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Assignment on Inventory Management

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This is an assignment on Inventory Management. This contains problems which may be used in Materials Management, Supply Chain Management or Operations Planning & Control.

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  • 10.1 Describe and Demonstrate the Basic Inventory Valuation Methods and Their Cost Flow Assumptions
  • Why It Matters
  • 1.1 Explain the Importance of Accounting and Distinguish between Financial and Managerial Accounting
  • 1.2 Identify Users of Accounting Information and How They Apply Information
  • 1.3 Describe Typical Accounting Activities and the Role Accountants Play in Identifying, Recording, and Reporting Financial Activities
  • 1.4 Explain Why Accounting Is Important to Business Stakeholders
  • 1.5 Describe the Varied Career Paths Open to Individuals with an Accounting Education
  • Multiple Choice
  • 2.1 Describe the Income Statement, Statement of Owner’s Equity, Balance Sheet, and Statement of Cash Flows, and How They Interrelate
  • 2.2 Define, Explain, and Provide Examples of Current and Noncurrent Assets, Current and Noncurrent Liabilities, Equity, Revenues, and Expenses
  • 2.3 Prepare an Income Statement, Statement of Owner’s Equity, and Balance Sheet
  • Exercise Set A
  • Exercise Set B
  • Problem Set A
  • Problem Set B
  • Thought Provokers
  • 3.1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements
  • 3.2 Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions
  • 3.3 Define and Describe the Initial Steps in the Accounting Cycle
  • 3.4 Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business Transactions on Financial Statements
  • 3.5 Use Journal Entries to Record Transactions and Post to T-Accounts
  • 3.6 Prepare a Trial Balance
  • 4.1 Explain the Concepts and Guidelines Affecting Adjusting Entries
  • 4.2 Discuss the Adjustment Process and Illustrate Common Types of Adjusting Entries
  • 4.3 Record and Post the Common Types of Adjusting Entries
  • 4.4 Use the Ledger Balances to Prepare an Adjusted Trial Balance
  • 4.5 Prepare Financial Statements Using the Adjusted Trial Balance
  • 5.1 Describe and Prepare Closing Entries for a Business
  • 5.2 Prepare a Post-Closing Trial Balance
  • 5.3 Apply the Results from the Adjusted Trial Balance to Compute Current Ratio and Working Capital Balance, and Explain How These Measures Represent Liquidity
  • 5.4 Appendix: Complete a Comprehensive Accounting Cycle for a Business
  • 6.1 Compare and Contrast Merchandising versus Service Activities and Transactions
  • 6.2 Compare and Contrast Perpetual versus Periodic Inventory Systems
  • 6.3 Analyze and Record Transactions for Merchandise Purchases Using the Perpetual Inventory System
  • 6.4 Analyze and Record Transactions for the Sale of Merchandise Using the Perpetual Inventory System
  • 6.5 Discuss and Record Transactions Applying the Two Commonly Used Freight-In Methods
  • 6.6 Describe and Prepare Multi-Step and Simple Income Statements for Merchandising Companies
  • 6.7 Appendix: Analyze and Record Transactions for Merchandise Purchases and Sales Using the Periodic Inventory System
  • 7.1 Define and Describe the Components of an Accounting Information System
  • 7.2 Describe and Explain the Purpose of Special Journals and Their Importance to Stakeholders
  • 7.3 Analyze and Journalize Transactions Using Special Journals
  • 7.4 Prepare a Subsidiary Ledger
  • 7.5 Describe Career Paths Open to Individuals with a Joint Education in Accounting and Information Systems
  • 8.1 Analyze Fraud in the Accounting Workplace
  • 8.2 Define and Explain Internal Controls and Their Purpose within an Organization
  • 8.3 Describe Internal Controls within an Organization
  • 8.4 Define the Purpose and Use of a Petty Cash Fund, and Prepare Petty Cash Journal Entries
  • 8.5 Discuss Management Responsibilities for Maintaining Internal Controls within an Organization
  • 8.6 Define the Purpose of a Bank Reconciliation, and Prepare a Bank Reconciliation and Its Associated Journal Entries
  • 8.7 Describe Fraud in Financial Statements and Sarbanes-Oxley Act Requirements
  • 9.1 Explain the Revenue Recognition Principle and How It Relates to Current and Future Sales and Purchase Transactions
  • 9.2 Account for Uncollectible Accounts Using the Balance Sheet and Income Statement Approaches
  • 9.3 Determine the Efficiency of Receivables Management Using Financial Ratios
  • 9.4 Discuss the Role of Accounting for Receivables in Earnings Management
  • 9.5 Apply Revenue Recognition Principles to Long-Term Projects
  • 9.6 Explain How Notes Receivable and Accounts Receivable Differ
  • 9.7 Appendix: Comprehensive Example of Bad Debt Estimation
  • 10.2 Calculate the Cost of Goods Sold and Ending Inventory Using the Periodic Method
  • 10.3 Calculate the Cost of Goods Sold and Ending Inventory Using the Perpetual Method
  • 10.4 Explain and Demonstrate the Impact of Inventory Valuation Errors on the Income Statement and Balance Sheet
  • 10.5 Examine the Efficiency of Inventory Management Using Financial Ratios
  • 11.1 Distinguish between Tangible and Intangible Assets
  • 11.2 Analyze and Classify Capitalized Costs versus Expenses
  • 11.3 Explain and Apply Depreciation Methods to Allocate Capitalized Costs
  • 11.4 Describe Accounting for Intangible Assets and Record Related Transactions
  • 11.5 Describe Some Special Issues in Accounting for Long-Term Assets
  • 12.1 Identify and Describe Current Liabilities
  • 12.2 Analyze, Journalize, and Report Current Liabilities
  • 12.3 Define and Apply Accounting Treatment for Contingent Liabilities
  • 12.4 Prepare Journal Entries to Record Short-Term Notes Payable
  • 12.5 Record Transactions Incurred in Preparing Payroll
  • 13.1 Explain the Pricing of Long-Term Liabilities
  • 13.2 Compute Amortization of Long-Term Liabilities Using the Effective-Interest Method
  • 13.3 Prepare Journal Entries to Reflect the Life Cycle of Bonds
  • 13.4 Appendix: Special Topics Related to Long-Term Liabilities
  • 14.1 Explain the Process of Securing Equity Financing through the Issuance of Stock
  • 14.2 Analyze and Record Transactions for the Issuance and Repurchase of Stock
  • 14.3 Record Transactions and the Effects on Financial Statements for Cash Dividends, Property Dividends, Stock Dividends, and Stock Splits
  • 14.4 Compare and Contrast Owners’ Equity versus Retained Earnings
  • 14.5 Discuss the Applicability of Earnings per Share as a Method to Measure Performance
  • 15.1 Describe the Advantages and Disadvantages of Organizing as a Partnership
  • 15.2 Describe How a Partnership Is Created, Including the Associated Journal Entries
  • 15.3 Compute and Allocate Partners’ Share of Income and Loss
  • 15.4 Prepare Journal Entries to Record the Admission and Withdrawal of a Partner
  • 15.5 Discuss and Record Entries for the Dissolution of a Partnership
  • 16.1 Explain the Purpose of the Statement of Cash Flows
  • 16.2 Differentiate between Operating, Investing, and Financing Activities
  • 16.3 Prepare the Statement of Cash Flows Using the Indirect Method
  • 16.4 Prepare the Completed Statement of Cash Flows Using the Indirect Method
  • 16.5 Use Information from the Statement of Cash Flows to Prepare Ratios to Assess Liquidity and Solvency
  • 16.6 Appendix: Prepare a Completed Statement of Cash Flows Using the Direct Method
  • A | Financial Statement Analysis
  • B | Time Value of Money
  • C | Suggested Resources

Accounting for inventory is a critical function of management. Inventory accounting is significantly complicated by the fact that it is an ongoing process of constant change, in part because (1) most companies offer a large variety of products for sale, (2) product purchases occur at irregular times, (3) products are acquired for differing prices, and (4) inventory acquisitions are based on sales projections, which are always uncertain and often sporadic. Merchandising companies must meticulously account for every individual product that they sell, equipping them with essential information, for decisions such as these:

  • What is the quantity of each product that is available to customers?
  • When should inventory of each product item be replenished and at what quantity?
  • How much should the company charge customers for each product to cover all costs plus profit margin?
  • How much of the inventory cost should be allocated toward the units sold (cost of goods sold) during the period?
  • How much of the inventory cost should be allocated toward the remaining units (ending inventory) at the end of the period?
  • Is each product moving robustly or have some individual inventory items’ activity decreased?
  • Are some inventory items obsolete?

The company’s financial statements report the combined cost of all items sold as an offset to the proceeds from those sales, producing the net number referred to as gross margin (or gross profit). This is presented in the first part of the results of operations for the period on the multi-step income statement. The unsold inventory at period end is an asset to the company and is therefore included in the company’s financial statements, on the balance sheet, as shown in Figure 10.2 . The total cost of all the inventory that remains at period end, reported as merchandise inventory on the balance sheet, plus the total cost of the inventory that was sold or otherwise removed (through shrinkage, theft, or other loss), reported as cost of goods sold on the income statement (see Figure 10.2 ), represent the entirety of the inventory that the company had to work with during the period, or goods available for sale.

Fundamentals of Inventory

Although our discussion will consider inventory issues from the perspective of a retail company, using a resale or merchandising operation, inventory accounting also encompasses recording and reporting of manufacturing operations. In the manufacturing environment, there would be separate inventory calculations for the various process levels of inventory, such as raw materials, work in process, and finished goods. The manufacturer’s finished goods inventory is equivalent to the merchandiser’s inventory account in that it includes finished goods that are available for sale.

In merchandising companies, inventory is a company asset that includes beginning inventory plus purchases , which include all additions to inventory during the period. Every time the company sells products to customers, they dispose of a portion of the company’s inventory asset. Goods available for sale refers to the total cost of all inventory that the company had on hand at any time during the period, including beginning inventory and all inventory purchases. These goods were normally either sold to customers during the period (occasionally lost due to spoilage, theft, damage, or other types of shrinkages) and thus reported as cost of goods sold, an expense account on the income statement, or these goods are still in inventory at the end of the period and reported as ending merchandise inventory, an asset account on the balance sheet. As an example, assume that Harry’s Auto Parts Store sells oil filters. Suppose that at the end of January 31, 2018, they had 50 oil filters on hand at a cost of $7 per unit. This means that at the beginning of February, they had 50 units in inventory at a total cost of $350 (50 × $7). During the month, they purchased 20 filters at a cost of $7, for a total cost of $140 (20 × $7). At the end of the month, there were 18 units left in inventory. Therefore, during the month of February, they sold 52 units. Figure 10.3 illustrates how to calculate the goods available for sale and the cost of goods sold.

Inventory costing is accomplished by one of four specific costing methods: (1) specific identification, (2) first-in, first-out, (3) last-in, first-out, and (4) weighted-average cost methods. All four methods are techniques that allow management to distribute the costs of inventory in a logical and consistent manner, to facilitate matching of costs to offset the related revenue item that is recognized during the period, in accordance with GAAP expense recognition and matching concepts. Note that a company’s cost allocation process represents management’s chosen method for expensing product costs, based strictly on estimates of the flow of inventory costs, which is unrelated to the actual flow of the physical inventory. Use of a cost allocation strategy eliminates the need for often cost-prohibitive individual tracking of costs of each specific inventory item, for which purchase prices may vary greatly. In this chapter, you will be provided with some background concepts and explanations of terms associated with inventory as well as a basic demonstration of each of the four allocation methods, and then further delineation of the application and nuances of the costing methods.

A critical issue for inventory accounting is the frequency for which inventory values are updated. There are two primary methods used to account for inventory balance timing changes: the periodic inventory method and the perpetual inventory method. These two methods were addressed in depth in Merchandising Transactions ).

Periodic Inventory Method

A periodic inventory system updates the inventory balances at the end of the reporting period, typically the end of a month, quarter, or year. At that point, a journal entry is made to adjust the merchandise inventory asset balance to agree with the physical count of inventory, with the corresponding adjustment to the expense account, cost of goods sold. This adjustment shifts the costs of all inventory items that are no longer held by the company to the income statement, where the costs offset the revenue from inventory sales, as reflected by the gross margin. As sales transactions occur throughout the period, the periodic system requires that only the sales entry be recorded because costs will only be updated during end-of-period adjustments when financial statements are prepared. However, any additional goods for sale acquired during the month are recorded as purchases. Following are examples of typical journal entries for periodic transactions. The first is an example entry for an inventory sales transaction when using periodic inventory, and the second records the purchase of additional inventory when using the periodic method. Note: Periodic requires no corresponding cost entry at the time of sale, since the inventory is adjusted only at period end.

A purchase of inventory for sale by a company under the periodic inventory method would necessitate the following journal entry. (This is discussed in more depth in Merchandising Transactions .)

Perpetual Inventory Method

A perpetual inventory system updates the inventory account balance on an ongoing basis, at the time of each individual sale. This is normally accomplished by use of auto-ID technology, such as optical-scan barcode or radio frequency identification (RFIF) labels. As transactions occur, the perpetual system requires that every sale is recorded with two entries, first recording the sales transaction as an increase to Accounts Receivable and a decrease to Sales Revenue, and then recording the cost associated with the sale as an increase to Cost of Goods Sold and a decrease to Merchandise Inventory. The journal entries made at the time of sale immediately shift the costs relating to the goods being sold from the merchandise inventory account on the balance sheet to the cost of goods sold account on the income statement. Little or no adjustment is needed to inventory at period end because changes in the inventory balances are recorded as both the sales and purchase transactions occur. Any necessary adjustments to the ending inventory account balances would typically be caused by one of the types of shrinkage you’ve learned about. These are example entries for an inventory sales transaction when using perpetual inventory updating:

A purchase of inventory for sale by a company under the perpetual inventory method would necessitate the following journal entry. (Greater detail is provided in Merchandising Transactions .)

