What Is Inventory Management? Tips & Techniques (2024)

Inventory management is the process of organizing stock on its way through a supply chain.

The goal of inventory management is to minimize the cost of holding inventory while maintaining consistent stock levels and getting products into customers’ hands faster.

Are you unsure where to start with inventory management? This walkthrough contains tips and techniques from inventory management experts for monitoring stock and keeping your customers happy.

What is inventory management?

Inventory management is the process of overseeing and controlling the flow of goods within a business. It involves tracking the movement of goods and materials, monitoring inventory turnover, and optimizing replenishment to ensure products are always available.

The goal of inventory management is to minimize the cost of holding inventory by helping you know when it’s time to replenish products or buy more materials to manufacture them. 

What counts as inventory?

• Raw goods: Materials or substances used in the production or manufacturing of products. Raw materials include wood, metals, plastics, or fabrics used to create finished goods. They come from one or more suppliers and producers.
• Work-in-progress (WIP): A partially finished product awaiting completion. WIP represents production costs such as labor and machinery. Costs are transferred to the finished goods account and attributed to the cost of sales.
• Finished goods: This type of inventory refers to the number of products in stock available for customers to buy. Once a WIP is complete, it becomes part of the finished goods inventory. 
• Maintenance, repair, and operations goods (MRO): Materials and equipment used in the production process but not as part of the final product. These include personal protective equipment, cleaning supplies, office supplies, and tech equipment. 

How does inventory management work?

Most of today’s inventory management systems are digital and cloud-hosted. They work across devices and users to ensure that everybody interacting with the supply chain is on the same page.

Essentially, the inventory program monitors and organizes all the elements involved in inventory management and syncs the data to your other business systems. There are three main types of inventory systems: perpetual, periodic, and manual.

A perpetual inventory system continuously tracks inventory in real time. In contrast, a periodic system requires physical inventory counts at the beginning and end of a specific period. A manual inventory system is the old-school pen-and-paper approach—it is really only a viable option if your monthly sales are in the single digits.

The importance of inventory management

Whether you’re a small business or company using enterprise resource planning (ERP), inventory management is important for several reasons:

Avoids spoilage

If you’re selling products with expiry dates, every sale opportunity has a time limit. Managing inventory helps you avoid unnecessary spoilage by optimizing inventory control.

Prevents dead stock

Dead stock won’t sell—not because it’s expired, but because it may have gone out of season, out of style, or otherwise become irrelevant. By adopting a diligent strategy, you can address this costly inventory mistake.

At the opposite end of the spectrum, you should also monitor your inventory levels to reduce the risk of overselling or accounting for phantom Inventory.

Reduces storage costs

Warehousing is often a variable cost that fluctuates based on the storage you require. When you store too many products at once or end up with a product that’s difficult to sell, your storage costs increase. Avoiding this will save you money.

Improves cash flow

Inventory directly affects sales (by dictating how much you can sell) and expenses (by dictating what you need to buy). Both of these elements factor heavily into your business’s current assets—how much cash you have on hand. Better inventory management leads to better cash flow management.

Optimizes fulfillment

Good inventory management can help improve order fulfillment. You can use tactics like inventory distribution, which involves holding inventory across multiple fulfillment centers, to ensure your products are near customer locations. This speeds up delivery time while reducing shipping costs—both of which help keep customers happy.

Proper inventory management also means offering buyers a seamless return experience while ensuring that usable inventory is reentered into circulation.

14 inventory management techniques

1. Demand planning
2. Inventory counts
3. LIFO vs FIFO
4. RFID technology
5. Barcodes
6. ABC reporting
7. Inventory valuations
8. Minimum order quantities
9. Safety stock alerts
10. Inventory audits
11. Six Sigma
12. Supplier relationships
13. Outsource inventory management
14. Just-in-time

Regardless of the system you use, the following techniques will improve your inventory management—and your cash flow:

1. Demand planning

A huge part of good inventory management comes down to accurately predicting demand. While countless variables are involved in projecting future sales, pay close attention to last year’s sales during the same period, guaranteed sales from contracts and subscriptions, seasonality, and upcoming promotions.

2. Inventory counts

Regular inventory reconciliation is vital. In most cases, you’ll rely on inventory software and reports from your warehouse management system to know how much product you have in stock. However, it’s important to make sure the facts match up. There’s no better way to gain peace of mind than a physical inventory count or stock take.

Update inventory records in real time. Access to fresh, correct inventory data is key to moving products quickly and efficiently.

3. LIFO vs FIFO

Last in, first out (LIFO) inventory management assumes that the merchandise you acquired most recently was also sold first. If prices rise over time, then the most recently purchased inventory will also be the most expensive. That means higher inventory costs will yield lower profits and, therefore, lower taxable income.

First in, first out (FIFO) determines the cost of goods sold (COGS). It means your oldest stock gets sold first—especially important for avoiding spoilage. 

4. RFID technology

Radio-frequency identification, or RFID technology, certainly has a place in the future of inventory management. In fact, many companies already use RFID tags to search for stock, combat phantom inventory, and decrease excess inventory.

5. Barcodes

Some retail stores use a barcode scanning system to keep track of product stock levels. This involves scanning some type of barcode that identifies each product, sending that information back to your IMS so you can track each item. 

Barcode inventory systems automate the tracking of products from the moment they enter your store to the moment they’re sold. It provides accurate, real-time insights into your inventory, helping you make smarter decisions and keep your customers satisfied.

