Inventory management is monitoring inventories of a business, product, or service to obtain information about current and future supply and demand levels.
Inventory management is divided into two processes: counting inventory and forecasting inventory. Inventory forecasting typically involves projecting the demand for goods to determine how much should be ordered for safety purposes. Both count-and-forecast processes are typically completed periodically, such as quarterly or annually.
The counting process involves taking physical inventory of all items in a business’ inventory using standard count methods and procedures.
The forecast process involves determining the forecasted demand for a particular product or service by projecting the demand for the future. Forecast models may determine the expected demand type based on historical information or changes in economic factors, such as GDP growth rates. Sales are then made based on a percentage of the amount of stock that should be available to meet demand at any given time.
Factors that complicate inventory management
A wide range of factors can complicate inventory management. Some of the most common complications involve items with short life cycles, seasonal sales, or the inclusion of services in inventory. Short life cycle items include food, where food has a large amount of variability due to human tastes and seasonal weather patterns. One tactic to reduce the variability caused by seasonality is to purchase various items so that something is being sold every season. Seasonal sales are popular with retailers because they can strategically plan when to release new items and how much to promote each item.
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In addition to seasonal sales and food, services must be included as part of the inventory. The inclusion of services in a business’s inventory can pose many problems. These include the difficulty of forecasting demand, difficulties associated with forecasting demand during a recession, and ethical issues related to using suppliers’ money for working capital instead of paying employees or operating expenses.