Insufficient inventory management and increased inventory distortion cause $1.1 trillion in loss worldwide every year. Despite this staggering statistic, inaccurate supply chain and inventory levels and inadequate inventory tracking are near-universal problems for small and large businesses alike.
Inventory management is crucial for sourcing, storing, and selling goods at the right cost and price. Failing to prioritize inventory organization can be detrimental to the success of any business — no matter its reputation, name, or size.
This guide unpacks inventory management, why it’s important, and the essential steps for optimizing and managing inventory.
Key takeaways:
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Inventory management is the process of controlling inventory at every lifecycle stage, from sourcing to storing to selling. This term can also refer to the theories, processes, and tools used to move raw materials, parts and components, and finished goods from one stage to another. The core purpose of inventory management is to ensure you have the right amount of stock on hand at the right time and cost.
Inventory management is important because satisfied customers and market demand depend on accurate inventory counts and organization. A product-focused business’s bottom line depends on systematic and transparent inventory management.
Businesses use many metrics — including inventory turnover ratio — to determine the success of their inventory management systems. Storage, manufacturing, and shipping can become costly to companies if their inventory isn’t managed properly.
There are three main types of inventory: raw materials, work-in-progress goods, and finished goods. However, further classifications can clarify the status of a product at any time. The nine most common types of inventory in inventory management are listed in the table below.
| Inventory types | |
| Raw materials | Materials or purchased parts that make up finished products |
| Work-in-process (WIP) goods | Partially completed goods in the process of becoming finished goods |
| Finished goods | An industry or company’s completed product that is ready to be sold |
| Transit inventory | Inventory, also known as pipeline inventory, that is in transit from the manufacturer’s place to the retailer or wholesaler shop |
| Safety stock | Extra inventory that can mitigate customer service problems, backorders, stockouts, unexpected costs, and uncertainties in demand, lead time, and supply variations |
| Anticipation inventory | Additional stock designed to protect a company from unprecedented consumer demand during a certain period |
| Decoupling inventory | Extra raw materials or WIP goods that are set aside to avoid production interruptions |
| Cycle inventory | The portion of total inventory that is constantly turned over and replaced with new stock; it’s also considered the minimum stock needed to maintain quotas |
| MRO (maintenance, repair, and operation) inventory | The products that support the production process of the finished goods, such as lubricants, screws and ball bearings, gloves, and packing materials |
Having the right products available at the right time in the right quantities to meet customer needs is the key to achieving a company’s objectives. Inventory management and control help do just that, which also curbs profit loss and helps businesses thrive.
Additionally, inventory management for small businesses and large businesses produce other benefits, including:
With so many moving parts, it’s no surprise that inventory management also has its challenges. Some of the most common challenges include:
Despite these challenges, it’s possible to minimize or even solve many inventory management roadblocks with proper organizational systems. Consider implementing the following solutions to common challenges so you can prevent issues — and meet them head-on.
Managing inventory may not be the most glamorous part of running a business, but it’s crucial, to say the least. Many businesses manage stock levels and product movement in spreadsheets, even as companies outgrow manual tools.
While it may come as a surprise, you’re likely not cutting any costs by manually tracking inventory on spreadsheets. Between time loss and human error, your business might be ready to move on, requiring you to invest in solutions that enable real growth.
No matter what your current inventory management process is, inventory management software is a critical investment for all businesses, simplifying product and material tracking and giving you more control over your business than ever before.
With an automated, all-in-one system like Cin7 Core or Cin7 Omni, an inventory management system will provide real-time visibility into your inventory, allowing you to improve your supply chain, keep customers happy, and minimize inventory loss.
These systems are efficient in handling inventory-related tasks across various inventory management methods. With convenient back-end management across multiple channels, locations, and currencies, inventory management systems can automate the entire e-commerce operations process.
Selecting an inventory management method isn’t one-size-fits-all — you’ll need to pick the method that suits your business best. There are various ways in which you can manage inventory, and it is up to your organization to choose the best inventory management technique for your goals:
An inventory management system refers to the physical and digital processes and tools businesses use to track, record, and analyze inventory movements and sales performance across the supply chain.
The best inventory management software tools provide visibility into stock levels, connections to additional sales channels, and reorder processes. These tools work by automatically and consistently tracking your inventory levels and streamlining inventory management activities, such as procurement and production, reporting, forecasting, selling, and order fulfillment.
Pro tip: Your business can leverage Cin7 Core and Cin7 Omni to efficiently perform inventory management tasks and support supply chain resilience.
