Inventory management is the process by which businesses track their stock levels. Proper management ensures that products are available when needed. It prevents businesses from buying items that aren’t selling.
This guide will teach you the basics of inventory management systems. You’ll learn how to build a system that improves your business.
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What Is Inventory Management?
Inventory management is how businesses source, store, and sell their inventory. To understand this term, you must study the process.
Definition and Core Concepts
Managing stock prevents businesses from running out of goods. This way, they’ll always have products to sell and meet customer demand.
You may have excess products if you don’t track available stock before ordering. When orders decrease, it’ll be difficult to sell these products, which ties up your capital. You also run short of stock, which prevents you from making sales.
To avoid this, you must track goods from when they arrive until you sell them. Inventory tracking allows you to view your products and their current locations. Tracking stock levels helps you know when to place an order and how many goods to request.
By using inventory management, you’ll no longer run short of orders. You can also avoid customer disappointment and excess inventory.
Types of Inventory
Here are the types of unsold inventory businesses handle:
- Raw materials are the components you use to make your products. For example, a furniture maker uses wood and fabric.
- Work-in-progress (WIP) inventory refers to incomplete items not yet ready for sale.
- Finished goods are products that are ready for sale. Most retailers deal with finished goods.
- Safety stock serves as a backup for sudden future demand or supply disruptions.
- Maintenance, Repair, and Operations support business, but aren’t final products.
- Decoupling inventory is the raw material that businesses keep to support production processes.
The Inventory Management Process
The inventory management process has many steps. A cycle begins when a business predicts optimal inventory levels. It then sends orders to suppliers who deliver inventory products.
While receiving and storing inventory, check the quality of goods and update records. As you produce and sell goods, always track the progress.
Note the location and condition of your stocks. If you use inventory management software, you’ll enjoy automatic updates.
Placing new orders is the last stage of the cycle. With inventory software, you can set an order limit. When your stock reaches this limit, the system will reorder a suitable amount of goods. Reordering ensures a continuous supply.
Why Effective Inventory Management Matters
The quality of your management affects your business success. An online inventory management system boosts quality and drives sales.
Key Benefits of Optimized Inventory Management
There are many benefits of inventory management. It helps you save money by not carrying excess inventory.
It also improves arrangement, helping teams find goods without delay. With faster item searches, teams have more time for other tasks. Also, customer satisfaction increases with a steady supply.
A good inventory management system records and ensures clear financial reports. This data shows how you make and lose money. Additionally, placing early orders allows you to build a strong relationship with suppliers.
Keeping a balanced inventory can help you spend less on storage and save money. Inventory improvements also produce good results.
The Cost of Poor Inventory Management
If you keep more products than necessary, your money will be inaccessible until you sell them. On the other hand, if your stock runs out, you’ll fail to meet customer expectations. Frustrated customers will buy elsewhere, resulting in a loss.
Imagine a product gaining popularity on social media and attracting many orders. You may miss a big chance to earn more if you don’t have enough inventory. But if you buy too much, you’ll find it difficult to sell the extra products when the demand drops.
Inventory problems can distract workers and hinder organizational efficiency. Sometimes, teams place last-minute customer orders and pay more for fast shipping. Knowing how much stock to keep prevents such issues.
To avoid these issues, use a good inventory management system that maintains balance.
Inventory Management Techniques
There are different methods of inventory control. So, you need to select a good inventory management technique.
Economic Order Quantity (EOQ)
Economic Order Quantity calculates the right order quantity. It checks yearly demand, order costs, and the quantity required to store one unit for a year.
It compares order and storage costs to determine the optimal quantity of stock that minimizes costs. So, EOQ is a suitable method for businesses with predictable demand. This method promotes data-driven decisions and reduces expenses.
The downside of using EOQ is that it does not consider changes in price or demand. Regardless, EOQ is great for businesses.
Just-In-Time (JIT) Inventory
JIT inventory management means getting and making products only when needed. It lowers inventory costs and saves storage space.
For JIT to work well, you must plan and make accurate predictions for demand. Also, get trustworthy suppliers. The JIT method reduces waste and money for warehouse and inventory costs.