Continuing Application

As previously discussed, Gearhead Outfitters is a retail chain selling outdoor gear and accessories. As such, the company is faced with many possible questions related to inventory. How much inventory should be carried? What products are the most profitable? Which products have the most sales? Which products are obsolete? What timeframe should the company allow for inventory to be replenished? Which products are the most in demand at each location?

In addition to questions related to type, volume, obsolescence, and lead time, there are many issues related to accounting for inventory and the flow of goods. As one of the biggest assets of the company, the way inventory is tracked can have an effect on profit. Which method of accounting—first-in first-out, last-in first out, specific identification, weighted average— provides the most accurate reflection of inventory and cost of goods sold is important in determining gross profit and net income. The method selected affects profits, taxes, and can even change the opinion of potential lenders concerning the financial strength of the company. In choosing a method of accounting for inventory, management should consider many factors, including the accurate reflection of costs, taxes on profits, decision-making about purchases, and what effect a point-of-sale (POS) system may have on tracking inventory.

Gearhead exists to provide a positive shopping experience for its customers. Offering a clear picture of its goods, and maintaining an appealing, timely supply at competitive prices is one way to keep the shopping experience positive. Thus, accounting for inventory plays an instrumental role in management’s ability to successfully run a company and deliver the company’s promise to customers.

Data for Demonstration of the Four Basic Inventory Valuation Methods

The following dataset will be used to demonstrate the application and analysis of the four methods of inventory accounting .

Company: Spy Who Loves You Corporation

Product: Global Positioning System (GPS) Tracking Device

Description: This product is an economical real-time GPS tracking device, designed for individuals who wish to monitor others’ whereabouts. It is marketed to parents of middle school and high school students as a safety measure. Parents benefit by being apprised of the child’s location, and the student benefits by not having to constantly check in with parents. Demand for the product has spiked during the current fiscal period, while supply is limited, causing the selling price to escalate rapidly.

Specific Identification Method

The specific identification method refers to tracking the actual cost of the item being sold and is generally used only on expensive items that are highly customized (such as tracking detailed costs for each individual car in automobiles sales) or inherently distinctive (such as tracking origin and cost for each unique stone in diamond sales). This method is too cumbersome for goods of large quantity, especially if there are not significant feature differences in the various inventory items of each product type. However, for purposes of this demonstration, assume that the company sold one specific identifiable unit, which was purchased in the second lot of products, at a cost of $27.

Three separate lots of goods are purchased:

First-in, First-out (FIFO) Method

The first-in, first-out method (FIFO) records costs relating to a sale as if the earliest purchased item would be sold first. However, the physical flow of the units sold under both the periodic and perpetual methods would be the same. Due to the mechanics of the determination of costs of goods sold under the perpetual method, based on the timing of additional purchases of inventory during the accounting period, it is possible that the costs of goods sold might be slightly different for an accounting period. Since FIFO assumes that the first items purchased are sold first, the latest acquisitions would be the items that remain in inventory at the end of the period and would constitute ending inventory.

Last-in, First-out (LIFO) Method

The last-in, first out method (LIFO) records costs relating to a sale as if the latest purchased item would be sold first. As a result, the earliest acquisitions would be the items that remain in inventory at the end of the period.

IFRS Connection

For many companies, inventory is a significant portion of the company’s assets. In 2018, the inventory of Walmart , the world’s largest international retailer, was 70% of current assets and 21% of total assets. Because inventory also affects income as it is sold through the cost of goods sold account, inventory plays a significant role in the analysis and evaluation of many companies. Ending inventory affects both the balance sheet and the income statement. As you’ve learned, the ending inventory balance is reflected as a current asset on the balance sheet and the ending inventory balance is used in the calculation of costs of goods sold. Understanding how companies report inventory under US GAAP versus under IFRS is important when comparing companies reporting under the two methods, particularly because of a significant difference between the two methods.

Similarities

  • When inventory is purchased, it is accounted for at historical cost and then evaluated at each balance sheet date to adjust to the lower of cost or net realizable value.
  • Both IFRS and US GAAP allow FIFO and weighted-average cost flow assumptions as well as specific identification where appropriate and applicable.

Differences

  • IFRS does not permit the use of LIFO. This is a major difference between US GAAP and IFRS. The AICPA estimates that roughly 35–40% of all US companies use LIFO, and in some industries, such as oil and gas, the use of LIFO is more prevalent. Because LIFO generates lower taxable income during times of rising prices, it is estimated that eliminating LIFO would generate an estimated $102 billion in tax revenues in the US for the period 2017–2026. In creating IFRS, the IASB chose to eliminate LIFO, arguing that FIFO more closely matches the flow of goods. In the US, FASB believes the choice between LIFO and FIFO is a business model decision that should be left up to each company. In addition, there was significant pressure by some companies and industries to retain LIFO because of the significant tax liability that would arise for many companies from the elimination of LIFO.

Weighted-Average Cost Method

The weighted-average cost method (sometimes referred to as the average cost method ) requires a calculation of the average cost of all units of each particular inventory items. The average is obtained by multiplying the number of units by the cost paid per unit for each lot of goods, then adding the calculated total value of all lots together, and finally dividing the total cost by the total number of units for that product. As a caveat relating to the average cost method, note that a new average cost must be calculated after every change in inventory to reassess the per-unit weighted-average value of the goods. This laborious requirement might make use of the average method cost-prohibitive.

Comparing the various costing methods for the sale of one unit in this simple example reveals a significant difference that the choice of cost allocation method can make. Note that the sales price is not affected by the cost assumptions; only the cost amount varies, depending on which method is chosen. Figure 10.4 depicts the different outcomes that the four methods produced.

Once the methods of costing are determined for the company, that methodology would typically be applied repeatedly over the remainder of the company’s history to accomplish the generally accepted accounting principle of consistency from one period to another. It is possible to change methods if the company finds that a different method more accurately reflects results of operations, but the change requires disclosure in the company’s notes to the financial statements, which alerts financial statement users of the impact of the change in methodology. Also, it is important to realize that although the Internal Revenue Service generally allows differing methods of accounting treatment for tax purposes than for financial statement purposes, an exception exists that prohibits the use of LIFO inventory costing on the company tax return unless LIFO is also used for the financial statement costing calculations.

Ethical Considerations

Auditors look for inventory fraud.

Inventory fraud can be used to book false revenue or to increase the amount of assets to obtain additional lending from a bank or other sources. In the typical chain of accounting events, inventory ultimately becomes an expense item known as cost of goods sold. 1 In a manipulated accounting system, a trail of fraudulent transactions can point to accounting misrepresentation in the sales cycle, which may include

  • recording fictitious and nonexistent inventory,
  • manipulation of inventory counts during a facility audit,
  • recording of sales but no recording of purchases, and/or
  • fraudulent inventory capitalization,

to list a few. 2 All these elaborate schemes have the same goal: to improperly manipulate inventory values to support the creation of a fraudulent financial statement. Accountants have an ethical, moral, and legal duty to not commit accounting and financial statement fraud. Auditors have a duty to look for such inventory fraud.

Auditors follow the Statement on Auditing Standards (SAS) No. 99 and AU Section 316 Consideration of Fraud in a Financial Statement Audit when auditing a company’s books. Auditors are outside accountants hired to “obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.” 3 Ultimately, an auditor will prepare an audit report based on the testing of the balances in a company’s books, and a review of the company’s accounting system. The auditor is to perform “procedures at locations on a surprise or unannounced basis, for example, observing inventory on unexpected dates or at unexpected locations or counting cash on a surprise basis.” 4 Such testing of a company’s inventory system is used to catch accounting fraud. It is the responsibility of the accountant to present accurate accounting records to the auditor, and for the auditor to create auditing procedures that reasonably ensure that the inventory balances are free of material misstatements in the accounting balances.

Additional Inventory Issues

Various other issues that affect inventory accounting include consignment sales, transportation and ownership issues, inventory estimation tools, and the effects of inflationary versus deflationary cycles on various methods.

Consignment

Consigned goods refer to merchandise inventory that belongs to a third party but which is displayed for sale by the company. These goods are not owned by the company and thus must not be included on the company’s balance sheet nor be used in the company’s inventory calculations. The company’s profit relating to consigned goods is normally limited to a percentage of the sales proceeds at the time of sale.

For example, assume that you sell your office and your current furniture doesn’t match your new building. One way to dispose of the furniture would be to have a consignment shop sell it. The shop would keep a percentage of the sales revenue and pay you the remaining balance. Assume in this example that the shop will keep one-third of the sales proceeds and pay you the remaining two-thirds balance. If the furniture sells for $15,000, you would receive $10,000 and the shop would keep the remaining $5,000 as its sales commission. A key point to remember is that until the inventory, in this case your office furniture, is sold, you still own it, and it is reported as an asset on your balance sheet and not an asset for the consignment shop. After the sale, the buyer is the owner, so the consignment shop is never the property’s owner.

Free on Board (FOB) Shipping and Destination

Transportation costs are commonly assigned to either the buyer or the seller based on the free on board (FOB) terms, as the terms relate to the seller. Transportation costs are part of the responsibilities of the owner of the product, so determining the owner at the shipping point identifies who should pay for the shipping costs. The seller’s responsibility and ownership of the goods ends at the point that is listed after the FOB designation. Thus, FOB shipping point means that the seller transfers title and responsibility to the buyer at the shipping point, so the buyer would owe the shipping costs. The purchased goods would be recorded on the buyer’s balance sheet at this point.

Similarly, FOB destination means the seller transfers title and responsibility to the buyer at the destination, so the seller would owe the shipping costs. Ownership of the product is the trigger that mandates that the asset be included on the company’s balance sheet. In summary, the goods belong to the seller until they transition to the location following the term FOB, making the seller responsible for everything about the goods to that point, including recording purchased goods on the balance sheet . If something happens to damage or destroy the goods before they reach the FOB location, the seller would be required to replace the product or reverse the sales transaction.

Lower-of-Cost-or-Market (LCM)

Reporting inventory values on the balance sheet using the accounting concept of conservatism (which discourages overstatement of net assets and net income) requires inventory to be calculated and adjusted to a value that is the lower of the cost calculated using the company’s chosen valuation method or the market value based on the market or replacement value of the inventory items. Thus, if traditional cost calculations produce inventory values that are overstated, the lower-of-cost-or-market (LCM) concept requires that the balance in the inventory account should be decreased to the more conservative replacement value rather than be overstated on the balance sheet.

Estimating Inventory Costs: Gross Profit Method and Retail Inventory Method

Sometimes companies have a need to estimate inventory values. These estimates could be needed for interim reports, when physical counts are not taken. The need could be result from a natural disaster that destroys part or all of the inventory or from an error that causes inventory counts to be compromised or omitted. Some specific industries (such as select retail businesses) also regularly use these estimation tools to determine cost of goods sold. Although the method is predictable and simple, it is also less accurate since it is based on estimates rather than actual cost figures.

The gross profit method is used to estimate inventory values by applying a standard gross profit percentage to the company’s sales totals when a physical count is not possible. The resulting gross profit can then be subtracted from sales, leaving an estimated cost of goods sold. Then the ending inventory can be calculated by subtracting cost of goods sold from the total goods available for sale. Likewise, the retail inventory method estimates the cost of goods sold, much like the gross profit method does, but uses the retail value of the portions of inventory rather than the cost figures used in the gross profit method.

Inflationary Versus Deflationary Cycles

As prices rise (inflationary times), FIFO ending inventory account balances grow larger even when inventory unit counts are constant, while the income statement reflects lower cost of goods sold than the current prices for those goods, which produces higher profits than if the goods were costed with current inventory prices. Conversely, when prices fall (deflationary times), FIFO ending inventory account balances decrease and the income statement reflects higher cost of goods sold and lower profits than if goods were costed at current inventory prices. The effect of inflationary and deflationary cycles on LIFO inventory valuation are the exact opposite of their effects on FIFO inventory valuation.

Link to Learning

Accounting Coach does a great job in explaining inventory issues (and so many other accounting topics too): Learn more about inventory and cost of goods sold on their website.

Think It Through

First-in, first-out (fifo).

Suppose you are the assistant controller for a retail establishment that is an independent bookseller. The company uses manual, periodic inventory updating, using physical counts at year end, and the FIFO method for inventory costing. How would you approach the subject of whether the company should consider switching to computerized perpetual inventory updating? Can you present a persuasive argument for the benefits of perpetual? Explain.

  • 1 “Inventory Fraud: Knowledge Is Your First Line of Defense.” Weaver. Mar. 27, 2015. https://weaver.com/blog/inventory-fraud-knowledge-your-first-line-defense
  • 2 Wells, Joseph T. “Ghost Goods: How to Spot Phantom Inventory.” Journal of Accountancy . June 1, 2001. https://www.journalofaccountancy.com/issues/2001/jun/ghostgoodshowtospotphantominventory.html
  • 3 American Institute of Certified Public Accountants (AICPA). Consideration of Fraud in a Financial Statement Audit (AU Section 316). https://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00316.pdf
  • 4 American Institute of Certified Public Accountants (AICPA). Consideration of Fraud in a Financial Statement Audit (AU Section 316). https://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00316.pdf

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Inbound Logistics

Inventory Management: Definition, Types, and Examples

Inventory Management: Definition, Types, and Examples

Effective inventory management is the unsung hero of successful business operations, whether in the bustling retail world or in systematic manufacturing processes. 

It’s a critical component that can dictate a company’s ability to meet customer demand, manage cash flow, and maintain a competitive edge. 

According to a report by the National Retail Federation , the retail industry loses nearly $50 billion annually due to inventory shrinkage, a problem that effective inventory management can mitigate

By leveraging data and modern inventory management systems, businesses can ensure that inventory levels are optimized, excess inventory is minimized, and inventory costs are controlled. 

This foundational aspect of supply chain management affects the balance sheets and impacts customer satisfaction and business agility.

In this article, we will share inventory management definitions, explain inventory management meaning, give an inventory example, and discuss how inventory management relates to both inbound and outbound logistics.

Inventory Management Defined

Inventory management refers to ordering, storing, using, and selling a company’s inventory. This includes managing raw materials, components, finished goods, and warehousing and processing of such items. 

Automotive and healthcare industries rely on effective inventory management to streamline production processes and reduce hold-ups. Historically, inventory management was a manual process. 