Effective inventory handling is a crucial success factor that touches all other elements of your business, from the customer experience to your finances. To better understand its impact, let’s unpack the effects of effective inventory management:
Inefficient inventory management ties your business’s hands when it comes to growth. Slow, manual processes can quickly consume your team’s time and lead to errors that push customers away, while streamlined and automatic processes can increase efficiency, trust, and revenue.
If you want to set yourself up to scale your business, you need to think beyond the basics of inventory management. Automated inventory management gives you a strategic advantage by leveraging automation, visibility, and data-based insights, along with additional benefits, including:
Pro tip: Access real-time inventory levels across all sales channels — including stock levels for e-commerce platforms like Shopify and Amazon — with Cin7 Core and Omni.
In-depth sales reports also track stock movements so you know where your products are at all times, and fully customized features like native EDI and third-party logistics (3PL) integrations accommodate the needs of growing businesses.
The benefits of an automated inventory management system won’t do you any good if its features aren’t up to par. Keep an eye out for the following features that support connected inventory performance:
You now understand the importance of inventory management, but where do you even start? Here are a few tips and best practices for inventory management to remember as you revitalize your processes.
Inventory is frequently stocked according to its average demand, but a rush of sales could leave you out of stock faster than you can replenish your inventory. Keep safety stocks to mitigate stockouts when there is a high variation in demand and supply.
Merchandise planning, or the strategic stocking, managing, purchasing, displaying, and pricing of products, can increase ROI and decrease inventory costs by:
The bread and butter of inventory management is tracking products at all times. You should be able to track a single item from when you order raw materials until the finished goods are in customers’ hands. Create a tracking system for each step by identifying responsible parties, selecting a tracking method, and training employees.
It’s been said before — manually tracking inventory is a process that you’ll likely outgrow fast. As your business expands, a more robust system is needed. Replacing manual management with connected inventory performance and systems allows automation and integrations to drive visibility, traceability, and efficiency throughout the inventory lifecycle.
It also offers solutions for understanding real-time insights and analytics on stock levels, sales trends, and more. Plus, cloud-based technologies connect point-of-sale bases that automatically update inventory levels after transactions and shipments. These systems also allow businesses to set up alerts for low inventory to avoid high-demand stockouts.
Though inventory management software offers endless benefits, you should still periodically count your inventory levels to ensure your stock reflects the software’s levels. Depending on your stock size, it may be best to schedule a thorough inventory review annually, biannually, or even quarterly.
Regular audits paired with systematic spot-checking may catch unexpected inventory shrinkage, improperly stored items, and more.
Efficient and responsive inventory management requires powerful systems, connected inventory performance, and key software features based on inventory performance needs. Whether you’re looking for POS and e-commerce integrations or streamlined fulfillment support, you need a reputable provider that offers the functionality you want.
With two cloud-based solutions, Core and Omni, Cin7 was named the best overall inventory management software provider of 2023 by Forbes. Built to meet the inventory demands of small and mid-size businesses, along with those in need of native EDI and 3PL connections, these tools are powerful solutions that provide unprecedented insights into your inventory processes.
Ready to manage your inventory more efficiently? Start your free trial today.
Still have inventory management questions? We answer some of your most frequently asked questions below.
Inventory management refers to the tools and methods used to track a company’s complete list of goods. Inventory management tracks raw materials from the original manufacturers to the warehouse to the point of sale.
The four main types of inventory refer to raw materials, work-in-process inventory, MRO inventory, and finished goods.
You can reduce inventory costs by investing in an automated inventory management system, centralizing stock, setting reorder points, eliminating deadstock, and avoiding overstocking.
The 80/20 inventory rule states that 20% of your inventory and product range should deliver 80% of your sales. Outside of inventory, it suggests that 20% of customers should drive 80% of profits. You may hear this also called the Pareto Principle.
You can use Excel for inventory management, but most businesses outgrow this solution very quickly. Tracking inventory through spreadsheets is a manual, time-consuming process. There’s a greater chance of human error and security breaches when relying on Excel spreadsheets for inventory management.
Inventory management helps you solve problems related to inefficient inventory handling. These can include difficulty scaling your business, costly manual errors, over- or understocking, and excess data capture.
By using inventory management software, you can automate repetitive tasks and reduce the chances of manual errors affecting your inventory levels.
Automation can help eliminate some of the time-consuming manual work of keeping your inventory running. You can also integrate your inventory management technology with other tools like your e-commerce platform, POS system, and accounting software to streamline orders, fulfillment, and financial tracking.
