What is inventory management?

Inventory management is the process of overseeing, controlling, and optimizing a company’s inventory. But what is considered inventory? If you produce a good, inventory includes raw materials, work in progress products, the final product, and even in transit goods (goods traveling between you and your customer or you and your suppliers). If you purchase the product from a supplier you won’t have raw materials (although you may have pieces to assemble), but you will have the rest of those items listed above. 

There are also many inventory management methods including:

• First in First Out (FIFO): under FIFO, the oldest inventory items are assumed to be the first ones sold or used, while the more recently acquired items remain in inventory.
• Last in Last Out (LIFO): this method assumes that the most recently acquired inventory items are the first ones sold or used, while older items remain in inventory.
• Perpetual Inventory Method: when a company keeps a continuous and up-to-date record of its inventory levels.
• Periodic Inventory Method: an approach where a company does not continuously track its inventory levels in real-time. Instead, inventory counts are conducted periodically at specific intervals. Intervals could be monthly, quarterly, or annually.
• ABC Analysis: a method of categorizing items in inventory based on their importance or value. “A” items are the most important and valuable, “B” items are moderately important, and “C” items are the least valuable. C items often represent a large portion of total inventory but contribute minimally to the overall consumption value (annual demand × item cost per unit). 
• Just-in-time Inventory: this is when materials and components are delivered to the production line or assembly point exactly when they are needed, neither too early nor too late. The goal is to streamline operations and reduce waste, and holding costs, by synchronizing production with customer demand.
• Economic Order Quantity (EOQ) Formula: this method is used to determine the optimal order quantity that minimizes total inventory holding costs and ordering costs. 

Who is involved in inventory management?

There are many parties you need to consider in your inventory management process. Of course your company is involved, but you must also consider suppliers, end customers, retailers and/or ecommerce platforms you sell through, and the shipping companies you work with. That’s a lot of parties to juggle! When you add this much complexity you’re going to need help with inventory management. This can come in the form of a tool like Excel (good for when you are just getting started) or, even better, an Inventory Management Software that can help you manage and connect all these parties.

The When: planning and forecasting 

How do you know how much inventory to have on hand? Or when to expand your product line? Or even when to offer discounts on your product? 

Planning and forecasting answers all of these questions and is an important part of inventory management. Forecasting tells you how much inventory you need and when the right time is to take certain actions like purchasing more product or raw materials, discounting, and expanding SKUs. However, this requires good data. And good data comes not only from your knowledge of the market and your business, which is important, but also from a strong inventory management practice. An inventory management software tool will aid you considerably in this effort by aggregating data and providing automated reports on this data. 

Where is your inventory? 

This seems like an easy question but as you grow this becomes more complex. You may start off in a garage or storage closet, but most small CPG companies grow to need a warehouse or even several warehouses. Moreover, you again need to consider inventory in transit, your inventory on retailer shelves, and lead times to get more inventory from your suppliers. You can also work with 3rd Party Logistic (3PL) companies that can take some of the shortage and fulfillment tasks off your hands.

Why Inventory Management is important for CPGs

A good inventory management process is vital for growing CPG companies. As you grow, it is easy for costs to get out of control. A good inventory management process will help you not only understand your costs but also avoid inventory inefficiencies by controlling and minimizing them. This is made easier when you use inventory management tools with connected inventory performance.

Inventory management also enables growth. When you have a handle on your inventory, your business has the ability to add SKUs, and expand markets and sales channels. As you do these things inventory management becomes more complex, but with good processes in place you can fuel this growth and beat your competition.

Inventory management doesn’t just encourage growth, it also increases customer satisfaction. Wondering how? Here are a couple of ways:

• Fulfilling their orders quickly – with good inventory management you’ll avoid going out of stock and having to backorder customers. 
• Selling where they buy – the growth stated above not only helps you but it helps your customers by showing up where they buy, whether that is a big box store or online.
• Returns and refunds – some returns are inevitable and with food and beverage products some spoilage as well. But when you use the right tools you’ll be able to handle this and get the customer the replacement product or refund they need quickly.