Still, today it has evolved into a sophisticated inventory management system integrated with supply chain logistics, thanks to advancements in technology like Enterprise Resource Planning (ERP) systems and inventory management software. These tools provide real-time data that businesses use to efficiently forecast, plan, and execute their inventory management processes.

Advantages of Inventory Management and Supply Chain

The advantages of sound inventory management are manifold. Primarily, it allows businesses to have the right products available at the right time, which is crucial for meeting customer orders and maintaining solid sales channels. This is particularly crucial for the inbound logistics process.

Good inventory management can lead to better inventory turnover, ensuring fresh and relevant products, which is especially important in industries with rapid product lifecycles, such as fashion or technology. 

Also, effective inventory management reduces costs by decreasing the need for excess inventory and storing inventory, which can drain resources and capital if not appropriately managed.

Inventory vs. Stock Explained

While often used interchangeably, inventory and stock have subtle distinctions. 

Inventory encompasses more than just the products available for sale (stock); it includes raw materials, work-in-progress items, and all components involved in the production process. 

Understanding this nuance is vital, as it affects how businesses plan their inbound logistics, procurement and manage inventory levels across the supply chain.

Counting Inventory

inventory management

Counting inventory , or taking a physical list, is a crucial task that validates the quantity and condition of items on hand. It’s a fundamental process that informs financial reporting, inventory forecasting, and supply chain planning. 

Accurate counts are essential for maintaining inventory data integrity, which impacts everything from order management to customer satisfaction. This process is critical at the end of accounting periods to ensure that reported inventory levels reflect the actual value of assets held by the company.

Types of Inventory Management Methods

Several methods help businesses optimize their handling of goods and materials.

Just-in-Time Management (JIT)

Just-in-Time Management (JIT) is a strategy where inventory is delivered only as it is needed in the production process, reducing the cost of storing inventory. Significant for industries like automotive manufacturing , JIT can lead to reduced inventory levels and associated costs, promoting an efficient supply chain.

Materials Requirement Planning (MRP)

Materials Requirement Planning (MRP) systems calculate the materials and components required to manufacture a product. This method is vital for manufacturing industries, ensuring that materials are available for production without the excess that can tie up capital.

Economic Order Quantity (EOQ)

Economic Order Quantity (EOQ) is a formula used to determine the optimal order quantity that minimizes inventory costs involving holding and ordering costs. This is significant across various industries for maintaining balance in inventory management.

Days Sales of Inventory (DSI)

Days Sales of Inventory (DSI) measures how quickly a company can turn its inventory into sales. A lower DSI indicates that a company is more efficient at selling off its stock. This metric is critical for retailers to gauge their inventory management efficiency.

Common Problems within Inventory Management

Though crucial, inventory management is fraught with challenges that can ripple through the supply chain and impact logistics operations. 

One common issue is overstocking, which ties up cash flow and can lead to excess inventory that may become obsolete or expire. Conversely, understocking risks stockouts, leading to delays in the production process and dissatisfied customers. 

Prominent Examples of Inventory Management

Inventory management plays a crucial role in industries where products have a limited shelf life, such as food and beverage or pharmaceuticals . Here, it’s pivotal to prevent spoilage and ensure compliance with safety regulations. 

In fashion retail, inventory management must be dynamic to keep up with changing trends and seasonal demand, making it essential for maintaining inventory freshness and reducing instances of dead stock.

Disadvantages of Inventory Management

Despite its many benefits, inventory management can have downsides. Holding inventory inherently involves storage costs, and stock that sits in a warehouse too long can lead to increased expenses without generating revenue. 

Moreover, complex inventory management systems can be costly to implement and maintain, requiring significant technological and training investments. These systems can sometimes lead to a dependency that may cripple operations if the system goes down or is attacked by cyber threats .

Inventory Management and Software

Inventory management software has revolutionized how companies approach their inventory processes. This technology allows for real-time tracking of goods, inventory forecasting, and more accurate demand planning. 

Inventory Management vs. Supply Chain Management

warehouse inventory

While inventory management focuses on overseeing and controlling goods within a company, supply chain management encompasses a broader scope, managing the entire flow of goods and materials from suppliers to the end customer. 

Tracking Inventory and Internal SKU Systems

Tracking inventory through internal Stock Keeping Units (SKUs) is an intricate part of inventory management. SKUs help businesses quickly categorize and locate inventory, facilitating faster inventory turnover and more precise inventory data. 

Forecasting and Controlling Inventory with Software

Modern inventory management software often includes sophisticated forecasting tools that utilize historical sales data, seasonal trends, and other variables to predict future demand. This predictive capability helps businesses maintain optimal inventory levels, reducing the risk of overstocking or stockouts. 

Types of Successful Inventory Management Techniques

A variety of inventory management techniques are employed by businesses to maintain efficiency and cost-effectiveness in managing stock levels.

These methods are tailored to match the needs of the company and the nature of the inventory it holds.

Economic and Minimum Order Quantity

Economic Order Quantity (EOQ) and Minimum Order Quantity (MOQ) are foundational concepts in inventory management. 

EOQ calculates the ideal order quantity to minimize total inventory costs, while MOQ determines the minuscule amount a supplier is willing to sell. Both are vital for optimizing inventory levels and reducing costs.

ABC Analysis

ABC Analysis categorizes inventory into three categories (A, B, and C) based on importance and volume. 

‘A’ items are high-priority with stringent control, ‘B’ are moderate, and ‘C’ have the most negligible financial impact. This prioritization is essential for efficient inventory control.

Just-In-Time Inventory

Just-In-Time (JIT) inventory management is a strategy that aligns raw-material orders with production schedules to minimize inventory costs. 

It’s crucial for businesses looking to reduce waste and increase efficiency in the production process.

Safety Stock

Safety Stock is additional inventory held to prevent stockouts caused by inaccuracies in demand forecasting or supply chain disruptions. 

It’s a critical buffer that ensures customer demand is met without delay.

First In-First Out (FIFO) vs. Last In-First Out (LIFO) Explained

FIFO and LIFO are methods to manage the flow of inventory costs. FIFO assumes the first items stocked are the first sold, reducing the chance of obsolete inventory. 

LIFO, less common, takes the last things in are the first sold, which can benefit in specific tax situations.

Reorder Triggers

Reorder triggers are pre-determined inventory levels that prompt a new purchase order. 

They are vital for maintaining stock levels and ensuring consistent supply without overstocking, playing a significant role in inventory management systems.

Batch Tracking

Batch tracking monitors the production and expiration dates of batches of inventory items. 

It’s crucial for traceability in case of recalls and managing stock with expiration dates, maintaining the integrity of the supply chain.

Consignment Inventory

Consignment inventory allows retailers to stock goods without purchasing them upfront; payment is made only after the sale. 

This method is vital for inventory management as it reduces the retailer’s capital in inventory and transfers the risk of unsold stock to the supplier.

Perpetual Inventory

A perpetual inventory system continuously tracks inventory levels, updating in real-time with every sale and restock. 

It’s essential for accurate inventory data, allowing for timely ordering and reduction of excess stock.

Dropshipping

Dropshipping is a retail fulfillment method where a store doesn’t keep products in stock but instead transfers customer orders and shipment details to the manufacturer or a wholesaler, who then ships the goods directly to the customer. 

This method is vital as it eliminates the need for managing physical inventory, significantly reducing handling and storage costs.

Lean Manufacturing

Lean manufacturing emphasizes waste reduction within the manufacturing system without sacrificing productivity. 

It’s vital for inventory management as it promotes a just-in-time approach, minimizing stock levels and reducing holding costs.

Six Sigma and Lean Six Sigma Techniques

Six Sigma and Lean Six Sigma focus on quality improvement and process efficiency. 

They are vital to inventory management by identifying and eliminating process defects, resulting in lower inventory costs and improved customer satisfaction.

Demand Inventory Forecasting

Demand inventory forecasting uses historical sales data to predict customer demand and manage inventory accordingly. 

It’s essential for preventing stockouts and overstock, making inventory management more responsive and cost-effective.

Cross-Docking

Cross-docking is a logistics procedure where products from a supplier or manufacturing plant are distributed directly to a customer or retail chain with marginal to no handling or storage time. 

It’s vital as it reduces the need for warehousing while increasing inventory turnover rates.

Bulk Shipments

Bulk shipments involve transporting large quantities of a single product, which can significantly reduce transportation costs. 

It’s vital for inventory management as it can lead to economies of scale, making larger shipments more cost-effective.

Cycle Counts

Cycle counting is an inventory auditing procedure where a small subset of inventory in a specific location is counted on a particular day. It contrasts with traditional physical inventory counting, where operations are halted to count all inventory. 

Cycle counts are less disruptive and more accurate, allowing for regular verification of inventory accuracy and providing ongoing insights into inventory levels without the operational shutdown.

The Significance of Inventory Management, Control and Optimization

Effective inventory management, control, and optimization methods are crucial for maintaining the delicate balance between too much and too little inventory. 

They ensure that capital is not unnecessarily tied up in stock, preventing stockouts that can lead to lost sales. These methods can result in improved cash flow, better customer service levels, and the ability to quickly respond to market changes.

How Inventory Affects Logistics

Inventory levels directly impact logistics operations; having the right stock in the right place at the right time is essential for effective logistics. 

High inventory levels can cause bottlenecks and increase storage costs, while lower inventory levels can result in inefficient transportation and higher shipping costs for urgent replenishment.

ERP Inventory Management Style

ERP inventory management incorporates all facets of a company’s inventory system into a unified system, including tracking, management, and forecasting. 

This method offers comprehensive insights into inventory, streamlines processes, and can improve overall efficiency.

Retail and Manufacturing Inventory Management

Inventory management in retail focuses on having the right products available to meet consumer demand while manufacturing inventory management ensures that production materials are at hand without overstocking. 

Both require strategies that optimize stock levels, though retail is more directly driven by consumer trends, and production schedules and supplier lead times influence manufacturing.

Unveil the essentials of inventory management with these succinctly answered frequently asked questions.

What does inventory management do?

Inventory management oversees stock levels, manages orders, and forecasts demand to optimize business operations.

What are the 4 types of inventory?

The four types are raw materials, work-in-progress, finished goods, and maintenance, repair, and operations (MRO) inventories.

What are the 3 major inventory management techniques?

The three main techniques are Just-In-Time, ABC Analysis, and Economic Order Quantity (EOQ).

Inventory Management Techniques Summary

Effective inventory management is a cornerstone of successful business operations, ensuring that inventory levels are balanced, customer demand is met, and inventory costs are minimized. 

Businesses can enhance their supply chain management and maintain a competitive edge in today’s market by employing strategic inventory management techniques, such as Just-In-Time and Economic Order Quantity. 

Additionally, advancements in inventory management software have made it easier for companies to track and manage their inventory more efficiently, further optimizing their inventory management processes.

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What Is Inventory Management?

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Inventory Management Defined, Plus Methods and Techniques

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

assignment inventory management

Inventory management refers to the process of ordering, storing, using, and selling a company's inventory. This includes the management of raw materials, components, and finished products, as well as warehousing and processing of such items. There are different types of inventory management, each with its pros and cons, depending on a company’s needs.

Key Takeaways

  • Inventory management is the entire process of managing inventories from raw materials to finished products.
  • Inventory management tries to efficiently streamline inventories to avoid both gluts and shortages.
  • Four major inventory management methods include just-in-time management (JIT), materials requirement planning (MRP), economic order quantity (EOQ) , and days sales of inventory (DSI).
  • There are pros and cons to each of the methods, reviewed below.

Investopedia / Alex Dos Diaz

A company's inventory is one of its most valuable assets. In retail, manufacturing, food services, and other inventory-intensive sectors, a company's inputs and finished products are the core of its business. A shortage of inventory when and where it's needed can be extremely detrimental.

At the same time, inventory can be thought of as a liability (if not in an accounting sense). A large inventory carries the risk of spoilage, theft, damage, or shifts in demand. Inventory must be insured, and if it is not sold in time it may have to be disposed of at clearance prices—or simply destroyed.

For these reasons, inventory management is important for businesses of any size. Knowing when to restock inventory, what amounts to purchase or produce, what price to pay—as well as when to sell and at what price—can easily become complex decisions. Small businesses will often keep track of stock manually and determine the reorder points and quantities using spreadsheet (Excel) formulas. Larger businesses will use specialized enterprise resource planning (ERP) software. The largest corporations use highly customized software as a service (SaaS) applications.

Appropriate inventory management strategies vary depending on the industry. An oil depot is able to store large amounts of inventory for extended periods of time, allowing it to wait for demand to pick up. While storing oil is expensive and risky—a fire in the U.K. in 2005 led to millions of pounds in damage and fines—there is no risk that the inventory will spoil or go out of style. For businesses dealing in perishable goods or products for which demand is extremely time-sensitive—2021 calendars or fast-fashion items, for example—sitting on inventory is not an option, and misjudging the timing or quantities of orders can be costly.

For companies with complex supply chains and manufacturing processes, balancing the risks of inventory glut and shortages is especially difficult. To achieve these balances, firms have developed several methods for inventory management, including just-in-time (JIT) and materials requirement planning (MRP) .

Some companies, such as financial services firms, do not have physical inventory and so must rely on service process management.

Inventory represents a  current asset  since a company typically intends to sell its finished goods within a short amount of time, typically a year. Inventory has to be physically counted or measured before it can be put on a balance sheet. Companies typically maintain sophisticated inventory management systems capable of tracking real-time inventory levels.

Inventory is accounted for using one of three methods: first-in-first-out (FIFO) costing; last-in-first-out (LIFO) costing; or weighted-average costing . An inventory account typically consists of four separate categories: 

  • Raw materials — represent various materials a company purchases for its production process. These materials must undergo significant work before a company can transform them into a finished good ready for sale.
  • Work in process (also known as goods-in-process ) — represents raw materials in the process of being transformed into a finished product.
  • Finished goods — are completed products readily available for sale to a company's customers.
  • Merchandise — represents finished goods a company buys from a supplier for future resale.

