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Inventory management is the supervision of noncapitalized assets -- or inventory -- and stock items. As a component of supply chain management, inventory management supervises the flow of goods from manufacturers to warehouses and from these facilities to point of sale. A key function of inventory management is to keep a detailed record of each new or returned product as it enters or leaves a warehouse or point of sale.
Organizations from small to large businesses can make use of inventory management to track their flow of goods. There are numerous inventory management techniques, and using the right one can lead to providing the correct goods at the correct amount, place and time.
Inventory control is a separate area of inventory management that is concerned with minimizing the total cost of inventory, while maximizing the ability to provide customers with products in a timely manner. In some countries, the two terms are used synonymously.
Why is inventory management important?
Effective inventory management enables businesses to balance the amount of inventory they have coming in and going out. The better a business controls its inventory, the more money it can save in business operations.
A business that has too much stock has overstock. Overstocked businesses have money tied up in inventory, limiting cash flow and potentially creating a budget deficit. This overstocked inventory, which is also called dead stock, will often sit in storage, unable to be sold, and eat into a business's profit margin.
But if a business doesn't have enough inventory, it can negatively affect customer service. Lack of inventory means that a business may lose sales. Telling customers they don't have something, and continually backordering items, can cause customers to take their business elsewhere.
An inventory management system can help businesses strike the balance between being under- and overstocked for optimal efficiency and profitability.