Inventory management encompasses many processes, but in its simplest form it refers to storing and organizing a company’s products. It includes such activities as ordering, restocking, storing and inventory forecasting.
Strategically managing inventory gets more challenging in accordance with growth of units sold. In today’s hyper-competitive marketplace, good inventory management is an often overlooked but critical aspect for any ecommerce business. It is vital that the inventory management process is efficient, cost effective, and accurate. If you do not have all of those components in place you may run considerable risk of failing to meet customer demand and losing money with your ecommerce fulfillment efforts.
11 Inventory Management Terms you Should Know
There can be a steep learning curve for understanding inventory management, even if you own a product-based company that deals with physical inventory. We are going to start with the key basic terminology and acronyms and define them to help build your knowledge of inventory management.
Days Inventory Outstanding
Days inventory outstanding (DIO) represents the number of days the current inventory will last. A lower DIO indicates a shorter time required to clear out inventory. DIO is also referred to as days sales of inventory (DSI), days in inventory (DII), or simply days inventory.
Economic Order Quantity
Economic order quantity (EOQ) is a term for the ideal quantity a company should purchase to minimize its inventory costs, like shortage or carrying costs. The overall goal of economic order quantity is to decrease spending; its formula is used to identify the greatest number of units needed (per order) to reduce buying. One of the primary gains of the EOQ model is customized recommendations for your particular company. At times, EOQ may suggest investing in a larger order to take advantage of discount bulk buying and to cut down on total costs associated with multiple shipments.
Finished Goods Inventory
Finished goods inventory includes all products that have been completed by the manufacturing or production process — or that have been purchased in completed form — and that are available for sale. This term typically applies to manufacturers, since their goods can be in multiple forms, such as raw or in production. Retailers usually only maintain ready-to-sell items, meaning all their goods are finished.
Inventory Cycle Count
An inventory cycle count is part of a company’s inventory auditing procedure. In an inventory cycle count, a subset of inventory is counted on a certain day to help maintain accurate inventory levels. Unlike a full inventory count, an inventory cycle count is less disruptive to operations — though it doesn’t offer as much accuracy across the board.
Reorder Point
A reorder point is the quantity at which you reorder an item to replenish its supply. The reorder point will differ greatly from product to product and business to business. For example, a product that sells quickly and in large amounts would generally have a higher reorder point than a slower moving product.
Safety Stock
Safety stock refers to the extra amount of a product that you keep to mitigate the risk of stockouts. Supply and demand can shift unpredictably, and having safety stock helps ensure you’re able to fulfill orders. The benefit is that sales are uninterrupted; however, purchasing and storing extra products ties up more money in inventory.
SKU
SKU stands for stock keeping unit, which is used in conjunction with a barcode system to represent a distinct item. SKUs are typically printed on products as scannable labels and hold item-specific data such as price, manufacturer, and other product details. Businesses use SKUs to identify products and keep track of inventory levels. As your product mix expands, you’ll need to manage SKU proliferation and adjust your fulfillment and supply chain operations to manage the complexity of adding new items.
Stockout
As the name implies, a stockout means you’ve run out of a product. Stockouts may occur for any number of reasons: an unexpected surge in customer demand, not ordering enough of a product, an erroneous delivery from a supplier, inaccurate stock counts in the warehouse, theft, or a combination of these.
Write-Downs
The reason some companies in your industry are successful is because they have efficient inventory management. Implementing an inventory management system (IMS) can help you identify the root cause of slow-moving inventory and find ways to reduce excess and obsolete stock. Inventory management also helps you sell off excess and obsolete stock more effectively through the process of write-downs. By reducing the price of an item, you can still make a profit. But failing to find a way to utilize obsolete stock will lead to a write-off where the product is considered a loss to your company.
Write-Offs
A dreaded term in the fulfillment industry is inventory write-off. It is the formal recognition that some of a company’s inventory no longer has value and cannot be sold. Sometimes inventory write-offs are inevitable—for example if items go out of style and need to be reworked or recycled for another purpose. Other times, a product gets damaged in the warehouse, either during storage or transportation, and is no longer sellable. If write-offs happen occasionally, it won’t cause a huge loss to your organization, but if they happen frequently it means your business has poor inventory management.
Supply Chain
A supply chain is the network of organizations, resources, activities, and technology that works together to create, sell, and distribute products to customers. A supply chain can have many complex touch points, depending on things like the number or amount of raw materials involved in manufacturing a product, the type of product, and who and where the end customer is.
Distributed Inventory
Having warehouses in multiple locations can help you provide more affordable and faster shipping to customers, and helps you make region-popular items more accessible. If you have warehouses located strategically around the country, you will have an easier time reaching customers in their shipping zone, saving you money and delivering in a more timely fashion.
Bottom Line
If you establish the best practices for inventory management it can be an incredible help in efficiently running your business. It is important to make the right choices that can scale and grow with your business. Great inventory management will save money, time, and improve customer service. Remember that with an effective inventory management system in place you can keep your business profitable, analyze sales patterns and predict future sales, and prepare for the unexpected. With a proper inventory management, a business has a better chance to survive and thrive.
Help with inventory management is one of the many benefits to working with a 3PL. If you are seeking logistics support we’d love to hear from you. You can read DCL’s list of services to learn more, or check out the many companies we work with to ensure great logistics support. Send us a note to connect about how we can help your company grow.