Depending on the type of business or product being analyzed, a company will use various inventory management methods . Some of these management methods include just-in-time (JIT) manufacturing, materials requirement planning (MRP), economic order quantity (EOQ) , and days sales of inventory (DSI) . There are others, but these are the four most common methods used to analyze inventory.

1. Just-in-Time Management (JIT)

This manufacturing model originated in Japan in the 1960s and 1970s. Toyota Motor ( TM ) contributed the most to its development. The method allows companies to save significant amounts of money and reduce waste by keeping only the inventory they need to produce and sell products. This approach reduces storage and insurance costs, as well as the cost of liquidating or discarding excess inventory.

JIT inventory management can be risky. If demand unexpectedly spikes, the manufacturer may not be able to source the inventory it needs to meet that demand, damaging its reputation with customers and driving business toward competitors. Even the smallest delays can be problematic; if a key input does not arrive "just in time," a bottleneck can result.

2. Materials Requirement Planning (MRP)

This inventory management method is sales-forecast dependent, meaning that manufacturers must have accurate sales records to enable accurate planning of inventory needs and to communicate those needs with materials suppliers in a timely manner. For example, a ski manufacturer using an MRP inventory system might ensure that materials such as plastic, fiberglass, wood, and aluminum are in stock based on forecasted orders. Inability to accurately forecast sales and plan inventory acquisitions results in a manufacturer's inability to fulfill orders.

3. Economic Order Quantity (EOQ)

This model is used in inventory management by calculating the number of units a company should add to its inventory with each batch order to reduce the total costs of its inventory while assuming constant consumer demand. The costs of inventory in the model include holding and setup costs.

The EOQ model seeks to ensure that the right amount of inventory is ordered per batch so a company does not have to make orders too frequently and there is not an excess of inventory sitting on hand. It assumes that there is a trade-off between inventory holding costs and inventory setup costs, and total inventory costs are minimized when both setup costs and holding costs are minimized.

4. Days Sales of Inventory (DSI)

This financial ratio indicates the average time in days that a company takes to turn its inventory, including goods that are a work in progress, into sales. DSI is also known as the average age of inventory, days inventory outstanding (DIO), days in inventory (DII), days sales  in  inventory or days inventory and is interpreted in multiple ways.

Indicating the liquidity of the inventory, the figure represents how many days a company’s current stock of inventory will last. Generally, a lower DSI is preferred as it indicates a shorter duration to clear off the inventory, though the average DSI varies from one industry to another.

If a company frequently switches its method of inventory accounting without reasonable justification, it is likely its management is trying to paint a brighter picture of its business than what is true. The SEC requires public companies to disclose  LIFO reserve  that can make inventories under LIFO costing comparable to FIFO costing.

Frequent inventory write-offs can indicate a company's issues with selling its finished goods or inventory obsolescence. This can also raise red flags with a company's ability to stay competitive and manufacture products that appeal to consumers going forward.

The four types of inventory management are just-in-time management (JIT), materials requirement planning (MRP), economic order quantity (EOQ) , and days sales of inventory (DSI). Each inventory management style works better for different businesses, and there are pros and cons to each type.

Tim Cook is known as an inventory genius. “Inventory is like dairy products,” Cook is quoted saying. “No one wants to buy spoiled milk.” For this reason, inventory management can save a company millions.

Let's look at an example of a just-in-time (JIT) inventory system. With this method, a company receives goods as close as possible to when they are actually needed. So, if a car manufacturer needs to install airbags into a car, it receives airbags as those cars come onto the assembly line instead of having a stock on supply at all times.

Inventory management is a crucial part of business operations. Proper inventory management depends on the type of business and what type of product it sells. There may not be one perfect type of inventory management, because there are pros and cons to each. But taking advantage of the most fitting type of inventory management style can go a long way.

Competent Authority. “ Buncefield: Why Did it Happen? ,” Page 34.

Toyota. “ Toyota Production System ,” Pages 1-2.

Chartered Institute of Procurement and Supply. “ How to Do Effective Material Requirements Planning .”

Kumar, Rakesh. “ Economic Order Quantity (EQQ) Model .” Global Journal of Finance and Economic Management , vol. 5, no 1, 2016, pp. 1-2.

assignment inventory management

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Inventory Management: Definition, Benefits, and Techniques

March 18, 2022 - 10 min read

Maria Waida

Businesses that effectively use inventory management are destined to succeed. With the help of inventory management software, companies can automate the process of ordering, storing, and optimizing their goods in a single place.

In this article, we will expand on the importance of inventory management, as well as the different inventory management techniques, benefits, and examples managers need to know. Keep reading to learn the key to inventory management that will give you a competitive edge. 

What is inventory management?

Inventory management refers to the process of storing, ordering, and selling of goods and services. The discipline also involves the management of various supplies and processes.

One of the most critical aspects of inventory management is managing the flow of raw materials from their procurement to finished products. The goal is to minimize overstocks and improve efficiency so that projects can stay on time and within budget. 

The proper inventory management technique for a particular industry can vary depending on the size of the company and the number of products needed. For instance, an oil depot can store a huge inventory for a long time. Or for businesses that deal in perishable goods, such as fast-fashion items, keeping on top of your inventory can be very costly.

One way to account for inventory is by grouping it into four categories: first-in-first-out, last-in-first-out, weighted-average, and first-in-first-out. Raw materials are the components used by a company to make its finished products.

Depending on the type of company that it is dealing with, different inventory management methods are used. Some of these include JIT, material requirement planning, and days sales of inventory.

Other methods of analyzing inventory can also be used depending on national and local regulations. For instance, the SEC requires public companies to report the existence of a so-called LIFO reserve.

Having frequent inventory write-offs can be a red flag that a company is struggling to sell its finished products or is prone to inventory obsolescence.

Learn even more about inventory management from Walton College’s Supply Chain Management program’s introduction on the subject covering everything from forecasting to point models: 

Why is inventory management important?

One of the most valuable assets of a company is its inventory. In various industries, such as retail, food services, and manufacturing, a lack of inventory can have detrimental effects. Aside from being a liability, inventory can also be considered a risk. It can be prone to theft, damage, and spoilage. Having a large inventory can also lead to a reduction in sales.

Both for small businesses and big corporations, having a proper inventory management system is very important for any business. It can help you keep track of all your supplies and determine the exact prices. It can also help you manage sudden changes in demand without sacrificing customer experience or product quality. This is especially important for brands looking to become a more customer-centric organization . 

Balancing the risks of overstocks and shortages is an especially challenging process for companies with complex supply chains. A company's inventory is typically a current asset that it plans to sell within a year. It must be measured and counted regularly to be considered a current asset. 

What is the goal of inventory management?

The goal of any good inventory management system is to help warehouse managers keep track of the stock levels of their products. This means allowing them full transparency into their chain to monitor the flow of goods from their supplier. 

The benefits are both operational and financial. Not only will it serve to improve performance, but it’s also useful for preventing theft with the help of product tracking and security. 

Managers can also aim to use their inventory management plan to monitor sales procedures which leads to better service. Inventory management is especially useful for businesses that want to effectively manage seasonal items or new bestsellers throughout the year without disrupting the rest of their chain.

Benefits of inventory management

The main benefit of inventory management is resource efficiency. The goal of inventory control is to prevent the accumulation of dead stocks that are not being used. Doing so can help prevent the company from wasting its resources and space.

Inventory management is also known to help: 

  • Order and time supply shipments correctly 
  • Prevent theft or loss of product
  • Manage seasonal items throughout the year
  • Deal with sudden demand or market changes 
  • Ensure maximum resource efficiency through cycle counting
  • Improve sales strategies using real-life data 

Inventory management system examples

Although inventory management can change from industry to industry, there are some big-picture themes worth learning about. Here are three major retail categories with real inventory management system examples:

Grocery store chains 

Modern groceries have managed to manage inventory coming in from different suppliers all over the world. Giving consumers several different types of internationally-grown produce in both organic and non-organic varieties at an affordable price, even when the fruits and vegetables aren’t in season, is a modern marvel thanks in part to inventory management. 

Overseeing stock in real time and even setting up automated replenishment systems is mission-critical to many. 

Online retailers

On average, Amazon ships approximately 1.6 million packages from their brand to third-party sellers per day. Their Smart Warehouse uses robot and human help to get the job done, but it’s inventory management that keeps it all rolling. According to Tech Vision, “Amazon’s management technique, along with all that automation, have made the business astonishingly lean and mean by historic standards.”

Toilet paper companies

The inventory management of toilet paper companies was in the hot seat in early 2020 as panic-buying led to shortages nationwide. As demand outgrew supply beyond anything the brands had seen before (about 845%), it’s no surprise why there has been an increased focus on inventory management since. 

Their secrets to overcoming this unprecedented event? Temporarily narrowing down their portfolio of products, sending out “defective” yet functional rolls, and even transitioning to a direct-to-consumer model, all with the help of strong inventory management systems. 

Steps and types of inventory management

Most product inventory management systems follow the same basic steps for finished products: 

  • Products arrive at your warehouse 
  • Products are checked and stored 
  • Managers or crew update inventory levels 
  • Customers place an order 
  • Customer orders are approved based on inventory 
  • Products are pulled and packaged 
  • Inventory levels are updated again 

This process is fairly straightforward and often involves help from software. There may be variations depending on what type of inventory management you are doing. Here are the main types you should know: 

  • Raw materials This refers to pieces of your product that need to be shipped to you and assembled by your team. Inventory systems that track these must account for supplier timelines. 
  • In progress Products made from raw materials and are currently being assembled or grouped fall under this category. This stage of inventory management may have one or several active projects at a time. 
  • Repair Scheduled maintenance, updates, and refurbished goods all count toward this segment. Repairs may be handled in-house or in collaboration with a third party. 
  • Finished goods Any good that is ready to ship to businesses or consumers is considered finished. These need to be updated regularly and constantly monitored to meet demand. 

Inventory management techniques

Without accurate inventory information, it can be very difficult to make decisions that affect your business. There are two main methods of keeping track of inventory: periodic and perpetual. The main difference between these is how often data is updated. Regardless of how often you track inventory, you may want to use one of the following inventory management techniques: 

  • ABC Analysis ABC (Always Better Control) Analysis is inventory management that separates various items into three categories based on pricing and is separated into groups A, B, or C. The A category is usually the most expensive one. The items in the B category are relatively cheaper compared to the A category. And the C category has the cheapest products of all three. 
  • EOQ Model Economic Order Quantity is a technique utilized for planning and ordering an order quantity. It involves making a decision regarding the amount of inventory that should be placed in stock at any given time. The order will be re-ordered once the minimum order has been reached.
  • FSN Method This method of inventory control refers to the process of keeping track of all the items of inventory that are not used frequently or are not required all the time. They are then categorized into three different categories: fast-moving inventory, slow-moving inventory, and non-moving inventory.
  • JIT Method Just In Time inventory control is a process utilized by manufacturers to control their inventory levels. This method saves them money by not storing and insuring their excess inventory. However, it is very risky since it can lead to stock out and increase costs.
  • Minimum Safety Stocks The minimum safety stock refers to the level of inventory that an organization maintains to avoid a possible stock-out.
  • MRP Method Material Requirements Planning is a process utilized by manufacturers to control the inventory by planning the order of the goods based on the sales forecast. The order is usually based on the data collected by the system.
  • VED Analysis VED is a technique utilized by organizations to control their inventory. It mainly pertains to the management of vital and desirable spare parts. The high level of inventory that is required for production usually justifies the low inventory for those parts. 

How to improve inventory management with Wrike

One of the most critical factors that a company should consider is the accuracy of the information presented in its inventory databases. The data should be updated regularly to prevent it from getting distorted. Wrike is a project management solution that can help you do exactly that. 

With Wrike's product management tools, you can manage all of your product team's activities in one place and get the most out of every project. Wrike's product launch automation helps accelerate product launches with a streamlined approach. Managers can easily keep inventory and shipping processes in check by planning and allocating tasks to the right people all from one central dashboard. 

Wrike also makes it possible to create workflows that keep everyone up-to-date with the latest inventory progress. Tools like interactive charts and task dependencies help team members at every level identify and prevent delays. You can communicate with both vendors and clients through the advanced CRM built directly into the platform. 

Plus, Wrike's advanced insights tools allow you to track progress in real time, which is important for any successful inventory management strategy. 

Why choose Wrike as your inventory management software?

Wrike is a project management solution that makes it possible to achieve all your inventory management goals while also maximizing the benefits of the process. Regardless of which inventory management technique you use, Wrike can help you take the process step by step to ensure your inventory is always accurate regardless of what type you’re managing. Improve your inventory management plan today with Wrike’s two-week free trial . 

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Maria Waida

Maria is a freelance content writer who specializes in blogging and other marketing materials for enterprise software businesses.

