Importance of Inventory Management

Importance of Inventory Management

Written by rabecca, In Software, Published On
May 26, 2022

Inventory management is the method that manages the flow and activities of all physical assets. They are required for the production of goods within manufacturing. It begins with the purchase of parts and finishes with the sale of the item.

It’s not just a storage space filled with “things needed for business”. It’s a lively and vital component of the manufacturing process. Inventory is an asset as any piece of equipment and should be treated with the same diligence. In fact, the value of inventory is often greater than the value of production equipment and is an important capital asset.

The inventory includes items that need to be assembled or processed and may contain consumables, such as chemicals needed to process and assembly of entire sub-assemblies such as housings, circuit boards and many other things. Inventory management can also extend from raw materials to the finished product, and based on the type of industry or method of production, it could comprise work in process (WIP).

The management of inventory is an essential part of supply chain management overall. And comprises the process of planning and ordering for the materials. And components required to make finished products as well as storage of the goods as well as the organization of the warehouse, as well as the management of processes such as inventory receipt and handling inventory lot tracking and documentation of stock movements and order pick-up for shipping, and many more.

The Importance of Inventory Management

The best way to grasp the significance of inventory and the necessity of having a solid and reliable method in place to manage it is to examine the extremes of stock-outs and overages. However, here is one of the weaknesses associated with the “old-school” inventory management app that is based on spreadsheets, paper count as well as manual inputs. Because while overages and stock-outs are the primary cause of extremes, there’s no middle ground and businesses may find themselves drifting from one extreme to the next.

The reasoning behind this constant reversal of “too much” and “not enough” illustrates the risks that manual control of inventory can pose. It additionally highlights the importance of reliable, accurate, and up-to-date inventory management. This is not only an issue for any distributor or manufacturer however, it can be particularly damaging to the financial and general well-being of SMBs.

A well-managed inventory system strikes the right balance between the “thin” middle ground to aid a business in reducing expenses. When you have the proper balance of supplies the cash can only be used for the amount that is needed and even then, it’s spent as close to the time of the invoice.

Types of Inventory

Before a product is manufactured and delivered to the consumer, it passes through various phases of existence in your inventory. Accounting for and understanding the various types of inventory can help you reduce your costs for business and improve efficiency.

Raw Materials

The inventory of raw materials consists of components or materials needed by the production team for the creation of the final product. For instance, a wooden furniture manufacturer’s inventory of raw materials might comprise of various types of wood, finishes, paddings, paints, and other textiles. If the furniture manufacturer constructs their furniture with prefabricated parts, this could include furniture legs, tabletops and armrests, backrests, and so on.

Work-in-Process (WIP)

Work-in-Process inventory or WIP inventory is the inventory of items that aren’t finished goods or raw materials instead, they are something else. For instance, when the sofa’s frame is constructed and the carcass is put back into inventory in order to sit and wait until the padding is built It is included in the WIP inventory.

Inventory of Work-in-Process is particularly important to account for. Because WIP items have already had to incur some production costs (raw materials such as labor, overhead, and others) It is crucial to record them to make sure that the valuation is accurate and bookkeeping.

Finished Goods

Final goods are the products that have passed through the entire process of production and are ready to go on sale. Certain businesses (such as sawmills, chemical companies metal fabricators, etc.) may sell their products to other manufacturers so that they can be used for components or materials in manufacturing. Distributing companies purchase products from manufacturers and then resell them.

What is Inventory Tracking?

The process of tracking inventory is a process of recording movements and monitoring the condition of materials and goods and their needs. This assists companies in:

  • Production planning, scheduling, and production
  • Optimizing their inventory processes
  • Beware of stock-outs and overstocks;
  • to prevent inventory from turning into dead stocks;
  • Providing customers with precise time frames for delivery;
  • improving traceability and achieving compliance
  • efficiently coordinating callbacks
  • improving the communication within the company and improving communication with suppliers and customers
  • making better business decisions based on information.

It is possible to track inventory in a manual manner, recording the movements using spreadsheets, either digital or physical, or with the aid of specific software. Because the manual method is becoming increasingly outdated, even for small companies the use of digital solutions is highly suggested.


The balance helps companies complete orders and improve satisfaction with customers. Customers are able to have what they want at the time they want it, without having to search for other sources. This gives more efficient customer service as well as strong brand recognition.

But a good inventory management system is equally important for the long-term financial health of any business. With the greatest precision, the seasonal and trends elements of their inventory businesses can identify ways to improve control costs and develop new products, provide services that are value-added, and create more lucrative agreements with suppliers.

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