Confused about the differences and similarities between inventory management and asset management? Here are 4 key differences to help you out.
4 Differences Between Inventory Management and Asset Management
Inventory management and asset management. Despite sounding very similar and having some key points of overlap, these are two very different practices with different definitions, purposes, and techniques.
Both essential for most businesses, understanding the key differences between asset and inventory management is crucial.
To clear up all the confusion, here are four major differences between inventory management and asset management.
1. Purpose
The first and perhaps most important difference between inventory and asset management is the purpose behind the practice.
In short, inventory management is about managing all the inventory and stock that an organisation intends to sell. This includes making sure there’s enough stock and raw materials in the right place at the right time, setting reorder points and calculating safety stock, managing the supply chain, and everything else to do with inventory control.
On the other hand, asset management is the management of all the equipment and assets that an organisation relies on for its operations and does not plan to sell. This involves asset tracking, accounting, and maintenance.
Here’s a closer look at what each practice seeks to do.
Inventory management
Inventory management seeks to track and manage an organisation’s inventory which is intended for sale to consumers. The purpose of inventory management is to keep track of the flow of goods and manage stock to meet demand or supply production lines. Objectives of inventory management include:
Increasing profit margins and reducing expenses
With effective inventory management, operations can run smoothly and cost effectively. This means that organisations can avoid overstock and deadstock, both of which can be costly if they are left unsold for a long time and the cost of storage makes them a liability. Ensuring that high demand items are never out of stock is also part of this.
Inventory management also provides real-time stock updates so that stock can be replenished only when necessary, again saving money on storage or overbuying. Finally, a good inventory system also helps identify the best-selling and worst-selling products, allowing the business to save money by reducing orders of poor-selling stock.
Inventory management also improves profit margins by better controlling inventory flow and customer service. Effective inventory management provides greater visibility over inventory levels and sales volume trends, making it easier to forecast future supply and demand.
Streamlining operations
With effective inventory management, organisations can streamline operations in a range of ways. For example, it can improve communication and relationships with suppliers as well as improving record-keeping for vendor purchases.
In the unfortunate case of a product recall, inventory management allows organisations to act quickly and effectively to identify the affected products, track them, and communicate with suppliers and consumers. This means that any issue can be dealt with speedily with greater transparency and full compliance with all regulations.
Asset management
While inventory management is concerned with all stock and inventory that is intended to be sold, asset management instead focuses on an organisation’s assets which are required for operations and will not be sold within the next year. This includes equipment, machinery, furniture, and IT assets.
The purpose of asset management is to maximise the efficiency of these assets to get the best use out of them throughout their lifecycle. Objectives of asset management include:
Maintaining assets
One of the goals of asset management is to optimise assets throughout their useful life by providing effective maintenance at the right time. Tracking and scheduling asset maintenance extends assets’ useful life and saves money on replacing the asset earlier than necessary. Maintenance also helps ensure that assets are safe for use.
Tracking assets
Another purpose of asset management is to track assets in real time to gain greater visibility and control over the asset register. With effective asset tracking, asset managers can reduce the risk of assets being lost or stolen and ensure that audits are completed effectively. This aspect of asset management is key because it makes it easier for assets to be located, used, and maintained cheaply and efficiently.
Asset reporting and analytics
Finally, effective asset management also involves reporting and analytics, which allows organisations to better understand asset status and use and solve any problems. Unlike inventory, assets will often remain in an organisation for years or decades, so up-to-date and detailed analytics about the assets are key to staying on top of operations.
2. Type of items tracked
It’s in the name: inventory management is concerned with inventory, while asset management looks at an organisation’s assets. However, as we know, inventory is an asset on the balance sheet. So, what exactly makes these two categories different?
While inventory is listed as an asset on your balance sheet, it’s completely different to the other assets that asset management is concerned with. Inventory is a current asset — a short-term asset that is expected to be sold or used up within one year.