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Quality assurance (QA) is one of the final and most important steps of any product roadmap. Used in a variety of industries, including software development and construction, quality assurance verifies that a product or service is of the highest quality, which is an integral process for any company. In this article, we’ll explain the basic premise behind what quality assurance is and why it is important. Keep reading to discover how Wrike can be used as a tool for quality assurance.  What does QA stand for? QA stands for quality assurance. It refers to the process or actions taken to ensure a product meets all of its requirements. Quality assurance is often used to track compliance and maintain consistent product management output over time. This is accomplished by ensuring that each step of the production process is thoroughly inspected and refined. The main benefits of QA include gaining a customer's satisfaction and confidence. This leads to higher sales and better customer loyalty over time.  Quality assurance processes have become so critical that many companies have created their own dedicated department. You may also hear of a quality assurance system referred to as a quality management system.  How is quality assurance used in project management? Quality assurance is used in project management to help companies avoid making mistakes and to minimize potential risks. With quality assurance in mind, project managers can start planning for the quality of their deliverables from the very beginning of their project plans.  Doing so will highlight areas where they can improve their work, increase efficiency, and hold their team accountable. Not only does this strengthen a brand’s reputation, but it also cuts down on the potential exponential costs associated with fixing QA issues down the line.  Quality assurance can be completed at any stage of the project process. It can begin with establishing a quality framework for the hiring process so that only the best, most compatible talent is brought on. After that, teams can perform self-checks to ensure that your work is conducted according to predefined standards.  Regular QA monitoring can be built into project plans with other departments, or third-party entities can easily be looped in to give approvals. After a product has gone to market, teams can further track its quality by receiving customer feedback and implementing changes as needed.  All of these quality assurance tasks can be organized and executed through proper product management. In fact, without a proper project management tool and strategy in place, companies are even more vulnerable to QA issues. For quality assurance issue prevention and resolution, having a clear understanding of what’s going on at all times is essential.  What are the three types of quality assurance methods? There are three types of quality assurance methods that project teams commonly use. These methods can vary depending on the requirements of the company; however, you can count on using at least one of the following during the process: Statistical process control Failure testing Total quality management Statistical Process Control Statistical process control (SPC) is most often used for developing products with technology and/or chemistry involved. This can include everything from consumables to cleaning supplies to software. The SPC method monitors ongoing progress through charts and strives for continuous improvement.  The steps involved in this quality assurance method include discovery, investigation, prioritization, further analysis, and charting. This can be done internally using project data, team input, and studies conducted by QA and operations teams. Decisions are based on facts and figures and will likely follow the scientific method approach.  Failure Testing Failure testing is commonly used to test physical or virtual products.  For physical products, that means whether the product will break down under pressure or in various usability scenarios. For example, crash testing a vehicle’s safety airbags would be considered failure testing.  For virtual products, failure testing focuses on a program’s resiliency against a number of possible high-stress scenarios. Issues such as cybersecurity and transaction capacity are all evaluated.  Overall, failure testing aims to assess a prototype or finished product and decide if it’s ready to go to market.  Total Quality Management The total quality management (TQM) method aims to continuously improve products by using quantitative methods. Practically speaking, it helps build a process that is consistent and predictable. It does so using a variety of modules that help manage the various phases of a project. TQM also supports teams by relying on data and analysis to plan and implement future updates. It’s most popular for improving assembly-line efficiency.  Regardless of which quality assurance method you use, having an execution plan is very important. It will help you keep track of all of the steps involved in the QA process as they happen. Teams can also track improvements over time and study trends as they progress.  What is quality control in project management? Quality control is a process that involves inspecting, testing, and reporting outputs to ensure that they meet the requirements of the project. In order to achieve the highest possible level of conformance, decisions need to be made in all phases of quality control.  Projects involve a wide variety of tasks and processes that are often subject to various forms of quality control. The project manager will typically always agree to follow quality control measures but having input from internal or external QA experts is a great idea too.  Quality assurance and quality control are sometimes used interchangeably. However, they are distinctly different.  Quality assurance vs. quality control Quality assurance (QA) and quality control (QC) are part of a quality system, along with other elements such as goals and procedures. Quality assurance typically covers all elements of a quality system, while quality control is a smaller subset. In other words, while QA sees the big picture (process), QC focuses on the details (finished products).  Quality assurance examples Quality assurance examples can be found in many different forms across all industries. They can happen in businesses both large and small, and the issues they aim to solve or prevent may be identified by internal teams, external partners, or even their very own customer base. Here are some general examples to help illustrate what quality assurance looks like: Running cybersecurity tests on a user portal after a breach was exposed  Revamping a car manufacturing process to better suit new safety standards  Changing fabric suppliers after discovering that dresses aren’t reacting to dye as well as they did weeks before  Designing a new bumper after data suggests its current design to be the cause of higher flat tire rates  Weeding out possible vat issues after receiving complaints from customers that their granola bars made buyers sick  As you can see, quality assurance plays an important role in a company’s overall success. From protecting customer health and private information to assuring that your brand image is consistent, these examples prove that QA is a non-negotiable asset for any company.  How to use Wrike during the quality assurance process Wrike’s product management tools help you manage all your quality assurance activities in one place. Using our tool, managers can accelerate product launches through automation and go-to-market faster without sacrificing quality. Wrike does all of this using features such as templates and cross-functional team communication tools.  Wrike offers pre-made templates designed by and for experts in your industry to ensure that you capture all the essential steps in every project. This lays a strong foundation for high-quality and consistent output.  Wrike also allows users to create their own process templates. Once an issue is discovered, teams can easily implement a custom QA solution template into their existing project plans and take action that much faster.  Whether you’re responding to an issue or monitoring to ensure one doesn’t come up, a project management solution that offers cross-functional team communication tools is a must-have for quality assurance. Wrike does this through several features. First, Wrike offers improved visibility into real-time reports through dashboards, charts, and detailed task views.  Second, Wrike allows teams to involve everyone in the conversation. This happens through integration with third-party communication apps so that all discussion is organized no matter where it takes place. It also is made possible through secure project plan access to outside partners who need to view and approve of plans.  Even within the program itself, teams can easily view succinct dashboards that outline where they are, what they have to do, and where the project is going. Team members can easily get one another up to speed on QA issues by pinpointing which tasks went wrong and reviewing in-task discussions to get a better understanding of the event.  Get quality assurance discussions started across multiple departments and countries with our easy-to-use project management software. Start Wrike’s free trial to get better insight into your own processes now.  

Bottom-Up Estimating in Project Management: A Guide

Bottom-Up Estimating in Project Management: A Guide

Need help creating the most accurate project forecast of all time? Look no further than bottom-up estimating.  Bottom-up estimating in project management is a method of estimating project duration or cost by aggregating the estimates of the lower-level components of the Work Breakdown Structure (WBS). In this article, we’ll dive deep into what bottom-up estimating is, the pros and cons of bottom-up estimating, and how it differs from a ‘top-up’ estimating approach.  Explore more about this effective technique, along with the tool you‘ll need to master it.  What is bottom-up estimating? Bottom-up estimating is a technique that helps determine the overall cost and timeline of a project. It works by gathering all the details of a project at the most minute level. It provides a better, more accurate forecast than other project planning methods because it allows managers to see every available element of the project before it even begins.  How accurate is the bottom-up estimation technique? Because the bottom-up estimation technique uses every known factor to determine the project’s needs, it is considered more accurate than most other methods.  When you have all the details related to a project before you begin, it is easier to determine:  Where bottlenecks may arise (and how to banish them before they do) How to overcome a lack of project resources How your team can strategically navigate this particular project This is particularly effective when starting a project that is unique or new to your team and doesn’t have historical data to pull from.  Pros and cons of a bottom-up approach in project management The pros of bottom-up estimating include:  Highly accurate. Laying out the project's scope can be very challenging since it involves estimating the exact details of the project and the people involved in its execution. Bottom-up estimating allows team members to see all the components of a project in one place, and it saves them time and effort by estimating separately. Saves time. By estimating the work package in advance, a manager can make better decisions and avoid costly mistakes. It also helps avoid surprises down the road. Even though there is a large time investment up front, the idea behind the method is that it will prevent wasted time down the road.  Reduces risk. A bottom-up estimate allows the manager to address issues related to the estimates without making significant changes. This allows the team to avoid making significant errors. Improves success. A bottom-up analysis also allows managers to implement strategies to help the team execute the project more effectively. A comprehensive bottom-up analysis also allows the manager to identify potential issues before they occur, which allows the team to react more effectively to those that arise. Increases productivity. The team's autonomy and control are also distributed through the various members of the team, which allows them to work efficiently. Bottom-up estimating cons:  Not scalable. Bottom-up estimation requires project managers to start from square one on each new project. There are opportunities to pull details from related projects from the past. But the point of bottom-up estimation is to create a forecast based on the individual components of this particular assignment.  Time-consuming. The project planning work is front-loaded. It can take days, weeks, or even months to gather all the necessary information. For teams with a high volume of incoming projects or staffing issues, this may not be ideal.  Slow-moving. Bottom-up estimation is typically not done in a hurry and is therefore incompatible with last-minute projects or work that has a short timeline.  Bottom-up vs. top-down estimating Bottom-up estimating is different from a top-down approach. In top-down estimating, management estimates the project based on the previous work on the same or similar projects.  Bottom-up estimation is ideal for unique projects or work that is unlike anything the team has done before. Top-down estimation, however, is ideal for duplicate projects, recurring assignments, or work that needs to be completed ASAP.  It’s also easier to templatize past project plans in top-down estimating than in bottom-up estimating. Bottom-up estimating example In its simplest form, bottom-up estimation looks at the individual costs and time duration required for each project task.  For example, let’s say you own a wedding cake bakery. The last time you gave a wedding cake quote for a three-tier and several dozen cupcakes, you underestimated the cost and lost profit on the project. Now, you’d like to better estimate a brand new order to avoid making the same mistake twice.  In this scenario, you would lay out the individual components needed for each baked good. Everything from frosting quantity to hairnets is factored in. You’ll also need to account for the time it takes to do the shopping, coordinate customer service, and more.  Having all of this together on one list will make it possible for you to see the entire scope of the project and provide an accurate estimation this time around.  Why you should use Wrike for bottom-up projects Wrike is a project management tool that allows users to create robust yet simple bottom-up estimates for work of any kind.  First, Wrike allows you to lay out all of the tasks that are involved in the project. Wrike’s task feature offers individual task due dates, descriptions, assignees, and more.  Once a task is assigned to an individual team member, you can also assign approvers and factor into decision-making time to your bottom-up estimate. Instead of asking for approval from everyone, the manager focuses on getting feedback from all team members. Wrike also makes it easy to identify the various skills and people needed to complete the assigned tasks using information already stored in your dashboard. Not only will you have the most qualified team members working on the right tasks, but you’ll also be able to balance out scheduling so that no one person is bearing the majority of the workload.  Finally, Wrike's Gantt Chart offers a visual view of project progress that lets you keep track of all your work's phases and dependencies. With our tools, you can set milestones, link task dependencies, and provide a clear step-by-step explanation of your bottom-up estimation to stakeholders.  Ready to take your project management strategy to the next level? Use Wrike’s two-week free trial today to create a highly accurate bottom-up estimation for your next project. 

The Ultimate Guide to Multi-Project Management

The Ultimate Guide to Multi-Project Management

The more companies grow, the more projects they have in progress at the same time. Managing workloads, keeping track of deadlines, and knowing what to prioritize can become complicated, which is why multi-project management is so vital. In this guide, we’ll outline how leaders use multi-project management to coordinate multiple projects, tasks, workers, and time. We’ll explore why having a multi-project management tool is important for organizing and managing work.  What is multi-project management? Multi-project management refers to the process of overseeing multiple active projects all at one time. It is often guided by a multi-project management framework which refers to the various stages of the project life cycle, from selection to planning, control, monitoring, and evaluation. A multi-project program will summarize the various essential elements of a project. Having this information allows a company to create and consolidate repetitive tasks across multiple projects within a portfolio. This approach can help improve the efficiency of all projects in the department.  Difference between project management and portfolio management There are key differences between projects and portfolios but the biggest one lies in the very nature of what they are.  A project is temporary, while a portfolio is ongoing. A project manager focuses on the requirements of an individual project, while a portfolio manager looks at all aspects of the organization’s operations.  Project managers will also be able to appreciate the results of their work if they can relate to a single objective. Tips for managing multiple projects Start planning early. Having a project plan in place is very important when it comes to coordinating multiple projects. Use templates and task lists to outline key components before project kickoff.  Manage time wisely. Pay attention to individual workloads when assigning tasks. Also, it's important to set some breaks so that the team can recharge and focus on the most important tasks.  Prioritize individual tasks. Project managers need to know how and when to focus on the most critical tasks in a project. Doing so will help the organization achieve better results and minimize the time spent on non-important tasks. Templatize repetitive actions. By batching tasks that are similar to or repetitive in different projects, you can work on them in the least amount of time possible. Keep plans flexible. It is very important that leaders are flexible and can alter their plans and goals as they see fit. Doing so helps avoid making common mistakes over and over again. Find managerial balance. A great leader knows when to take command and when to trust their team.  Create detailed tasks. Assign a specific time allotment or effort for each task along with individual due dates, approval assignments, and task descriptions.  Encourage open communication. This is important because it allows teams to easily identify potential issues before they occur, which can be addressed before any major delays happen. Multi-project management challenges Like with any given project, there are infinite challenges you may experience. However, there are three common themes among the top multi-project management challenges. Here’s what they are and how to overcome them.  Challenge: Lack of prioritization Team members may have multiple tasks to do across a variety of projects and only so many hours to do them in. Cut down on analysis paralysis by deciding which tasks are a priority for them so they can make decisions on the flow and continue moving forward.  Solution: Clear priority indicators  Set individual priorities on tasks and update them as needed.  Challenge: Miscommunication Cross-functional teams, third-party vendors, and external stakeholders can easily lose sight of communications if they aren’t easy to access.  Solution: Centralize discussions Bring everyone together and give them controlled access to in-platform conversations, files, and tasks as needed.  Challenge: Inefficient use of resources Scheduling conflicts, budget constraints, and the occasional sick day can all throw a wrench in even the best-laid project plans.  Solution: Improve visibility  Use a project management solution that will allow you to see a macro view of all your projects in one multi-project management dashboard.  What is a multi-project management dashboard? A multi-project management dashboard is a project management tool that covers the various features of all your active projects in one easy-to-digest space. Through this dashboard, you can view all of your most important schedule, budget, and reporting metrics.  Each project schedule and project plan are displayed as a percentage complete and status indicator for reference. The project budget displays planned costs vs. the actual costs in real time, while visual charts display the various resources, risks, and issues affecting the projects in play. They can also be used to create reports and chart-based data sets.  You may already be familiar with using multi-project dashboards if you have experience with Agile project management.  Features to look for in a multi-management project tool Although some project apps offer these features, a true multi-management project tool will have each of the following: Dashboards that give users a bird’s-eye view of all active projects Detailed task descriptions that include individual effort indicators, deadlines, and in-task communication Integrated planning and scheduling tools that make it easy to pinpoint potential roadblocks Prioritization settings so that managers can indicate which areas should get the most resources and attention at the right time In-platform communication with controlled access to project plans, files, and assets Centralized document storage made accessible to all project team members Real-time budget and scheduling updates for accurate resource allocation How to implement multi-project management software Like any other project, implementing a multi-project management software requires planning and preparation. This should include a variety of key steps and roles for everyone involved, as well as a plan for communicating with the team. Before you dive into tool comparisons, the first step is to thoroughly assess your company’s needs. This will help you answer the most important questions, which will also inform the project’s overall budget. Once you have decided on the type of software that will work best for your company, you can start to narrow down the providers by interviewing them and gathering feedback from other users. This step will give you a better understanding of how to use them and what your options are.  During the execution phase, you will start converting data and preparing for the transition to the new platform. This is a critical step in the process, and it involves preparing for various scenarios. One of the most challenging parts of a successful software roll-out is dealing with resistance from your staff members, especially if they’re already overwhelmed with a number of ongoing projects. Having people with varying levels of expertise can help manage this issue and keep the system running smoothly.  Some software tools may even be ready within a day if you are able to dedicate time to quickly adding in project details and tasks. Get a jumpstart on this before you even purchase your next tool by taking stock of all current project workflows.  Mapping out your organization's processes is an important step in the transition from an old to a new project management software. This will help you visualize how those processes operate and identify opportunities for improvement which can help you prevent or overcome them in the future.  Implementing a multi-project management tool also works best if you can get the senior and middle managers to buy in first. They may be more likely to adopt the software if they see its effectiveness first-hand. List the activities that your team deals with and identify the key processes that have the most impact on achieving goals and targets. How to manage multiple projects with Wrike Wrike is an effective tool for project coordination no matter how many active projects you have on at the same time. With Wrike’s multi-project dashboards, you can quickly go over your work schedule, review progress, and approve changes where needed. It’s also a useful space for reflecting on projects and tasks throughout their entire lifecycle.  But above all else, Wrike is the best tool for keeping track of the tasks that require the most effort. It does so by allowing you to rate the amount of work that each task requires. At the same time, you can keep up with all the details, such as deadlines and stakeholder approvals through detailed task descriptions.  Creating a step-by-step breakdown structure for your tasks is the easiest way to make them more efficient. That’s why Wrike offers an automated workflow system to help you create a copy of all your past tasks and trigger the next steps in real time. With Wrike, you can easily evaluate your progress and assign tasks to specific projects. This eliminates the need to wait for the projects to finish before getting a more detailed view into what else is going on.  This level of transparency holds employees accountable and provides greater visibility into vital project aspects that will cut down on miscommunications and unnecessary questions. Plus, Wrike allows managers to plan each project's goals and assign people to oversee the work so that everyone knows what's expected of them. This will make it easier to get done and reduce stress. And with Wrike's Report Builder, users can customize the data so that it only reviews the most important metrics with updates made in real time so you never miss a beat.  In conclusion Multi-project management is a process that can be easily used to jump-start various projects while keeping everything organized in one place. Having a solid foundation like the kind Wrike can provide will allow you to focus on what matters most instead of starting from scratch each time you begin, work on, or finish another project. Start Wrike’s free trial today to begin mastering the art of multi-project management. 

