Inventory Management: Tips and Trends for 2023
The COVID-19 pandemic created an abundance of negative ripple effects—including a broken global supply chain that received a lot of attention. With lockdowns and social distancing added in, retailers found themselves with building inventory levels that created a major dent in the bottom line. As a result, ordering patterns shifted to tighten and improve margins—but with an unreliable supply chain, some found themselves low on stock and unable to meet customer demands.
In a July 2020 article, Flexport described those dicey dynamics and the difficulties companies faced.
“With some brick and mortar retailers returning to operation for the first time since COVID-19, the impact of a prolonged period of supply chain disruption is starting to show. One concern topping the list for many is how to find the sweet spot in inventory management,” Flexport said. “Even before customer traffic started to return, the problem of overstocking was becoming an elevated issue. It’s not surprising, given that stores were forced to close with stockrooms full of inventory—which then prompted retailers to limit their exposure by cancelling future commitments.”
As a result, Flexport said retailers started infusing more caution into inventory strategies by “narrowing assortments, tightening controls, and increasingly looking for greater visibility over how to stock inventory.”
Like many of the business challenges placed in the spotlight during the pandemic, trying to find inventory management’s sweet spot was nothing new—but it was definitely exacerbated by the sudden and unpredictable shifts in the retail landscape.
Here, we’ll take a look at various dynamics related to inventory management—including perspectives from experts that include trends for 2023.
What is inventory management?
In its resource, “How to Manage Inventory Effectively (2023 Guide)” Forbes describes the difference between inventory management and supply chain management: “Inventory management is a key element of supply chain management, but the terms aren’t interchangeable. Supply chain management oversees the flow of products from raw goods and production sourcing through final distribution. Inventory management deals with receiving, tracking and storing the products you hold, plus provides data for informed purchasing.”
Noting that inventory management is a “critical element of the supply chain,” IBM refers to inventory management as “the tracking of inventory from manufacturers to warehouses and from these facilities to a point of sale.”
“The goal of inventory management is to have the right products in the right place at the right time,” IBM says. “This requires inventory visibility — knowing when to order, how much to order and where to store stock.”
TechTarget describes inventory management as “the supervision of noncapitalized assets—or inventory—and stock items,” and notes that as part of supply chain management, “inventory management supervises the flow of goods from manufacturers to warehouses and from these facilities to point of sale. A key function of inventory management is to keep a detailed record of each new or returned product as it enters or leaves a warehouse or point of sale.”
Source: Eye on Tech on YouTube
Effective inventory management is critical because an imbalance in inventory can create a negative impact on the business in various ways. Holding too much stock drives up business costs—and having too little creates unhappy customers who may take their business elsewhere.
Plus, as the Association for Supply Chain Management (ASCM) points out, there are regulatory ramifications, too.
“…the Securities and Exchange Commission (SEC) requires all public companies to track their inventory, and the management of these processes must be documented in order to remain in compliance with SEC guidelines,” ASCM says. “This calls for a robust inventory management system to be implemented in order to both fulfill regulatory requirements and maintain organizational inertia.”
Types of inventory management
Of course, all inventory is not the same. TechTarget underscores the need for “a robust inventory management system” by listing 13 different types of inventory that must be tracked across the supply chain, including:
Raw materials: “Unprocessed materials such as metals, plastics, and oils that aren't recognizable after product completion”
Parts and components: “Screws, bolts, hinges, and other parts that are recognizable on their own before and after product completion”
Work in progress (WIP): “Products currently in production that may include raw materials, parts and components, packing materials and more”
Finished products: “Completed items that are ready to be distributed and sold”
Maintenance, repair and operations (MRO) goods: “Supplies used either in the manufacturing of products or to maintain the business or organization”
Packing and packaging materials: “Primary, secondary, and tertiary packaging that protects products during the fulfillment process from manufacturer to end user”
Backup stock: “Backup, safety or anticipation stock includes products, raw materials or inventory that an organization carries in order to cover any unexpected or sudden events or to take advantage of sale pricing”
Decoupling inventory: “Spare items or works in progress that are kept at production line stations in order to eliminate any work stoppages”
Cycle inventory: “The amount of inventory required to meet customer needs (normal demand) at any given time”
Service inventory: “The number of services that can be provided within a specific timeframe”
Transit inventory: “Products or items that are currently in transit either from a manufacturer, a warehouse or a distribution center”
Theoretical inventory: “The minimum amount of stocked products that an organization needs to facilitate an entire process without needing to wait”
Excess inventory: “Unsold or unused products that aren't expected to sell but need to be kept in storage”
Inventory Management Methods
Although described in the context of utilities, global consulting firm Deloitte describes five “levers” of inventory management that each have “unique impacts” and can be individually implemented or used in some combination by companies in other industries, too. They include:
Inventory analytics—which can help to optimize inventory by “leveraging predictive inventory consumption models” to enable “the assessment of expected inventory usage and stocking policies.”
