Inventory management - what is it and how to optimise it

Inventory management is a fundamental process in the logistics of any eCommerce. A well-managed inventory will allow you to scale your sales. Discover how you can improve inventory management with this guide.

Main challenges of inventory management

Despite the importance of inventory management in optimizing logistics costs, inventory management faces a number of challenges to solve, such as:

Lack of space: if there is not enough space, the goods will be stored inadequately, which can lead to increased costs and risks of accidents at work. In this case, it is important to improve storage systems and increase capacity if necessary.
Stock excess, i.e., storing more items than necessary to meet demand with a certain margin of stock. In these cases, this excess of accumulated merchandise generates more expenses than income.
Poor traceability causes a loss of control of the goods and, consequently, disrupts the continuity of the supply chain. Thanks to modern business systems and digitalization, traceability is easier than ever at all stages.
Too many procedures: Obviously, in inventory management, as in any other business process, defined rules are necessary for the proper organization of the warehouse. However, when there are too many processes, there are likely to be unproductive or unnecessary activities that can consume time and money.
Unforeseen events that can jeopardize demand forecasting: there are factors that companies cannot control, and that can jeopardize the entire inventory management. The current supply crisis is a clear example of this, but in reality, any event at any point in the chain can seriously affect these activities.
Poorly trained employees: the lack of training and integration of workers is a factor that can slow down the entire chain, making it inefficient and generating cost overruns. It is important to facilitate this training and, above all, to be constantly updated.

ABC Method

ABC method consists of dividing the inventory into three different groups, usually using the value of the inventory as a criterion:

Group A, accounts for around 20% of the inventory's references but represents 80% of its total value. This category includes those items that are critical for decision-making.
Group B, where 30% of the references that account for around 15% of the total value of the inventory are located. These goods are at an intermediate point, so they do not require as much supervision as those in group A.
Group C, which includes the remaining 50%, has the lowest inventory value, around 5%. These are very varied items, with a price significantly lower than those in categories A and B.

This system makes it possible to reorganize stock according to the value of the products stored, which facilitates warehouse management and operations, making them much more agile and less chaotic.

Inventory Management Systems

One of the most important elements in this process are inventory management systems. These are tools that allow items to be organized according to the needs of each company, taking into account the processes with which each type of business operates. Some of them are manual and the vast majority, especially in recent years, use specific technology and computer software for their implementation.

There are at least four main inventory management systems:

Perpetual inventory systems, which allow handling small or medium quantities of stock. They have a fixed database that is updated when necessary or when logistical events occur. It works with real-time information.
Periodic inventory systems do not use real-time information. In fact, they are updated periodically, replacing the previous information with the most updated version. They work with an initial and a final type of inventory, being the final one, the one that will become the initial one for the next period and so on.
Barcode inventory systems, this system is used to scan and identify each unit of inventory. It is much more efficient than the other two manual systems.
Radio Frequency Identification (RFID) systems rely on radio frequency technology (also known as RFID) to identify inventory units and their movements within the supply chain. The fundamental difference with barcode is that it allows several items to be scanned at the same time and over a greater distance, making it much more efficient.

Why is inventory management important in the supply chain?

Inventory may be the most important asset of any business, especially for an eCommerce, and the process where all elements of the supply chain converge. Insufficient inventory can lead to dissatisfied customers, as not all demand can be met. Conversely, more stock than necessary can cause storage costs to skyrocket, not to mention the risks of stockouts and theft.

Balance is key. It is important to always have an optimal amount of stock, one that is neither too high nor too low. Companies must seek the right balance to optimize demand management.

We are currently experiencing very difficult times in the supply chain and many e-commerce vendors have been affected by stock-outs and low liquidity to meet the costs of purchasing inventory. Faced with this situation, good inventory management and demand forecasting are essential in order to obtain the necessary liquidity to deal with purchases in advance. To solve this problem there is RITMO Invoice Financing, a financial tool that allows eCommerce sellers to finance their suppliers' invoices in easy instalments, while RITMO takes care of paying the suppliers directly.

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