What is Inventory Management? Definition & Overview

What is Inventory Management?

What is Inventory Management?

A management right help to support the production process and meet customer needs in a timely manners. Consequently, with the right policy, the company can maximize profits.


The fundamental objective of inventory management is to guarantee production processes and reduce associated costs. The purpose is to generate profits, to guarantee the stability of the operations. Consider the policy objectives:

  • Establish the exact amount of stock available at any given time.
  • Identify the amount of inventory to be purchased shortly.
  • Determine the optimal delivery time for orders.


The management consists of the calculation of the stock indices, the control of the actual volumes, and the timely replenishment of the stocks. A well-functioning policy is necessary to achieve the following competitive advantages :

  • Decrease in losses derived from the shortage of raw materials.
  • Reduction of excess stocks.
  • Increased turnover rate.
  • Reduction of the company’s costs for stock storage.
  • Optimization of taxation.
  • Reduction of losses due to deterioration or depreciation of reserves can be determined through a quantity surveyor report.


Stock management is a specific procedure that involves the following protocol:

  • Analysis of the inventory volume of the previous period. During this stage, the really necessary supply volume is established. In addition, the effectiveness of its use is established.
  • The objectives for the use of the reserves are determined. For example, it can be the maximum supply of production at the moment, setting the size of the supply in the seasonal period.
  • Optimization of the number of reserves for the main production. In other words, the magnitude that is needed is determined.


If optimization runs incorrectly, it can lead to these negative points:

  • Lack of funds to support product that is in circulation.
  • Alteration of the normal functioning of warehouses.
  • Claims from clients and consumers.
  • Expiration of the useful life of the products.

These criteria should guide when establishing the optimal volume:

  • The manufacturer’s pricing policy.
  • Specificities of the acquisition and sale of products.
  • External factors. Above all, the competition.

Overstock should not be allowed. This can lead to the following negative consequences:

  • Increased storage costs.
  • Excessive property tax increase.
  • Risk of no income from surplus products.
  • Expiration of useful life.

The insufficiency of production, in turn, causes these consequences:

  • Suspension of the production process.
  • Sales size reduction.
  • The need to urgently purchase additional raw materials under unfavorable conditions.

The main consequence of an inappropriate policy is the appearance of lost profits for the company.


Optimization involves data analysis. The procedure consists of combining the following steps:

  • Analysis of the real demand. If consumers buy 50 units of a product in a store, it does not make sense to buy 200 units. Therefore, it is necessary to accurately analyze the current level of demand for the products. Based on the analysis carried out, the company will be able to buy exactly the number of stocks that it will be able to sell before the future purchase.
  • Calculation of safety stocks. For the calculation, it is necessary to take into account all the factors that affect sales. For example, it could be seasonal demand, consumer behavior. For example, consumers buy on average 1000 units of products per month (this is an average bar), however, in theory, the demand can reach 1,200 units. The optimal safety stock would be 200 units. The calculation can be made based on these strategies: increase profits, reduce purchase volume, reduce storage costs, meet consumer needs.
  • Surplus and deficit analysis. This procedure establishes the current situation. For example, representatives of a company can make a systematic mistake: buying excessive quantities of products. The analysis will ensure the reduction of probable risks.
  •  Product line optimization. Goods with chaotic or stable demand are identified.
  • Management reports. All information is delivered to the address in report mode. The early detection of negative trends allows you to quickly stabilize production, avoiding significant losses.

Inventory management is carried out based on the information collected.

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