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Inventory is necessary for many businesses including retail and manufacturing facilities. Maintaining appropriate inventory levels is crucial, as too much inventory can be costly. An inventory management system helps to control and balance the flow of incoming and outgoing merchandise. For most businesses, a strong inventory management system is advantageous for several reasons.
Supply and Demand
Having an adequate supply of a particular product to meet customer demand is crucial to both sales increases and customer service. If a customer comes to a business to purchase a product and it is out of stock, the sale is lost forever and the customer will probably go to a competitor to find what they need. A good inventory management system, whether computerized or manual, will identify sales trends and prepare for customer needs.
Manufacturing facilities should always maintain proper inventory of the supplies necessary to produce their products. If one component is missing from the inventory, the whole production process is interrupted. Streamlined operations are an important benefit of an effective inventory management system.
Lead Time Adjustments
Inventory management systems are important for determining when to order certain items, especially for products with varying lead times. Some products take longer to receive from the manufacturer than others, and it’s important to have an inventory management system that accounts for lead time. If for example, a grocery store was going to have a sale on hotdogs, relish and mustard, but the hotdogs took longer than three days to receive while the condiments took five days, the inventory management system would need to ensure that all items were in stock in time for the sale.
Another significant advantage to an inventory management system is it reduces the liabilities and loss created by overstock. Similar to monitoring supply and demand, a good inventory management system will notice declines in sales or identify one-time occurrences to prevent over-ordering certain products. For instance, if a clothing store was having a sale on a certain style of jeans, it may order additional stock to meet customer demands. The inventory management system should take the sale into account before ordering more of the jeans based on the spike in sales. Otherwise, they store may have to offer even deeper discounts to get rid of the excess inventory.
- Retail Touch Points: Top 5 Benefits of Insight-Driven Inventory Management
- Start Up Nation: How to Run a Small Business - Inventory Management
- "Encyclopedia of Management: Inventory Management"; edited by Marilyn M. Helms; 2006
- Masao Nakamura, Sadao Sakakibara and Roger Schroeder. "Adoption of Just-in-Time Manufacturing Methods at U.S.- and Japanese-Owned Plants: Some Empirical Evidence," pages 230-231. IEEE Transactions on Engineering Management, 1988.
- Electronic Code of Federal Regulations. "Regulation S-X, 17 CFR Part 210: Sec. 210.5-02 Balance sheets." Accessed Aug. 1, 2020.
Based in South Florida, Leann Harms has been writing since 2008. Her design, technology, business and entertainment articles have appeared in "Design Trade" magazine and Web sites including eHow. Harms has a Bachelor of Arts in English from Florida Atlantic University.