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7 Inventory Management Techniques to Optimize Your Inventories

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If you run a business that sells physical products, you know how important it is to keep track of your inventory. Inventory management is the process of planning, organizing, and controlling your stock levels to meet customer demand and avoid overstocking or running out of products. Inventory management techniques are the methods and tools you use to optimize your inventory management process.

In this blog post, we will explore some of the most effective inventory management techniques that can help you improve your business operations, reduce costs, and increase profits.

What is Inventory Management?

Inventory management is the process of keeping track of what you have, where it is, and how much it costs. It’s a crucial part of running a business, whether you sell physical products or services. Inventory management helps you optimize your cash flow, avoid stock outs or overstocking, and improve customer satisfaction.

There are different types of inventory, such as raw materials, work-in-progress, finished goods, and spare parts. Each type has its own challenges and requires different strategies to manage effectively.

Why is Inventory Management Important?

Poor inventory management affects your bottom line. It can lead to:

Overstocking: You waste money on storage costs, spoilage, and obsolescence.

Understocking: You lose sales and customers due to stockouts and delays.

Inaccuracies: You make wrong decisions based on unreliable data.

On the other hand, good inventory management can help you:

Reduce costs: You optimize your inventory levels and avoid unnecessary expenses.

Increase sales: You meet customer demand and offer faster delivery.

Improve quality: You ensure product availability and freshness.

Enhance productivity: You streamline your operations and reduce errors.

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Seven Essential Inventory Management Techniques

1. abc analysis.

This technique involves categorizing your inventory items based on their value and importance. The most valuable items are labeled as A, the moderately valuable items as B, and the least valuable items as C. Then, you allocate more resources and attention to the A items, less to the B items, and the least to the C items. This way, you can prioritize your inventory management efforts and optimize your cash flow.

2. EOQ Formula

This technique involves calculating the optimal order quantity for each item. The Economic Order Quantity (EOQ) formula considers the demand rate, the ordering cost, and the holding cost of each item. The goal is to minimize the total cost of ordering and holding inventory. The EOQ formula is:

EOQ = √(2 x D x S / H)

D = Annual demand in units

S = Ordering cost per order

H = Holding cost per unit per year

By using the EOQ formula, you can determine how much to order and when to order each item.

3. JIT Method

This technique involves ordering and receiving inventory just in time for production or sales. The JIT method reduces the need for storage space and eliminates the risk of overstocking or understocking. However, it requires accurate forecasting, reliable suppliers, and flexible production processes. The JIT method is suitable for businesses that deal with perishable or fast-moving items.

4. Cycle Counting

This technique involves counting a small portion of your inventory on a regular basis. For example, you can count 10% of your inventory every week until you cover the entire inventory in 10 weeks. Then, you repeat the cycle. Cycle counting helps you maintain accurate inventory records and identify any discrepancies or issues. It also reduces the disruption caused by annual physical counts.

FIFO stands for First In, First Out, and it’s a way of managing your inventory that makes sure you sell the oldest items first.

Why is this important? Well, imagine you’re running a grocery store and you have a bunch of bananas on your shelves. You don’t want to sell the ones that you just got from your supplier, because they’re fresh and have a longer shelf life. You want to sell the ones that have been sitting there for a while, because they’re more likely to go bad soon. That way, you reduce waste and increase customer satisfaction.

FIFO helps you do that by keeping track of when you received each batch of items and making sure you sell them in the same order. FIFO is also useful for accounting purposes, because it gives you a more accurate picture of your cost of goods sold and your profit margin. By using FIFO, you can match your sales revenue with the actual cost of the items you sold, rather than the cost of the items you bought most recently. This can help you avoid overestimating or underestimating your income and expenses.

LIFO stands for Last In, First Out. It’s a way of managing inventory that assumes that the last items you bought or produced are the first ones you sell. This means that the items left in your inventory are the oldest ones.

Why would you use LIFO? Well, one reason is to save on taxes. If the prices of your items are rising over time, then selling the newest ones first means that your cost of goods sold is higher, and your taxable income is lower, which is beneficial for your bottom line.

But LIFO also has some drawbacks. For one thing, it doesn’t reflect the actual flow of goods in most businesses. Usually, you sell the oldest items first, not the newest ones. That’s why LIFO is not allowed under some accounting standards, like IFRS. Another problem is that LIFO can distort your inventory value. If you have a lot of old items in your inventory that you bought at low prices, then your inventory value will be understated compared to the current market value. That can affect your balance sheet and your financial ratios.

LIFO is a method of inventory management that has some advantages and disadvantages. You should use it carefully and only if it makes sense for your business and your industry.

7. Inventory Management Software

This technique involves using a software system that automates and simplifies your inventory management tasks. Inventory management software can help you:

Track your inventory levels in real-time

Generate purchase orders and invoices

Manage multiple warehouses and locations

Integrate with other systems such as accounting, e-commerce, or CRM

Analyze your inventory performance and trends

Create reports and dashboards

Factors to Consider When Choosing the Right Inventory Management Technique for Your Business

Choosing the right inventory management technique for your business depends on several factors, such as:

Type and nature of your products: Are they perishable, seasonal, or fast-moving? Do they have a high or low turnover rate? Do they require special storage or handling conditions?

Size and complexity of your operations: How many locations, warehouses, or distribution centers do you have? How many suppliers and customers do you deal with? How much inventory do you need to keep on hand at each stage of the supply chain?

Level of demand and competition in your market: How predictable or volatile is your customer demand? How often do you need to replenish your stock? How do you balance the trade-off between stock availability and holding costs? How do you differentiate yourself from your competitors?

Goals and objectives of your business: What are your financial and operational targets? How do you measure your inventory performance and efficiency? How do you align your inventory strategy with your overall business strategy?

Tips for Effective Inventory Management

To make the most of your inventory management techniques, here are some tips that you can follow:

Set clear and realistic goals. For example, you can aim to reduce your inventory costs by 10%, increase your inventory turnover by 20%, or improve your customer satisfaction by 15%.

Review and update your inventory policies and procedures regularly For example, you can revise your reorder points, safety stock levels, or order quantities based on the changes in demand, supply, or market conditions.

Train and educate your staff on the importance and benefits of inventory management. You can educate employees on how inventory management affects the cash flow, profitability, and customer loyalty of your business.

Communicate and coordinate with your suppliers, customers, and other stakeholders. Share your inventory forecasts, orders, and feedback with your suppliers to ensure timely and accurate delivery. You can also inform your customers about your inventory availability, lead times, and delivery options to manage their expectations and satisfaction.

Measure and monitor your inventory performance and progress. Use key performance indicators (KPIs) such as inventory turnover ratio, days sales of inventory, gross margin return on investment, or fill rate to evaluate how well you are managing your inventory.

How Creately Helps You to Manage Inventory

You can use Creately to design your inventory layout, track your stock levels and visualize processes to figure out inefficiencies.

Create and inventory layout. You can draw a layout from scratch by dragging and dropping shapes from the library or choose a customizable template. You can customize the shapes with colors, labels, and icons.

Connect the shapes with lines to show the flow of your inventory. You can use different line styles and arrows to indicate the direction and type of movement. ta panel. You can enter information such as item name, quantity, price, and barcode and any other necessary attachments.

Use the filters and search functions to find and highlight specific items in your inventory. You can also sort and group your items by different criteria.

Share your inventory diagram with others by exporting your diagram as an image or PDF, or embed it on your website or blog.

Wrapping Up

Inventory management is a vital aspect of any business that deals with goods or materials. By applying the inventory management techniques discussed in this post, you can optimize your inventory levels, reduce your inventory costs, increase your sales, improve your quality, and enhance your productivity.

Join over thousands of organizations that use Creately to brainstorm, plan, analyze, and execute their projects successfully.

FAQs About Inventory Management

More related articles.

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Hansani has a background in journalism and marketing communications. She loves reading and writing about tech innovations. She enjoys writing poetry, travelling and photography.

Asset Inventory Management: Tools and Processes Explained

If someone asked you for a list of your company’s assets, how difficult would it be to provide it? What about the exact location, condition, and utilization of each asset? 

Organizations with a large number of physical assets can answer those questions only if they have the right asset inventory management system and process in place. Setting that up plays an important role in lowering your asset management cost and improving overall business productivity.

To get there, you first need to understand what asset inventory management entails and which tools you can use to streamline and optimize the process. 

The difference between asset management and inventory management

Asset inventory management is, in a sense, a lovechild of asset management and inventory management . So, to understand asset inventory management, we first need to explain the overarching concepts.

Here are necessary definitions to help us frame the discussion.

What is an asset? 

Assets are resources that a company uses to run its business: produce items or deliver a service. 

Most commonly, the word asset is used to refer to physical assets like machinery, vehicles, fixtures, computer equipment, furniture, and similar.

In a broader sense of the word, an asset can also mean intellectual property (like patents) and digital assets (like important documents, webinars, videos, whitepapers…).  

What is inventory?

The word inventory refers to a broad category of materials and items that are used to build a product, as well as for finished goods the company plans to sell. There many different types of inventory , the main categories being:

  • Raw materials and components (items that will be a part of the final product)
  • WIP (work-in-progress) inventory (semi-finished products; intermediate goods)
  • Finished goods (items the company plans to sell)
  • Maintenance, repair, and operations (MRO) inventory (supplies needed to perform maintenance work)

What is asset management?

Asset management refers to the set of tools and practices that are used to track, maintain, and repair company assets. It covers the whole asset lifecycle, from procurement to disposal.

The main goals of asset management are:

  • Keeping track of the company’s assets
  • Keeping assets in peek operational condition to reduce the chance for unexpected breakdowns and extend asset lifespan
  • To streamline all maintenance work (be it reactive or proactive)

Good asset management will always lead to improved asset performance, fewer safety incidents, improved business productivity, and most importantly, lower operating costs .

What is inventory management?

Inventory management encompasses tools and practices used to manage your inventory. It includes actions like buying, storing, and tracking inventory. It also keeps an eye on the inventory stock and production demand in an effort to make accurate inventory forecasts for upcoming months. 

Poor inventory management practices lead to overstocking and under stocking, lost items, problems with vendors and suppliers, and different productivity issues , all of which can negatively affect your bottom line.

An important subsection of inventory management is spare parts inventory management . It is used to forecast, purchase, store, and track MRO inventory. MRO items have a special section because they are the only type of inventory that doesn’t end up being part of the final product . Instead, those are items used to maintain and repair company assets (consumables like adhesives and welding rods, janitorial supplies, office supplies, replacement parts for different assets…).

The purpose of asset inventory management

As its name suggests, asset inventory is concerned with having an up-to-date inventory of your company’s assets. 

what is asset inventory management

  • Create a central repository of all assets the company wants to track
  • Track the physical location of the company’s assets (especially important for assets that are used at different locations like transportation and construction equipment) 
  • Track the utilization of assets (time of asset in use vs idle time )
  • Track asset performance
  • Track the condition of the asset (often done by looking at the maintenance history of the asset in question)
  • Track the asset through its lifecycle (so accounting can properly depreciate fixed assets over time and so that managers can plan for upgrades or disposal and purchasing of replacement assets)

Naturally, you can’t apply all of these elements to every single asset. You are not going to measure the performance of your furniture or track if your building ventilation system walked over to a different location.