In contrast, other assets are considered fixed assets (also called non-current assets). These are long-term assets that are not expected to be sold or used up within a year. Asset management refers to the management, tracking, and maintenance of these long-term assets and does not include short-term assets like inventory.
Therefore, inventory management covers:
- Finished goods that are ready to be sold to consumers (stock)
- Raw materials and parts used to manufacture the goods
- Work-in-progress products that are being made
On the other hand, asset management covers the things used in business operations that are not sold to the customer, such as:
- Buildings, warehouses, or factories
- Land
- Machinery and equipment
- Tools
- Vehicles
- Furniture such as desks and chairs
- Computer hardware and software
In short, raw materials are looked after by inventory management but the warehouse they are stored in falls under asset management.
3. Maintenance
One of the big differences between inventory and asset management is maintenance.
Maintenance is a key aspect of asset management. Whether the asset is a piece of manufacturing equipment, a vehicle, or a tool, maintenance is essential to keep it in good working condition throughout its useful life and ensure the safety of everyone who uses it.
Different organisations may opt for different maintenance strategies:
- Corrective maintenance is only carried out when a problem is detected
- Preventive maintenance is regularly scheduled maintenance aiming to reduce the risk of problems
- Risk-based maintenance incorporates risk assessments into preventive maintenance and schedules maintenance accordingly
- Condition-based maintenance continually assesses the condition of the asset and maintenance is carried out when certain parameters are detected
The different maintenance costs and strategies vary between different organisations, but the general idea is that maintenance is essential to the management of assets in order to optimise their use and extend their lifespan. Asset management involves the planning, scheduling, assigning, and creating work orders for maintenance.
In contrast, maintenance is not a concern for the management of inventory. This is because inventory is intended to be sold quickly and therefore individual items do not require maintenance.
4. Software
While both types of management can be assisted by software, asset management software and inventory management systems have different features and capabilities.
Inventory management software needs to be able to track and report on inventory location and status in real time, using advanced analytics and reporting to forecast future supply and demand for better inventory control. For example, your inventory management software might allow you to:
- Track and manage completed or work-in-progress inventory
- Set minimum reorder stock levels for just-in-time replenishment
- Track stock at serial, batch, and bulk levels
- Prevent dead or expired stock with inventory control
- Generate stock valuations for your finance system
On the other hand, asset management systems encompass a wide range of tasks such as depreciation and amelioration calculations, asset tracking, maintenance scheduling, recording asset history, reporting, forecasting, and auditing. For example, the software might allow you to:
- Manage assets over multiple books, countries, and companies
- Track the full history of assets with adjustments, transfers, and disposals
- Edit parent-child relationships for fixed assets that are interdependent
- Generate reports and forecasts for assets
- Easily comply with all relevant accounting standards
Despite the differences between these two types of software, they can easily go hand-in-hand. Some advanced accounting software has the capabilities for the management of both inventory and assets, with modules for asset management, inventory management, inventory control, and more. These integrated asset and inventory management systems are a smart investment for any organisation looking to enhance accounting with more efficient and accurate software.
Conclusion
While there are some clear differences between the definitions of asset and inventory management, there are also many similarities.
Both seek to improve efficiency, visibility, and profit margins in a business through the strategic management of its fixed or current assets. Moreover, both are interested in tracking items, though asset management often uses barcode asset tracking, QR codes, or RFID tags, while stock and inventory management often uses serial numbers, batch, or bulk tracking.
Finally, both types of management allow businesses to get the most out of their assets, whether that’s with careful maintenance to extend a fixed asset’s useful life, or with meticulous inventory control, forecasting, and setting reorder points to ensure inventory stock meets demand.
Using high-performing asset and inventory management software, organisations can better manage all fixed and current assets to boost efficiency and profits. If you’re interested in learning more about the benefits of an integrated asset accounting and inventory management system, FMIS can help. Visit their website to request a demo of their powerful software today.