However, JIT can be risky. If there are problems in the supply chain, it can affect and slow down production. To avoid this, get many suppliers and safety stock.
ABC Analysis
ABC analysis groups products by rating their importance. This approach uses the Pareto principle, which states that 80% of effects result from 20% of causes. In this case, 80% of sales come from 20% of products.
ABC analysis gives businesses accurate inventory data. This data helps to group products as follows:
- A items: 10- 20% of high-value products representing 70-80% of value.
- B items: 30-40% of moderate-value products bringing 15-20% of value.
- C items: Low-value accounting for 5% of value and 50% of items.
Grouping products identifies those that need more attention and resources.
FIFO vs. LIFO Methods
First-in, First-out (FIFO) and Last-in, First-out (LIFO) use arrival time to manage inventory. The FIFO method sells the oldest products in retail stores before they expire.
It’s an effective method for businesses that sell perishable goods. Using LIFO means selling the most recently purchased inventory before others. This pattern is suitable for times of inflation. It matches recent prices with current sales and can lower taxes.
FIFO shows higher profits when prices increase, while LIFO can lower a business’s taxes. However, if you don’t manage LIFO effectively, it can result in higher taxes.
Min/Max Method
This method sets the lowest and highest amounts of a product you should keep. When the stock reaches the minimum level, you order more to reach the maximum level.
Before selecting these levels, it’s essential to consider the available space. Also, note how people use the item and the time it takes to receive supplies.
Using an online inventory management system automates this process. It checks stock and places orders at the right time.
Demand Forecasting Techniques
Successful inventory management aims to predict how much product customers will need. Before predicting, study past sales, patterns, and buying cycles. You can also use market trends to understand customers’ needs.
Artificial Intelligence (AI) tools can improve the correctness of your predictions. AI can find patterns that people might miss.
Businesses that sell more during certain seasons must order at the right time. Good timing ensures sufficient stock when demand is high. It also prevents businesses from buying many goods during slow times.
Sometimes, over-relying on data can lead to mistakes. That’s because circumstances can affect trends. To avoid risks, watch current trends as you study data. When you use both, you’ll get the correct results.
Safety Stock and Reorder Points
Keeping extra goods prevents a shortage when demand or supply changes. Businesses must store inventory cheaply to find the right amount of safety stock.
Consider your customer service level and changes in demand and delivery times. This process will determine when to place new orders and avoid stockouts.
To find the best reorder point, multiply the average daily demand by the lead time. Then, add the answer to your safety stock.
This formula indicates when to stock up. When handling products with high demand, maintain high safety stock and service levels.
How to Implement Effective Inventory Management
Running an e-commerce business involves many tasks, such as tracking stock. Proper inventory management includes many steps, including selecting good suppliers and improving business operations.
Choosing Suppliers
Good suppliers make inventory management easier. When selecting a supplier, verify their reliability. Choose a supplier with fair prices and quality products. To build a strong relationship, be polite, negotiate reasonably, and pay them on time.
Depending on only one supplier can be risky. So, prepare a backup in case something goes wrong.
Inventory Categorization Strategies
Sorting your products into groups helps you understand their value and manage them. You can use ABC analysis or group items based on their appearance or importance. The frequency of orders is another factor for grouping items.
Sorting items helps you determine where to place each one. Fast-selling products should be accessible. However, slower-moving goods can stay in less busy areas.
You can also track your inventory using Stock Keeping Units (SKUs) and barcodes. These digital tools ensure accuracy.
Some smart systems adjust the location of products based on customer preferences. As customer interest shifts, the item they like remains in a reachable place.
Tracking Inventory Levels
Every business needs to know what it has in stock at all times. An online inventory management system updates records when a sale or return occurs. This update provides the correct information to make informed decisions.
Managing inventory is challenging, especially when you store goods in different places. But having different stocks makes it easy to transfer products to local stores. You can maintain a good stock level without buying too much inventory.
However, if you have many sales outlets, you need to integrate them. Channel integration enables you to view all your inventory in one place. With a central connection, you can avoid selling out or collecting orders for finished goods.
Conducting regular cycle counts is essential. Periodic checks ensure your records remain accurate. They help identify mistakes that can prevent bigger problems.
