benefit from attractive business loan interest rates, flexible repayment options, and minimal business loan documents required—all designed to meet your budget and cash flow needs. Take advantage of our business loan EMI calculator to estimate your monthly payments in advance. Visit our website for more details.

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