It is up to the organization to decide which metrics they want to track for different assets.

The role of asset tracking in asset inventory management

Asset tracking utilizes electronic tags to track an asset’s current location, user, condition, and storage location. 

There are multiple ways to track assets:

  • Scannable barcode labels
  • Bluetooth Low Energy (BLE)

Each asset needs to have a unique asset ID so we do not leave any room for interpretation and confusion when having multiple assets of the same type. For similar reasons, it is a good idea to have a central repository of your assets with accompanying asset logs. 

Those logs are particularly useful to track the movement of assets that use barcode labels. They record when was the asset moved last time and who moved it (who is the current user of the asset). In other words, you can track chain-of-custody for items that are often moved around.

More advanced tracking methods like GPS track the asset location in real-time. Nonetheless, asset logs are still very helpful as they track maintenance history and cost associated with each asset.

Having an asset tracking system in place significantly reduces the chance that an important item gets stolen or misplaced. Moreover, the data system generates can be used to calculate asset depreciation (and for other financial purposes).

The benefits of using an asset inventory management system

Implementing an asset inventory management system (sometimes abbreviated as AIM) helps you build a central repository of your assets. The ability to do that is beneficial in more ways than one.

1) Improved productivity

Knowing the location of every asset, its condition, and how much it is utilized, can boost productivity on many different levels.

By knowing where the asset is, employees do not need to waste time tracking down its location.

By knowing its condition, you eliminate the chance that an employee will waste time preparing for a certain process, only to find out that the asset is broken, partially functional, or shut down for maintenance work. 

By tracking asset utilization and performance, the organization can plan for upgrades or the purchase of new assets in a way that matches their needs. Moreover, it helps the company keep an optimal level of asset inventory.

2) Lower operational costs

Assets are necessary for performing business activities. If an asset ends up stolen or misplaced, the company has to purchase replacements, increasing its operational costs. Up-to-date asset inventory combined with asset tracking prevents that from happening.   

Additionally, having a digital asset inventory management system removes the need for manual data entry, eliminates administrative work, and lessens the need for tedious asset inventory checks. The end result is lower labor and operational costs.  

3) The ability to estimate asset value

Assets that are regularly used lose their value over time. This is why accounting depreciates assets . 

If you want to accurately depreciate asset value, you need to know the original asset value for the organization, at which stage of the lifecycle it is now, and how much it is being used. This will give you a good idea of how fast the asset will deteriorate. All of this data can be found in an AIM system if its database is kept up-to-date.

The records can be cross-referenced with the company’s EAM/CMMS system for even greater insight. After all, detailed asset logs and maintenance history is the best way to find out the condition of the asset and estimate its remaining useful life.

At some point, an asset will become a burden. In other words, the value it brings to the organization will be lower than the amount of resources you have to spend to keep it operational. Asset inventory management helps you realize when you’ve crossed that point –  and helps you plan for new asset purchases. 

4) Less hassle coordinating maintenance work

Scheduling maintenance work for broken assets is much simpler than scheduling routine maintenance work . It is for one simple reason – broken assets are not in use.

When a maintenance supervisor needs to schedule planned downtime for assets that are operational, they can’t do that on a whim. It doesn’t matter if we are talking about reinstalling windows on an office PC or shutting down the conveyor belt for a monthly inspection. They have to know when the assets will be free to not disrupt operational activities or mess with the production schedule. For complex assets and machinery on the plant floor, predictive maintenance technology can help plan maintenance activities in advance.

Knowing “when” to schedule maintenance is important, but so is “where”. Many assets are used by different people at different locations. Vehicles and computer equipment are the first that come to mind. Maintenance technicians need to know the location of the asset they are supposed to work on. 

Free Essential Guide to CMMS

Discover everything you need to know about CMMS in this comprehensive guide. Begin your maintenance journey now!

assignment inventory management

5) Informing future purchases

Having a pulse on your asset inventory is essential for optimizing your procurement process and for planning new purchases. 

For example, let’s say you have 20 laptops available for your workforce. If asset utilization is tracked properly, you know that 15 laptops are used regularly and 3 are used occasionally. If you hire a new employee, you know right away that there is no need to purchase additional computer equipment.

Similarly, you might have a bunch of assets of the same type, but from different vendors. This is an opportunity to compare asset performance and maintenance costs. Knowing which vendor offers better value is useful information to have before your next purchase.

What to look for in an asset inventory management software

To answer this question, you first need to understand your asset management needs.

How many assets do you have? Do you want to track and manage industrial assets, office equipment, or both? Do you want to focus on asset inventory tracking or do you need software that can also help you schedule routine maintenance and manage maintenance tickets ?

Discuss which asset management problems do you want to solve with the software (lost items, frequent equipment breakdowns, high operational costs…). With that, it is going to be much easier to make a list of your must-have features.

Keep in mind that asset inventory management doesn’t really come as a standalone solution. It is often a part of larger asset management solutions like CMMS or EAM or facilities management software. These solutions can be roughly divided into three groups. The first group offers robust asset maintenance and asset tracking features. The second group is focused on asset tracking and offers barebone asset maintenance features. The third group is focused on asset maintenance and offers limited asset tracking features. A detailed review of available features should precede any buying decisions.

Here are some general software characteristics you should look for:

  • Cloud-based solution so you only need an internet connection to access the database which can be updated in real-time
  • Mobile-enabled solution so you can use the system on any mobile device
  • Solution with appropriate asset tracking capabilities (barcodes, GPS, or RFID, depending on the needs of your organization)
  • Tool with appropriate integration capabilities (in case you need to connect it with your ERP software, financial software, etc.)
  • Solution with appropriate asset management functionality (maintenance history, ticketing system, work order management , based on your maintenance needs)
  • Solution that is configurable (so that you can decide things you want and do not want to track and have the ability to create customizable fields, KPIs, and reports)

It is really important that your asset management software is intuitive and easy to use. Many solutions will match your feature requirements on paper, but not in practice. It is really important to try them out first and see how the features are implemented. If the software is buggy, slow, or hard to figure out, it’s not worth the trouble.

This is why we always suggest businesses to make a shortlist of potential solutions, talk with vendors about available features, and take a free trial for a hands-on test. We have a whole guide on how to choose the right asset management software for your organization if you’re interested in learning more about the proper selection process.

When reviewing asset management solutions, always take a closer look at their pricing plans. They often have limitations on the number of users and/or assets you can add to the database. If you need to enter an unusually large number of assets or users, a lot of software vendors will be open to creating a custom monthly/yearly plan.

Using Limble CMMS to track and manage your assets

Limble CMMS offers many prime features you would find in enterprise asset management software . As such, Limble can be used to answer many of your asset inventory management needs. 

Let’s take a quick look at features you might find very useful.

1) Centralized asset card Having all asset information in one place is very important if you want to stay organized. A centralized asset card is the best way to find any info about your asset. You can view all asset information you defined (make, model, manuals, warranty, location…), detailed maintenance history,  and reports.

Centralized asset management

Additionally, Limble users can use barcodes for easy asset identification . It is often used by maintenance technicians in the field to quickly access asset logs. They can just scan the barcode with the mobile device and Limble will automatically open the asset card for that particular asset.

3) Unlimited custom fields Different businesses use different assets and have different tracking needs. Limble allows you to create an unlimited number of custom fields and track only what you want to track. Location, make, model, manuals, pictures, mileage, hours run, meter readings, and any other information that is important to your company.

4) Organizing assets into a parent-child hierarchy When you have a bunch of assets spread around different locations, it can be very useful to organize those assets in a parent-to-child hierarchy. This provides a neat visual overview of your assets and how they are organized inside your facility. Moreover, it helps you generate custom reports like “show me all assets that are children of asset X”.

I was looking for proper asset management software with locations, assets, sub-assets, components and not just a maintenance management software. I stumbled upon Limble and honestly I was pleasantly shocked. I like everything… I love the interface… I love the ease of use… I love being able to see my full factory in one place. A small yet very valuable thing which Limble does and which I did not find in any other software is that you can choose the generality of statistics that you want. If I want statistics on Asset level 1 I can get that. If I want statistics on Asset level 5 I can get it with just one click. – Mohammad Hassaan Akram, Factory & Maintenance Manager, Unilever

If this sounds like something you’re searching for, don’t hesitate to:

  • SCHEDULE A DEMO : Contact us and someone on our team will give you a walkthrough and get you familiar with all of the major features.
  • TRY SIMULATED SELF DEMO : Clicking on this button will refresh your browser tab and load a simulated test environment where you check how Limble works at your own pace.
  • or START A FREE TRIAL : You can sign-up for a free 30-day trial to evaluate if Limble CMMS is a good fit for your organization.

Best practices for managing asset inventory

Before we wrap this up, we should discuss best practices you can apply at any organization to stay on top of your asset inventory . 

Implementing software won’t’ be one of the points. It should be clear by now that this is the best way to manage large and expensive asset inventory.

Start with clean data

To build a strong asset management strategy, we need a stable foundation based on accurate data. 

The first step should be making a list of all assets you want to track and which metrics you want to track for each type of asset. After that, the asset list and respective asset details can be imported into your software of choice. 

If you’re already using a digital system to track assets, the first step can be to make an asset audit and ensure that the database is accurate and up-to-date.

The goal of both scenarios is to clean up your data:

  • Ensuring you do not have missing items and duplicate entries
  • Defining data entry standards (naming conventions, compulsory fields, appropriate data formats…)  

Set up clear operating procedures

Your database will not be accurate for long if people do not follow set operating procedures when interacting with your assets. There should be clear guidelines defined for things like:

  • Procedures and policies for new asset acquisitions
  • How to update asset inventory database (adding new assets or archiving those that were lost/disposed of)
  • Procedure for taking the asset out of storage
  • Procedure for returning the asset back to storage
  • How to leave comments/notifications and update asset logs (if your asset inventory management system allows that in the first place)
  • Procedure for updating the system when an asset changes its current user (exchanges hands)

Many of those will be very simple procedures, but it is important that EVERYBODY follows them. Part of that effort is to provide the necessary training. Even if it is from something basic like how to handle a barcode scanner.   

There will always be border scenarios that aren’t covered by standard operating procedures. You should have a known person in charge people can contact to solve specific problems.

Set up automated reports and periodic audits

If you’re using asset management/asset tracking software, use the available reports. Most modern solutions give you the ability to set up automated reports to track important metrics and KPIs . If there is a problem, check asset logs for additional details.

To ensure the database is accurate and up-to-date, set up periodic auditing. If there are significant discrepancies, try to pinpoint the cause of the problem. If needed, update operating procedures and communicate the changes to all relevant parties.

Follow best inventory and asset management practices

Being good at inventory management requires the understanding of basic inventory principles like lead times, safety stock, reorder points, turnover rate, and similar. Learning best practices for managing inventory can inform your asset inventory management strategy.

Knowing where your assets are and how they are utilized is great, but it doesn’t mean much if they’re constantly breaking down and are not able to fulfill their purpose. After all, one of the goals of asset inventory management is to make sure that assets are ready and available when workers need them.

Applying best asset management practices ( like preventive maintenance ) prolongs asset lifespan and reduces the number of operational issues. This leads to lower asset turnover, more automated workflows, and lower operational costs. Ultimately, it results in a smoother asset inventory management process.

Staying on top of asset inventory gets exponentially harder as the number of assets grows. Enterprises have no other option but to implement asset management and asset tracking solutions to control their assets and their inventory.

If you want to learn more about Limble CMMS and how it can help manage your asset inventory, let us know what you’re looking for and we’ll be glad to share more details with you.

Pls provide asset inventory strategies for non stick, non profit educational institutions thanks

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Creating a Database Model for an Inventory Management System

assignment inventory management

Lisandro is a Database Architect from Rosario, Argentina. With almost 20 years of experience in Oracle and SQL Server, among other database engines, he currently works as Sr. Data Engineer on OZ Digital Consulting. He is also a member of both the Oracle ACE program and the Argentina Oracle User Group. In his free time, he enjoys watching his soccer team (Rosario Central) with his two sons.

  • database design
  • example ER diagram

In this article, we’ll use the Vertabelo online data modeler to design a data model for an inventory management system.

Do you need to create and implement a database for an inventory management system? In this article, we’ll walk you through a generic inventory management system database model. No two  organizations are the same; they all have their unique requirements and needs. So, this database design may require adjustments or modifications based on your own organization requirements, preferred inventory counting method, and your local legal or industry regulations.

To build our entity-relationship diagram, we’ll use the Vertabelo  online data modeling tool. Vertabelo allows database architects and developers to design and implement a database model, starting with a conceptual or logical data model and converting it into a physical model. It will also automatically create all the required SQL scripts to implement your design in a physical database. If you want to learn more about ER diagrams, read What Is an ER Diagram? and What Are Conceptual, Logical, and Physical Data Models? .

Inventory Management System Requirements

The most important feature of any inventory management system is to provide up-to-date information about inventory levels. This allows organizations to reduce costs (by minimizing overstocking) while maintaining customer satisfaction by ensuring prompt deliveries and reducing out of stock situations.

To achieve this, the system must track both existing inventory levels and all operations that affect them, like purchase orders sent to providers and customers’ delivery orders. This will become clear as we go on. Let’s review the different entities involved, their attributes, and their relationships. We’ll start by creating and filling a logical data model. You can learn how easy it is to create a database model on Vertabelo in Create an Online Data Model in 4 Steps .

Creating an Empty Model

Creating a new logical data model in Vertabelo can be done in three simple steps:

data model for inventory management system

Adding Inventory Management System Entities

Next, let’s add the entities in our system. Entities are added by clicking on the “Add new entity” button in the model toolbar:

data model for inventory management system

A database model for inventory management system should have the following entities:

Products are the starting point for designing our system. Each industry or business line will have different product attributes (e.g. clothes have material, size, and color, while cars have color, trim level, engine type, etc.). In this article, we’ll focus on those attributes required to create our database model rather than specific attributes required for sales or other activities.