Setting Up Reorder Points and Safety Stock
Consider your business needs before deciding when to reorder. Some businesses watch trends, seasonal changes, and how sales affect demand.
It also helps to understand how your suppliers perform. Their performance reveals how long it takes to get products and how much that time can change.
A reorder point is not stagnant. You can adjust it during busy or slow seasons to avoid running out or having excessive stock.
You can use automatic reordering to reduce mistakes and delays. Periodic inventory systems use set rules to place orders when it’s time to restock.
Conducting Regular Inventory Audits
Physical inventory counts help ensure your records are accurate. Although it may delay work, a full count provides comprehensive information. Cycle counting is easier to manage. Instead of counting everything at once, you can count a small group of items each day or week.
ABC analysis simplifies counting by directing more attention to high-value goods. You’ll check your most valuable items (A items) more often and the others less frequently.
When you check your stock, correct any incorrect records. You must also determine the cause of the issue. That way, you can stop it from happening again.
Forecasting Demand
Businesses examine past sales to predict future purchases. This method helps them spot trends and plan for busy seasons. Companies should also monitor market trends, industry news, and economic changes. These data can improve predictions.
Planning for different seasons means you can adjust your stock ahead of time. Sometimes, special events can change what people want. Past sales data may not reflect this, so study the season. If there are any changes, update your forecast to avoid inventory issues.
Optimizing Your Inventory Management Process
Businesses use Key Performance Indicators (KPIs) to check inventory management efforts. Some useful KPIs for checking inventory management include:
- Inventory turnover: How many times a business sells and replaces goods
- Days of supply: How long the stock lasts
- Tracking accuracy: Whether records match the inventory
Lean principles and Six Sigma can simplify inventory management. These methods help reduce waste and errors. It is also essential to train your team to operate these systems.
Essential Inventory Management Tools and Technology
Businesses can use advanced tools to control inventory. These tools are fast and produce good results.
Effective inventory management extends far beyond simple stock tracking, according to Gabriel Cohen from Klipboard, a warehouse management solution.
He says that “most successful businesses connect inventory data with purchasing, finance, sales, and warehouse operations.
This unified approach transforms inventory management from a reactive process into a strategic advantage, enabling real-time decision-making across the entire supply chain and preventing costly stockouts or overstock situations before they occur.”
Inventory Management Software
Businesses use inventory software to manage their stock. Some software controls only inventory, while others track other activities, orders, and accounting. When choosing an inventory software, select one that can:
- Forecast demand
- Track items in real-time
- Work across different locations
Small businesses often use QuickBooks Inventory, while larger companies prefer Oracle NetSuite. Before using the tools effectively, you must import your data into the system. You also need to adjust some processes and train your team.
Barcode and Radio Frequency Identification (RFID) Systems
Barcode systems use scanners to read printed codes. But if something blocks the scanner’s view, it can’t read the code. RFID uses radio waves to read tags on products, even when the tags are not visible. RFID is fast and can scan many items simultaneously.
Barcodes are less expensive, but RFID technology works faster and more accurately. It is the best solution for businesses that sell expensive items, as it produces a high return on investment.
Warehouse Management Systems (WMS)
WMS controls processes to simplify item storage, picking, and shipping. When it integrates with inventory, order, and accounting systems, it functions more effectively.
A WMS reduces mistakes when picking items, saves space, and increases productivity. When choosing a WMS, consider the following factors:
- Your business model
- The nature of your warehouse
- Your operational needs
You’ll make the right choice if these factors influence your decision.
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Enterprise Resource Planning (ERP) Systems
ERP systems manage inventory and many other parts of the business. They update financial records and store data for decision-making.
With ERP systems, you don’t have to edit data, as they maintain the correct information. They also automate workflow, allowing easy collaboration. However, you will spend money and time setting up an ERP system. You must also adapt processes to fit the system.
Supply Chain Management and Inventory Optimization Tools
Scenario planning enables businesses to test various inventory strategies. After testing and comparing, you can implement the best strategy. In complex supply chains, network optimization can help you decide how much stock to keep and where to store it.
