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Inventory management is the process of overseeing and controlling a business’ inventory (stock) of goods and materials. It involves balancing the need to have products available for sale or production while minimising the costs associated with holding excess inventory such as expiration, tie down of funds, breakages, pilferages, etc.

Not too long ago, a family member was using a specific product at home, which I decided to try. “This is excessively sweet,” I remarked. Suddenly, everyone’s attention was focused on me, as if questioning when I had last used the product myself. This prompted us to inspect the product together. To our surprise, we discovered that the product had expired over three (3) months ago. One of the consequences of selling expired products is the erosion of trust among your customers and consumers. This not only leads to an immediate loss of revenue but also jeopardizes long-term business prospects.

Effective inventory management is crucial for businesses of all sizes, as it can impact profitability, customer satisfaction, and overall operational efficiency. Here are some key aspects and strategies for managing inventory:

Inventory Classification: Inventory can be classified into different categories based on their importance and demand. The most common classification method is ABC analysis, which categorises items into three groups:

A items: High-value and high-demand items that require close monitoring.
B items: Medium-value and medium-demand items that need regular attention.
C items: Low-value and low-demand items that require less frequent monitoring.

Inventory Tracking: Implement a robust inventory tracking system to monitor stock levels in real-time. Barcode scanning, RFID, or manual tracking methods can be used to keep accurate records of items coming in and going out. Inventory management software can be used as well.

Reorder Points and Safety Stock: Establish reorder points for each item in your inventory. When the stock level reaches this point, it triggers a reorder to replenish supplies. Safety stock is an extra buffer to account for unexpected fluctuations in demand or lead times. Lead time is the period of time that it takes for goods to be delivered after someone has ordered them.

Supplier Relationships: Build strong relationships with suppliers to negotiate favourable terms, such as lower prices, shorter lead times, and reliable delivery schedules. This can help in reducing carrying costs and ensuring a steady supply of goods. Carrying costs are the various costs a business pays for holding inventory in stock.

FIFO and LIFO: Choose an appropriate method for valuing your inventory, such as First-In-First-Out (FIFO) or Last-In-First-Out (LIFO), based on your business needs and tax considerations.

Regular Audits: Conduct regular physical audits to verify the accuracy of your inventory records. This helps identify and rectify discrepancies. Audit is simply the examination of records.

Continuous Improvement: Continuously analyze your inventory management processes and make improvements based on data and feedback. This will help you to easily calculate inventory turnover rate (how quickly your inventory is being sold), spot obsolete/expired inventory and source goods from multiple suppliers to reduce the risk of disruptions in the supply chain (supplier diversification).

Effective inventory management requires a balance between having enough inventory to meet customer demand and avoiding excess inventory that ties up capital and storage space. It is an ongoing process that should be continually reviewed and adjusted to adapt to changing market conditions and business needs.

Post Author: Chukwuemeka Ayogu

Chukwuemeka Ayogu is the founder and Lead Consultant at Countsystem, a service provider in accounting sector in Nigeria, bsiness systems and controller services. He is an Accountant Partner of Accounteer, a cloud based accounting software. He is an experienced service provider with diverse working experiences. He has worked in customer service at Regional Business Unit Nigerian Breweries Plc, Customer Service Representative at Diamond Bank Plc, Principal Partner at Prudential Auditors & Consultants, State manager at Chijgz Resources International and more.

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