Centralization—which involves “establishing central inventory stocking policies for common materials that are used across several locations.” Centralization can help optimize inventory and reduce inventory investment.
Inventory governance—which is “often overlooked” but may be a primary driver for improving how inventory is used. “Companies should consider establishing policies and guidelines for how they control inventory. …”
Product life cycle management [technology] solutions—which support inventory optimization across the enterprise by supporting the rationalization of stock keeping units (SKUs). “The creation of unique SKUs for materials that have the same fit, form, and function can lead to improved inventory balances. …”
Supplier-managed inventory—which refers to the fact that a company’s supplier base should also be included in inventory optimization responsibilities. “Suppliers can play a critical role in managing inventory levels within stocking locations through defined replenishment service levels. …”
7 Steps to Managing Inventory
In its 2023 guide mentioned earlier, Forbes describes a seven-step approach to inventory management that can help organizations optimize the process:
Define product sourcing and storage methods: “How you source and store the various products you sell determines how you manage your inventory. …”
Decide how to track inventory data: Regardless of the business model, “…keeping close tabs on inventory data is vital to inventory management.”
Create an internal SKU system: An internal product SKU system “is helpful for quickly identifying and tracking products during daily activities. …”
Organize inventory storage areas: To improve the efficiency of inventory-related tasks, “having a place for everything and everything in its place” is key.
Use forecasting to order inventory: By doing so, companies can better predict the amount of inventory needed to meet future demand.
Set up inventory receiving procedures: Ensuring the prompt receipt of inventory shipments “is another key element of learning how to manage inventory. …”
Keep track of inventory levels: “Closely monitoring inventory is key to improving your cash flow, spotting theft or other loss issues, and boosting that bottom line.”
When it comes to tracking inventory levels, IBM describes three approaches to do so:
Periodic inventory management—described as “a method of inventory valuation for financial reporting purposes in which a physical count of the inventory is performed at specific intervals…”
Barcode inventory management—in which a barcode inventory management system assigns a number with specific data points to each product a company sells.
RFID inventory management: Radio frequency identification (RFID) is “a system that wirelessly transmits the identity of a product in the form of a unique serial number to track items and provide detailed product information. …”
Top Inventory Management Trends for 2023
In “14 Top Inventory Management Trends to Know in 2023,” Oracle’s Abby Jenkins says that “companies with best-in-class inventory management practices don’t guess how much stock to buy, and they keep a steady flow of raw materials, work-in-progress items and finished goods moving from manufacturing to consumer, over a variety of distribution channels.”
Jenkins says being best-in-class in this context requires staying abreast of evolving trends and determining whether they’re a good fit for the organization. Here are just a few of 2023’s top trends from her list:
Automated Guided Vehicles (AGVs) and Automated Mobile Robots (AMRs): AGVs and AMRs are “tools to help warehouse operators collect products from decks and pallets” and can reduce the amount of time needed to move inventory around.
Artificial intelligence (AI): Within some warehouse and inventory management systems, AI and machine learning (ML) work “hand-in-hand” with industrial internet of things (IIOT) capabilities.
Cloud-based solutions: Being able to enjoy real-time tracking of inventory can be a “game-changer” for businesses. Since cloud-based solutions make it possible for company data to be accessed at any time from any location, decision-makers can respond to inventory issues more quickly.
Distributed inventory management: When inventory is distributed across multiple warehouses, both transportation costs and delivery times can be reduced—if the business puts “the right products in the right places” and consistently sends those products from the warehouse that’s closest to the customer.
Predictive picking: “…this trend depends on data analysis — in this case, using unstructured data to predict behavior by recognizing interdependencies and patterns.” By using predictive picking software, businesses can start creating fulfillments before an order is even placed.
Personalization: In inventory management, personalization means a business has “a deep understanding of customers' buying habits,” so relevant products can be stocked and suggested based on past customer behavior to improve the purchasing experience.
To view the full list, please check out 14 Top Inventory Management Trends to Know in 2023.