Risk assessment tools identify weaknesses in supply chain operations and suggest solutions. Modern tools also measure the amount of carbon that different inventory strategies generate.
Using these tools enables businesses to achieve both environmental and financial objectives.
Mobile and Cloud-Based Solutions
Mobile inventory tools help workers to receive, pick up, and count items with their phones. Workers can set up cloud-based systems and receive real-time updates. With this system, you can perform inventory management work remotely.
These solutions help your business function optimally at all times. However, since they store private data, you need robust security to ensure safety.
Setting Up Your Online Store’s Inventory Management
Creating an online store requires careful inventory planning. Therefore, it’s important to launch your website with the best hosting service.
Using a good web host ensures seamless integration with inventory management systems. You can connect online and physical inventory systems to get instant updates. This integration will prevent you from selling unavailable items online.
If you sell on marketplaces, connect those stores to your central inventory. Good inventory management solutions send simultaneous updates to all channels. This function prevents stock-taking errors when orders leave and items arrive.
Inventory Management Challenges and Solutions
Inventory management helps businesses succeed, but these systems can also encounter issues. Find below possible problems and their solutions.
Data Accuracy Issues
One common problem is incorrect stock count. Several factors can cause this, including shipping errors, counting mistakes, and theft. Using barcodes reduces mistakes and ensures correct records.
When you improve business operations, stock counts have fewer mistakes. When training workers, emphasize the importance of accuracy. When they understand the effects of wrong information, they’ll count carefully.
Managing Multi-Location Inventory
If your business has many warehouses, you need a central management system. But you can also allow inventory managers to control stock in each location.
Having tools that show real-time updates from every location is also useful. It allows the main office to oversee activities while local teams handle daily tasks.
Consider using smart transfer methods to move stock between places. These methods transfer stock to stores with complete products for sale. So, none of your sales outlets will lack items or have excess stock.
Seasonal Demand Fluctuations
Businesses must plan for peak seasons by:
- Studying past data
- Arranging storage space
- Hiring more staff.
Ask suppliers for a longer payment plan to avoid poor cash flow when stocking up for peak season. Off-season inventory strategies can help you manage the downturn after peak periods. Also, consider reducing order quantities and planning a clearance sale.
Supply Chain Disruptions
Conduct risk assessments to spot disruptions in advance. In the event of supplier problems, buy from your backup source. Communicate clearly with all parties in the supply chain.
Managing Perishable and Time-Sensitive Inventory
Some online retailers sell without inventories, especially when dealing with perishable products. However, advanced tracking methods can manage perishable goods. This system tracks expiration dates, allowing you to sell older goods first.
When forecasting perishable items, consider their shelf life. You need enough stock to avoid running out. Also, avoid excess storage to prevent goods from spoiling. You can use markdown rules to set steps for handling products soon to expire.
Inventory Shrinkage and Loss Prevention
Inventory shrinks when employees or customers steal goods. Dishonest vendors and administrative errors also lead to losses. To avoid this, tighten security measures by verifying transactions and using physical controls.
Teach your employees the financial impact of shrinkage and how they can help to prevent it. Use RFID to enhance inventory visibility and detect inaccuracies.
Conclusion
Good inventory management keeps customers happy while helping the business earn more. By using the right methods and systems, businesses can turn inventory into a tool for success.
Use a well-hosted website that integrates with inventory tools and a suitable technique. Maintain accurate records and use your data insights to manage your supply chain efficiently.
Next Steps: What Now?
Are you ready to upgrade your inventory? Here’s what to do:
- Review your management style and adjust it as needed.
- Find and use an ideal software that meets your business’s needs.
- Train your staff to use inventory tools and apply strategies properly.
- Use your records to make data-driven decisions.
Further Reading & Useful Resources
- What Is a Sole Proprietorship?
- How to Start a Sole Proprietorship?
- How to Start an LLC?
- How Much Does It Cost to Start an LLC?
- C Corporation Explained: Pros & Cons
- How to Get a Business License?
- E-commerce Marketing Strategies
- How to Overcome E-commerce Business Challenges?
- How to Build an E-commerce Website?
- How to Create a Website?
