Managing inventory plays a vital role in ensuring smooth and uninterrupted business operations. Today, inventory is a central element in numerous industries, including retail, e-commerce, textiles, food production, and many more. Whether it’s raw materials or finished goods, having the right inventory strategy is crucial for sustainable growth and profit.
That’s why understanding what is inventory and mastering efficient inventory management strategies are non-negotiable in modern business. From preventing loss to optimizing storage space, this article will walk you through everything, from types of inventory, benefits of effective stock management, to actionable strategies and common challenges you must overcome.
What Is Inventory in Business?
At its core, what is inventory refers to the raw materials, semi-finished, or finished goods that a company holds with the intention of selling, distributing, or using in production in the near future.
Effective inventory control, also known as inventory management, is essential to reduce production bottlenecks, minimize waste, and ensure products are available when needed.
Types of Inventory Every Business Must Know
Not all inventory is created equal. To master what is inventory, you must first understand its different forms. Each type plays a unique role across various stages of the supply chain:
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Raw Material Inventory: This includes unprocessed materials that are essential for manufacturing. If raw materials run out or face delivery issues, production halts immediately. Examples of inventory in this category include crude oil, fresh food ingredients, and industrial chemicals.
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Work-in-Progress (WIP) Inventory: These are partially manufactured goods not yet ready for sale. Additional steps like assembling or finishing are still needed. Common examples of inventory here include automotive parts, flour, rubber sheets, and wooden boards.
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Finished Goods Inventory: Finished goods are ready-to-sell products. They may be stored temporarily because distributors don’t have enough space, or previous inventory hasn’t sold out yet. Examples: packaged rice, ready-to-ship furniture, or completed vehicles.
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Merchandise Inventory: Merchandise stock refers to goods purchased for direct resale without undergoing any modification. This inventory type is common among resellers, dropshippers, and distributors aiming to save on shipping and anticipate price fluctuations.
Benefits of Efficient Inventory Management
Strong inventory management goes beyond stock tracking. Here’s how it powers up your business:
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Prevents Stockouts: Running out of stock can be a deal-breaker. It interrupts supply chains, frustrates customers, and sends them straight to competitors. Accurate forecasting helps avoid this by identifying minimum stock levels, especially for slow-to-produce items.
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Optimizes Storage Space: Overstocking leads to clutter, higher storage costs, and even product damage. Too little stock, on the other hand, disrupts supply flow. Effective management ensures you strike the perfect balance.
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Enhances Cash Flow: Surprisingly, excess inventory can choke your cash flow. Unsold goods lock capital and increase storage costs. Efficient inventory management ensures smarter purchasing, keeping cash available for critical needs.
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Reducing losses from expired goods: Implementing effective inventory management also helps minimize the risk of losses caused by expired products. Business managers must be especially careful when storing items with expiration dates to ensure these products are sold before reaching the end of their shelf life.
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Establishes Safety Stock: Safety stock cushions you from sudden spikes in demand or supply chain disruptions. Calculating and maintaining this buffer ensures business continuity and customer satisfaction.
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Enables Business Analysis: Modern inventory software not only tracks inventory levels but also highlights fast- and slow-moving items. This helps with product innovation, pricing strategies, and marketing plans, ultimately driving growth.
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Improves Customer Satisfaction: When customers consistently find the products, they need in stock, loyalty increases. This is especially vital for fast-moving consumer goods (FMCG) like food, personal care products, and household essentials.
Common Challenges in Inventory Management
Every stage of business operations faces various challenges, and inventory management is no exception. Some common obstacles encountered in managing inventory include:
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Stock shortages or surpluses: One of the frequent issues in inventory management is either having too little or too much stock. Stock shortages can disrupt sales cycles and reduce customer satisfaction, while excess inventory increases storage costs and risks product quality deterioration.
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Manual inventory management: Managing stock manually significantly raises the risk of errors such as miscounts, inaccurate data, and lost records due to human oversight. These issues indirectly affect the ability to maintain adequate stock levels to meet market demand. Fortunately, these problems can be easily addressed by using inventory software tailored to specific business needs.
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Inaccurate inventory data: Discrepancies between recorded inventory data and actual stock often arise from careless record-keeping or lost items. Such mismatches impact business decisions and reduce potential profits.
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Difficulties in tracking inventory: Manually counting stock is time-consuming and labor-intensive, especially when dealing with large quantities or multiple storage locations. This challenge results in inventory data not being recorded in real-time, as there is often a significant delay between stocktaking and the movement of goods.
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Limited storage capacity: Another common problem is restricted storage space. When inventory exceeds the available capacity, it creates significant operational challenges. Businesses may have to reduce stock levels or arrange for additional storage if possible.
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Inaccurate demand forecasting: Inventory management heavily relies on predicting market demand. Poor forecasting can leave businesses overwhelmed by high demand or stuck with excess inventory for extended periods. Detailed sales data analysis and market trend monitoring are essential to improve forecast accuracy.
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Human error: Mistakes made by staff are another challenge, especially when large inventories are still counted manually. Therefore, automating inventory processes with appropriate inventory software is recommended to minimize risks related to human factors.
Strategies and Methods of Inventory Management
There’s no one-size-fits-all method, but these strategies are proven to help manage inventory effectively:
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First In First Out (FIFO): This method ensures that the items first received are also the first to be sold or used. Nearly all business sectors, including retail and Fast Moving Consumer Goods (FMCG), apply the FIFO method in their inventory management. It is highly effective in maintaining the quality of goods delivered to customers by preventing older stock from lingering.
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First Expired First Out (FEFO): A variation of FIFO, FEFO prioritizes the sale or use of products approaching their expiration date first. This method helps preserve product quality and safety for customers. Items with longer expiration dates can be stored for longer periods without risk.
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Last In First Out (LIFO): The opposite of FIFO, LIFO means that the most recently acquired items are the first to be used or sold, while older stock remains in storage. This method is best suited for durable goods without expiration dates, such as ceramics or garments.
LIFO can also be useful for managing inventory that responds to seasonal trends, allowing businesses to capitalize on timely demand spikes without missing market opportunities.
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Just In Time (JIT): The JIT method involves ordering goods only when they are needed for production or sale. This approach significantly reduces storage costs and is especially beneficial for businesses with limited warehouse space. Examples of items ideal for JIT include self-published books, automotive parts, homemade foods, and handmade products.
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Economic Order Quantity (EOQ): EOQ focuses on optimizing production efficiency by determining the ideal order quantity that minimizes both ordering and holding costs. This calculation helps businesses purchase stock in the most cost-effective amounts while aligning with market demand forecasts, ensuring neither excess nor insufficient inventory.
Implementing these inventory management strategies thoughtfully can lead to streamlined operations, reduced costs, and improved customer satisfaction.
The Internet of Things (IoT) era now empowers business managers to perform efficient inventory management with the support of tailored applications. Even the management of liquid assets can be handled accurately using the right technology.
Understanding these needs, Telkomsel Enterprise has introduced an innovative solution called IoT INTANK. IoT Intank Liquid Asset Tank Monitoring is designed primarily to monitor the volume of liquid assets such as fuel, production materials, and other products by using height sensors aligned with the conditions of the storage tanks.
With IoT INTANK, liquid asset monitoring becomes practical and accessible anytime and anywhere. This solution from Telkomsel Enterprise provides comprehensive visibility into the status of your asset supply, ensuring better control and management.