6. ABC reporting

Categorize your inventory using an ABC analysis. You can use an ABC report to grade the value of your stock based on a percentage of your revenue:

• A = % of stock that represents 80% of your revenue
• B = % of stock that represents 15% of your revenue
• C = % of stock that represents 5% of your revenue

Your A stock represents your most profitable and valuable products. You’ll want to make sure you always have these products on hand so you don’t miss out on future sales. Conversely, C stock is slow-moving or dead. Discount these items to free up cash and shelf space.

7. Inventory valuations

Inventory valuation is the cost of unsold inventory at the end of a reporting period. Since inventory is often your largest asset, it’s important to consistently measure its value. How you value inventory impacts your cost of goods sold, net income, and ending inventory—all factors that directly affect profitability. There are also tax implications associated with your inventory valuation method. 

8. Minimum order quantities

Minimum order quantity (MOQ) is the smallest number of products that you must purchase in one order from a supplier. Suppliers set MOQs to avoid wasting resources on orders that deliver them little or no profit.

By strategically managing this metric, you can optimize inventory levels, reduce costs, and maintain a smooth supply chain, ultimately contributing to the success and profitability of your retail business.

9. Safety stock alerts

Safety stock or par levels are the minimum amount of product required at all times. You know it’s time to make an order when your inventory dips below these predetermined levels.

Par levels should vary by product, customer demand, and the time it takes for new stock to arrive (your IMS will track this information in a retail sales report).

10. Inventory audits

It’s important to audit inventory regularly. Run monthly and annual audits to ensure accuracy between your stock quantity and financial records. Investigate discrepancies until you find and address the root cause. 

11. Six Sigma

Six Sigma is an optimization method used in supply chain management to reduce excess and obsolete write-offs—inventory often sold below cost or donated. 

12. Supplier relationships 

Strong relationships with suppliers give you more leeway when unexpected problems arise. When you have an existing supplier relationship, minimum order quantities are often negotiable.

To maintain your end of the relationship as a retailer, let your supplier know when you expect an increase in sales or a large number of purchase orders so they can adjust production and lead times. 

It’s also important to go over supplier performance. Identify where suppliers can improve or when to cut them off. 

13. Outsource inventory management 

Shopify Fulfillment Network distributes your inventory across a network of US warehouses on your behalf. As a result, you can offer two-day delivery to your customers at an affordable rate. 

As your fulfillment partner, Shopify will take customer orders, receive your customer returns, and reenter usable inventory into circulation.

14. Just-in-time

Just-in-time or JIT inventory management is about keeping the lowest inventory levels possible to meet demand, replenishing them just before a product goes out of stock.

JIT requires careful planning and forecasting but works well for rapidly growing brands with scheduled launches and product line extensions.

Multi-channel inventory management 

Selling on multiple channels is no longer a question, it’s pretty much a mandate if you want to compete with other online retailers. That makes inventory management even more important and complex—your customers don’t care where the products are, they just want to know whether they’re in stock and if they can get them.

That’s why an integrated multi-channel approach is so important when it comes to inventory management. Shopify POS allows you to sync in-store data with online data so you can always optimize stock levels and know which products you have in which locations.

When Allbirds adopted Shopify POS and Shopify Plus, it was able to take advantage of all the business tools that came included, notably inventory management. This allowed the retailer to optimize stock levels in stores, keeping less inventory in-store and requiring less retail space to operate. 

“With Shopify Plus, we have our point-of-sale and ecommerce systems under one umbrella, which serves our ultimate purpose of being an omnichannel retailer and viewing the customer as one customer—no matter where they shop with us,” says Travis Boyce, head of global retail operations. 

Inventory management systems 

Every business should strive to eliminate as much human error from its inventory management processes as possible, which means using inventory management software. 

Inventory management software

Inventory management software comes as a standalone program or is built into an ecommerce platform such as Shopify. Using it, you can monitor and adjust your stock replenishment schedule and track orders from sale to delivery.

Inventory management apps

Inventory management apps let you monitor the live status of your stockroom. These apps are handy for employees involved in running your business actively, allowing them to access information from a smartphone or tablet.

Most inventory management apps offer inventory quantity and location tracking, stock level alerts, and order monitoring.

If you’re a Shopify merchant, try these popular inventory management apps for your store:

Inventory management with Shopify

If you run your business with Shopify, inventory management is already built in.

You can set up inventory tracking, view your inventory, and adjust your inventory levels in the Inventory area of your Shopify admin. You can also view the history of inventory adjustments and transfers for variants tracked by Shopify.

Shopify also provides inventory reports that show you a month-end snapshot of your inventory. You can access various reports like:

• Average inventory sold per day
• Percent of inventory sold
• ABC analysis by product
• Product sell-through rate
• Days of inventory remaining

To find these reports:

• From your Shopify admin, go to Analytics > Reports.
• Click Categories.
• Click Inventory to filter the reports to show only inventory reports.

The future of inventory management

Technology continues to grow and develop at an incredible pace, and many of these new and emerging technologies have applications for inventory management:

Predictive analytics 

Predictive analytics uses a combination of automation, data, and machine learning to deliver accurate forecasts and analyses. Based on algorithms, these analytics models can give retailers data-backed insights that can improve inventory management. This technology only continues to improve over time. And the more data you give it, the better it will know your business. 

Artificial intelligence

Artificial intelligence (AI) continues to develop and gain new applications within inventory management solutions. Self-correcting AI solutions can empower businesses to automate inventory decisions and react to customer demands in real time.

IoT

Internet of Things, or IoT, devices can reduce the time it takes associates to find inventory by providing real-time location data. This data can also help you make more informed and effective inventory management decisions by knowing exactly how much stock you have and where.

Take control of your stock with effective inventory management on Shopify

An inventory management system will reduce your holding costs, help you analyze sales patterns, predict future sales, and prepare for the unexpected. With proper inventory management, businesses have a better chance of profitability and survival.

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