We can group product attributes into two subsets: generic attributes and storage attributes. Let’s start with the generic attributes for the Product entity:

  • ProductID : This will be a unique ID number and the primary identifier (later the surrogate primary key ) of the entity. We will use an INTEGER If you want to learn more about primary identifiers and additional identifiers (which become unique keys), read the article What Is a Primary Key? .
  • ProductCode : Besides the ProductID , products are usually identified by an internal code (also called an SKU or Stock Keeping Unit). This code consists of letters and numbers that identify characteristics about each product, such as manufacturer, brand, style, color, and size. This is also an additional identifier. We will use a VARCHAR(100) datatype for this attribute.
  • Barcode : This external product code (also known as the UPC or Universal Product Code) is standardized for universal use by any company. We will use a VARCHAR(100) datatype.
  • ProductName : The product’s n We will use a VARCHAR(100) datatype.
  • ProductDescription : A more detailed description of the product. We will use a VARCHAR(2000) datatype.
  • ProductCategory : The product’s category. We will use a VARCHAR(100) datatype.
  • ReorderQuantity : Some products cannot be ordered by units; you need to purchase them in packages or We will use the INTEGER datatype.

Note : ProductCategory could (and should) be normalized (stored in a separate entity). To keep the model simple, we are using a denormalized version. To learn about normalization in database models, take a look at the article Normalization in Relational Databases .

Let’s finish the review with the storage attributes for the Product entity; these determine how to store the products. Some examples are:

  • PackedWeight : Product’s weight, including packaging. This may be required to define storage location. We will use the DECIMAL(10,2)
  • PackedHeight : Product’s height, including packaging. This may be required to define storage location. We will use the DECIMAL(10,2)
  • PackedWidth : Product’s width, including packaging. This may be required to define storage location. We will use the DECIMAL(10,2)
  • PackedDepth : Product’s depth, including packaging. This may be required to define storage location. We will use the DECIMAL(10,2)
  • Refrigerated : Indicates if the product requires refrigeration. We will use a BOOLEAN

This entity has the information related to places where inventory is located. Many organizations have several locations, and each location includes one or more warehouses with different features. Location attributes are:

  • LocationID : This will be a unique ID number and the primary identifier (later the surrogate primary key) of the entity. We will use an INTEGER datatype.
  • LocationName : The name of the location. We will use a VARCHAR(100) datatype.
  • LocationAddress : The full address of the location. We will use a VARCHAR(200) datatype.

Note : Location addresses could (and should) be normalized into several attributes (e.g. Address, City, PostalCode) and tables (PostalCodes, Cities, States, and Countries). To keep the model simple, we are using a denormalized version.

This entity represents the actual storage area inside a Location . It has the following basic attributes:

  • WarehouseID : This will be a unique ID number and primary identifier (later the surrogate primary key) of the entity. We will use an INTEGER datatype.
  • WarehouseName : The name of the w We will use a VARCHAR(100) datatype.
  • IsRefrigerated : This attribute indicates if the warehouse has refrigeration. We will use a BOOLEAN data type.

Note #1 : Each Warehouse is related to a Location . We will see how to create those relationships later in this article.

Note #2 : Additional attributes (like the dimensions and capacity of each warehouse) may be added if required.

This entity represents the relationship between products and warehouses. Each product may exist in several Warehouses, and each warehouse may contain many different products. Besides the relationship, we need to store additional data (like the quantity of that product available), so we are going to create an entity that represents this relationship. The basic attributes are:

  • InventoryID : This will be a unique ID number and the primary identifier (later the surrogate primary key) of the entity. We will use an INTEGER datatype.
  • QuantityAvailable : The quantity on hand for that We will use an INTEGER datatype.
  • MinimumStockLevel : The minimum number of units required to ensure no shortages occur at this warehouse. We will use an INTEGER
  • MaximumStockLevel : The maximum number of units desired in stock, i.e. to avoid overstocking. We will use an INTEGER
  • ReorderPoint : When the number of product units reaches this level, a purchase order must be generated. This threshold is somewhere between the minimum and maximum levels and should take into account the time between sending a purchase order and the new products’ arrival to avoid getting under the MinimumStockLevel . We will use an INTEGER

Note #1 : Each Inventory is related to a Warehouse and a Product . We will see how to create those relationships later in this article.

Note #2 : MinimumStockLevel , MaximumStockLevel , and ReorderPoint can be defined at the Product or Warehouse level (as we decided here), depending on requirements.

Note #3 : Depending on the size of the warehouses and the diversity of their products, additional information for locating the product in the warehouse may be required (like sector, row, shelf, etc.).

Organizations purchase products from providers, so we need to store some basic information about these providers. We will focus only on those attributes required for inventory management:

  • ProviderID : This will be a unique ID number and the primary identifier (later the surrogate primary key) of the entity. We will use an INTEGER datatype.
  • ProviderName : The provider’s We will use a VARCHAR(100) datatype.
  • ProviderAddress : The provider’s full We will use a VARCHAR(200) datatype.

Note : Provider addresses could (and should) be normalized into several attributes, as we explained for location addresses.

Order & OrderDetail

When companies purchase products from a provider, they include information about the places (warehouses) where the products will be stored and quantities that need to be delivered. This information is stored in the following two entities.

  • OrderID : This will be a unique ID number and the primary identifier (later the surrogate primary key) of the entity. We will use an INTEGER datatype.
  • OrderDate : This is the date when the order was generated.

OrderDetail

  • OrderDetailID : This will be a unique ID number and the primary identifier (later the surrogate primary key) of the entity. We will use an INTEGER datatype.
  • OrderQuantity : The amount of a specific product ordered for a specific w We will use an INTEGER datatype.
  • ExpectedDate : The date when the products should arrive at the w We will use a DATE datatype.
  • ActualDate : The date when the products were received by the w We will use a DATE datatype.

Note #1 : Each Order is related to a Provider and may include several OrderDetail s. Each of them represents the expected quantity of a Product in a Warehouse . We will see how to create those relationships later in this article.

Note #2 : We are focusing only on inventory information. We are not considering other details like price, taxes, etc.

Organizations sell products to their customers, so we need to store some basic information about customers. As with Provider , we will focus only on those attributes required for inventory management:

  • CustomerID : This will be a unique ID number and the primary identifier (later the surrogate primary key) of the entity. We will use an INTEGER datatype.
  • CustomerName : The customer’s We will use a VARCHAR(100) datatype.
  • CustomerAddress : The customer’s full address. We will use a VARCHAR(200) datatype. As with other addresses we’ve presented, this could (and should) be normalized into several attributes.

Delivery & DeliveryDetail

Once we sell products to a customer, the inventory management system generates a delivery request. It may include different products from different warehouses, depending on products’ availability and warehouses’ proximity to the customer’s address. This information is stored in the following two entities.

  • DeliveryID : This will be a unique ID number and the primary identifier (later the surrogate primary key) of the entity. We will use an INTEGER datatype.
  • SalesDate : This is the date when the sale was made and the delivery request was generated.

DeliveryDetail

  • DeliveryDetailID : This will be a unique ID number and the primary identifier (later the surrogate primary key) of the entity. We will use an INTEGER datatype.
  • DeliveryQuantity : The amount of a specific product to be delivered from a specific w We will use an INTEGER datatype.
  • ExpectedDate : This is the date when the products should arrive at the customer’s address. We will use a DATE datatype.
  • ActualDate : This is the date when the products were delivered. We will use a DATE datatype.

Note #1 : Each Delivery request is related to a Customer and may include several DeliveryDetail s. Each of them represents the expected quantity of a Product to be sent from each Warehouse . We will see how to create those relationships later in this article.

There are situations when some products need to be transferred from one warehouse to another. This kind of operation is registered as a Transfer with the following attributes:

  • TransferID : This will be a unique ID number and the primary identifier (later the surrogate primary key) of the entity. We will use an INTEGER datatype.
  • TransferQuantity : How much of a specific Product has been transferred from one warehouse to another w We will use an INTEGER datatype.
  • SentDate : This is the date when the products left the source w We will use a DATE datatype.
  • ReceivedDate : This is the date when the products arrived at the target w We will use a DATE datatype. This attribute will accept NULLs, since this piece of information is not available at the moment the transfer is generated.

And now we have finished defining all the entities involved, as shown in the following diagram:

data model for inventory management system

Relationships Between Entities

Defining the entities is just a part of creating a data model; it is not complete until we identify how those entities are related. Let’s analyze the relationships one by one:

Provider – Order

Each Order in our system is assigned to a Provider , but not all providers may have orders. We need to establish a 1:N (one-to-many) relationship between the two tables, with N being 0, 1, or more.

To achieve this in Vertabelo, we need to select the Add 1:N Relationship button:

data model for inventory management system

Then we click on the Provider entity, and – keeping the mouse button pressed – move the mouse over the Order entity and release the button. The two entities are now related:

data model for inventory management system

If we click on the relationship (the line in the diagram) we can see the Relationship Properties panel on the right side of the screen. This is where we can define the type (one-to-one (1:1), one-to-many(1:N)) and cardinality of the relationship , as shown below:

data model for inventory management system

Selecting “Mandatory” on the Provider side means that each Order must have a Provider assigned.

Order – OrderDetail

This is a classic 1:N relationship between two entities, with N being 1 or more since there cannot be orders without at least one OrderDetail .

Customer – Delivery

Each Delivery in our system is assigned to a Customer , but not all customers may have deliveries. We need to establish a 1:N relationship between the two tables where N is 0, 1, or more.

Delivery – DeliveryDetail

Another example of a classic 1:N relationship. Each Delivery must have at least one DeliveryDetail , and each detail belongs to one and only one Delivery .

Location – Warehouse

Each Location can have one or more Warehouse s, so we need to define this as a 1:N relationship. Both sides are mandatory, since it is illogical to have a Location without a Warehouse and vice versa.

Product – OrderDetail

This is a 1:N relationship, where each OrderDetail must have an associated Product and each Product may be included in 0, 1, or many Orders .

Product – DeliveryDetail

This is a 1:N relationship, where each DeliveryDetail must have an associated Product and each Product may be included in 0, 1, or many DeliveryDetail s.

Warehouse – OrderDetail

Another 1:N relationship, where each OrderDetail is associated with a Warehouse and each Warehouse can have 0, 1, or many OrderDetail s.

Warehouse – DeliveryDetail

Another 1:N relationship, where each DeliveryDetail is associated with a Warehouse , and each Warehouse can have 0, 1, or many DeliveryDetail s.

Product – Inventory

This is a 1:N relationship, since each Product may have stock in 0, 1 or many warehouses, represented here as Inventory . We need to remember that Inventory is an intermediate entity created to resolve a many-to-many relationship between Products and Warehouses .

Warehouse – Inventory.

This is a 1:N relationship, since each Warehouse may store 0, 1, or many products (represented here as Inventory ).

Product – Transfer

This is another 1:N relationship, since each Product may appear in 0, 1, or many transfers, and each Transfer consists of one and only one Product .

Warehouse – Transfer

This is a tricky relationship, since there are actually two relationships between these two entities. Each Transfer is related to:

  • A “source” Warehouse . This is the warehouse where the products were originally
  • A “destination” Warehouse . This is the warehouse where the products are being transferred.

In this case, we need to create two 1:N relationships between the entities.

Our Final Model

Now that we have completed all the relationships, we have the final database model for an Inventory Management System:

data model for inventory management system

Database Design Next Steps

In this article, we created an ER diagram for an inventory management system. Using Vertabelo, we can easily transform it to a physical model (which includes database-specific information) and then automatically generate the DDL script to build the database. You can learn about these two processes in the following articles:

  • How to Generate a Physical Diagram from a Logical Diagram in Vertabelo
  • How to Generate a SQL DDL Script in Vertabelo

If you have found this article useful but need to create a data model for other business requirements, check out here to Find Database Schema Examples or search for other solutions across all the example ER diagram walkthroughs available in this blog!

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Er diagram for a movie database, best database schema diagram tools, top 11 best practices for database design.

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Inventory Management

Inventory is defined as a stock or store of goods. The term inventory refers to the goods or materials used by a firm for the purpose of production and sale. It is the management of inventory and stock. It also includes the items, which are used as support materials to facilitate production. 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.

There are three basic types of inventory: raw materials, work-in-progress and finished goods. Raw materials are the items purchased by firms for use in the production of the finished product. Work-in-progress consists of all items currently in the process of production. As an element of supply chain management, inventory management includes aspects such as controlling and overseeing ordering inventory, storage of inventory, and controlling the amount of product for sale. These are actually partly manufactured products. Finished goods consist of those items, which have already been produced but not yet sold. In inventory management, goods are delivered into the receiving area of a warehouse in the form of raw materials or components and are put into stock areas or shelves.

Inventory Management refers to the process of ordering, storing and using a company’s inventory: raw materials, components, and finished products. Inventory constitutes one of the important items of current assets, which permits smooth operation of production and sale process of a firm. The goal of inventory management is to minimize the cost of holding inventory by helping business owners know when it’s time to replenish products or buy more materials to manufacture them. Inventory management is that aspect of current assets management, which is concerned with maintaining optimum investment in inventory and applying effective control system so as to minimize the total inventory cost. So staying on top of ordering, forecasting and storage are key parts of good quality inventory management.

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Assignment of Reference Data Sets to Reference Objects

You can assign the reference data sets to reference objects using the Manage Reference Data Set Assignments page. For multiple assignments, you can classify different types of reference data sets into groups and assign them to the reference entity objects.

The assignment takes into consideration the determinant type, determinant, and reference group, if any.

Determinant Types

The partitioned reference data is shared using a business context setting called the determinant type. A determinant type is the point of reference used in the data assignment process. The following table lists the determinant types used in the reference data assignment.

Determinant

The determinant (also called determinant value) is a value that corresponds to the selected determinant type. The determinant is one of the criteria for selecting the appropriate reference data set.

Reference Groups

A transactional entity may have multiple reference entities (generally considered to be setup data). However, all reference entities are treated alike because of similarity in implementing business policies and legal rules. Such reference entities in your application are grouped into logical units called reference groups. For example, all tables and views that define Sales Order Type details might be a part of the same reference group. Reference groups are predefined in the reference groups table.

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