A Complete Guide To Inventory Management
                     A Complete Guide To Inventory Management
https://www.imprezz.in/ | Imprezz
Inventory is the lifeline of every business which helps in the smooth 
functioning of business and meet the need of customers. The 
effective management of your inventory determines the 
success of your business. 
The importance of managing your inventory should be a primary 
objective to overcome the gap between supply and demand. Any 
laxness in terms of inventory management puts the risk of either 
overstocking or understocking – contributing to increased holding 
cost.
In this guide, we help you understand everything about inventory 
management with relevant information necessary for your business.
What is Inventory Management?
Inventory management is a process where you track your inventory and stock in 
and out of the warehouse. The objective of tracking your inventory is to 
understand the total inventory at a given time and what are the levels of your 
inventory.  Earlier companies were dependent on the traditional pen-paper 
approach to track their inventory, but, with the rising complexities, companies 
have adopted various inventory management software.
If companies don’t manage their inventory, it might be difficult for them to predict 
whether the existing level of inventory will meet the demand in the future or not. 
Consequently, the companies might see a fluctuating level of inventory – 
sometimes below the desired level and sometimes more than required. Hence 
companies should adopt a stringent inventory management practice.
What is Inventory?
The term inventory is used multiple times in this blog. What actually 
accounts for inventory – Raw materials, finished goods, or stock for the 
purpose of selling? Inventory is basically goods that a company handles with 
the objective of selling which might include raw materials acquired to 
manufacture goods or the final product from which various constituents are 
extracted. It might even include intangible items like software, patents, 
trademarks, and copyrights.
Different types of Inventory
Inventory can be classified further based on their end-use. Let’s understand 
the different categories of inventory:
 Raw Material: This includes inventory that is used to make the finished 
product.
 Work-in-progress: Inventory that is unfinished and is in the process of 
manufacturing.
 Finished goods/Goods for sale: This includes the final product which is 
ready to be consumed by the end-user.
 MRO Inventory: Manufacturing, Repair, and Operating inventory that 
helps in the manufacturing process.
 Safety Stock: The inventory that is stored in the warehouse to meet the 
supply shortages and increased demand during the uncertainties.
Key Stages of 
Inventory 
Management Process
The inventory 
management process 
starts right from the 
beginning when the 
stock moves from your 
suppliers to the 
warehouse. The 
companies keep a track 
of their inventory 
management process at 
five stages.
Purchasing 
It means tracking inventory when it is purchased as a raw material to turn into 
products or sell with no further processing required.
Production
Not all companies are involved in the production stage. Some companies make 
finished products from raw materials or constituents, hence it is important to track 
the inventory at this stage.
Holding Stock
It constitutes the raw material stored before it is used in the manufacturing process 
or finished stock before it is sold.
Sales 
Once you sell the stock to the customer and get the payment, it’s time to keep a 
track of your inventory.
Reporting
Under this step, the business estimates the total sale made and the amount 
received against that sale.
Inventory Management vs. Inventory Control
Most people use these terms interchangeably, but it is important to know 
that both terms have distinct meanings and are two different processes of 
inventory.
The inventory management process starts from the beginning till the stock is 
out and sold to the end-user. However, Inventory control is limited to 
managing stock which you currently have in the storage. Inventory control is 
limited to understanding how much stock is available, where it is and what 
condition it is in. The objective of inventory control is to reduce the cost of 
holding excessive inventory, minimize the time in estimating the total 
inventory in the warehouse.
Inventory management is a broad concept that encompasses your supply 
chain, manufacturing, fulfillment, sales, and reporting. Later, it is followed by 
inventory control where you focus on optimizing the purchase, control, 
production, or sales.
Basic terminologies used in Inventory Management
Once you deep dive into the inventory management process, you’ll come 
across basic terms and formulas. It is important to have a clear 
understanding of these concepts to ease the process.
Cost of Good Sold (COGS)
Also, known as Cost of sales refers to the direct cost of producing goods, 
which includes the cost of raw material and labor.
Days inventory outstanding (DIO)
It refers to the average number of days the company holds inventory before 
selling it.
Economic order quantity (EOQ)
Economic order quantity refers to the optimal order quantity at any given 
point in time, which helps to minimize the total holding and ordering cost.
Finished goods
It refers to manufacturing items/products that are ready to sell.
Inventory accounting
As stated above that the inventory is available in three stages: Raw 
materials, Work-in-progress, and Finished goods. The inventory 
accounting system keeps a track of changes to inventory at all three stages 
and adjusts their asset values and costs accordingly.
Inventory Cost
Inventory cost refers to the cost involved in procuring, storing, and managing 
inventory. It is also categorized into three categories namely – ordering cost, 
carrying costs, and shortage costs.
Inventory Management Software
Automated software to track inventory levels, orders, sales, and deliveries. 
The software helps in maintaining minimum stock levels and sends the 
notification every time the stock is below the desired level.
Lead Time
The time period between an order placed and when the order is received is 
called lead time.
Point of sale
Point of Sale is the time and place in which a retail transaction is completed.
Purchase order
A purchase order is a document created by a buyer requesting a vendor for 
the delivery of goods or services. It specifies the type and quantity of 
products, the agreed price, and delivery and payment terms.
What Next?
To understand more about inventory management, take a look at our 
inventory management software, which has all the added features to keep 
your inventory in control and save time.
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