27 July, 2023

What is inventory management? The complete guide

Inventory management is the process of purchasing or gaining, storing, and using company inventory. Inventory can include raw materials, components and parts, and finished goods and is tracked from its initial purchase to the final sale.

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:

  • Inventory management is the holistic process of sourcing, storing, and selling inventory. It covers tracking goods during manufacturing and sourcing until the final product is in the customer’s hands.
  • Inventory turnover ratio measures the rate at which goods are purchased, used, and sold and is a primary KPI for overall supply chain management.
  • Successful inventory management benefits companies by enhancing planning and forecasting, improving delivery times, controlling inventory costs, boosting efficiency, and strengthening trust.
  • Common inventory management challenges are inventory shrinkage, deadstock, out-of-stock inventory, demand changes, and poor use of warehouse space.

What is inventory management?

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.

Why is inventory management important?

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.

Types of inventory

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 

Benefits of inventory management

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:  

  • Enhanced planning and forecasting: Inventory management tools can help you analyze and distinguish products as well-performers and shelf-eaters, in addition to improving revenue generation and freeing up cash flow.
  • Improved delivery time: Properly arranged and tracked inventory helps protect you from mismanagement, and expedited delivery can increase customer satisfaction.
  • Reduced inventory costs: Inventory management allows you to accurately order and reorder products and materials, which decreases costs associated with backstock and storage. 
  • Increased efficiency: Effective systems prioritize systemic management so you can track the products and their quantities efficiently.
  • Strengthened trust: Updated stock and inventory numbers can increase internal and external trust by providing dependable information to manufacturers, employees, and customers during the sourcing, storing, selling, purchasing, and acquiring stages.

Representations of five common benefits of inventory management

Inventory management challenges

With so many moving parts, it’s no surprise that inventory management also has its challenges. Some of the most common challenges include:

  • Inventory shrinkage: A situation where unforeseen circumstances like theft or vendor error cause stockouts and loss of inventory. 
  • Deadstock: Stock frequently caused by incorrect forecasting and demand dips that never sells and occupies warehouse space, clutters inventory systems, and blocks cash flow.
  • Out-of-stock inventory: An inventory stockout occurs when a business exhausts its stock of a particular good or service, which can decrease revenue and credibility.
  • Demand changes: A shift in customer demand and desire for a specific good or service leading to deadstock or stockouts.
  • Poor use of warehouse space: Inefficient warehouse layouts that negatively impact workflows, supply chain performance, and shipping times.

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.

Common inventory management challenges and their solutions.

The inventory management process

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.

How it works

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.

Inventory management methods

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:

  • ABC analysis: Also known as the 80/20 rule, this technique separates inventory into three categories based on required revenue and control measures.
  • Demand forecasting: The process of predicting future customer demand for goods and services based on historical data. 
  • Economic order quantity (EOQ) formula: This formula is designed to prevent over- or understocking and minimize capital investments in purchasable products.
  • Fast, slow, non-moving (FSN) inventory: This method separates products based on consumption, quantity, and the rate at which inventory gets used.
  • First-in-first-out (FIFO): This popular inventory valuation method is just as it sounds: the oldest stock or the inventory that entered the warehouse first is sold first.
  • Just-in-time (JIT) inventory: This method refers to having inventory readily available at the right time and in the right place per the demand without overstocking it.
  • Last-in-first-out (LIFO): Similar to FIFO, this inventory accounting method involves selling goods most recently produced or purchased.
  • Perpetual inventory method: This management technique consistently tracks inventory as it moves through the supply chain.
  • Periodic inventory management: This technique monitors inventory at specific intervals during an accounting period, rather than after every sale.
  • Two-bin inventory control: With this method, two identical bins are filled with components fitted onto the final product. Production line workers refrain from using the items in the second bin until the first is wholly utilized. The empty bin acts as a signal for replenishment.
  • Vendor-managed inventory (VMI): In this model, a vendor or supplier takes on full responsibility for maintaining agreed inventory levels and requests specific information from a buyer about preferred locations or stores.

What is an inventory management system?

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.

Why effective inventory management matters

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: 

  • Less human error: To err is human. Effective and automatic data inputs decrease manual errors, which are more likely to result in stockouts, lost inventory, and other mistakes.
  • Decreased manual work: Low-performing inventory software and manual spreadsheet upkeep are eliminated, which means your team can focus on growth rather than running inventory.
  • Simplified scaling: Efficient inventory management removes complicated logistical problems and increases growth and expansion opportunities.
  • Positive customer experience: Efficient management systems decrease manual mistakes, including late or missing orders and inaccurate product availability, which can increase consumer trust.
  • Supported finances: Proper visibility into stock levels helps prevent stockouts and deadstock, which lowers sourcing and storage costs.

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.

Benefits of an automated inventory management system

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: 

  • Real-time data access: Real-time visibility means you always know what items are available and where they are, ensuring your product availability information is always accurate and up-to-date.
  • Reduced manual errors: Using reliable software to track inventory gives you a better idea of what products to reorder and when to order them.
  • Efficiency: Bird’s-eye and detailed inventory views provide near-immediate access to inventory numbers, simplify order fulfillment, and improve warehouse locations and layouts.  
  • Sales tracking and forecasting: Inventory management software makes it easy to track supply and demand trends and order products accordingly, which can improve demand and sales forecasts and stock predictions.
  • Partnership support: Reliable inventory management gives shoppers access to accurate product availability information and provides accurate past, current, and future data about transactions and potential deals with vendors.
  • Scaling support: Features like stock alerts, reorder points, asset tracking, and inventory data management allow businesses to scale with fewer complications.
  • Reduced cost: Avoid deadstock, stockouts, overhead, and customer loss costs with real-time visibility into inventory numbers.

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.

More than 50% of products have been out of stock more frequently in stores

Essential features your system should have

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:

  • Inventory tracking: Tools like barcode scanning should help you purchase, store, and track all the items you keep in stock.
  • Supplier management: Vendor management features like auto-fill for purchase orders and purchase histories help organize supplier information for more efficient purchasing.
  • Point-of-sale (POS) and e-commerce integration: Ensure a faster customer checkout experience and a centralized place for inventory data with connected e-commerce and POS systems.
  • Procurement automation: Automated low-stock alerts and reorder points can help streamline purchasing and stocking to meet customer demand.
  • Inventory reporting: Automatic inventory reports should track inventory turnover rate, inventory forecasting, cost of goods sold (COGS), inventory value, sales reports, and stock age.
  • Usability: To choose intuitive and user-friendly software, compare systems based on their ease of use, customer support, onboarding process, and learning resources.

How to manage inventory

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.

The five steps in the inventory management process

Step 1. Keep safety stock

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.

Step 2. Emphasize merchandise planning

Merchandise planning, or the strategic stocking, managing, purchasing, displaying, and pricing of products, can increase ROI and decrease inventory costs by:

  • Lowering unwanted inventory in the warehouse
  • Decreasing labor and maintenance costs
  • Reducing obsolescence by selling more stock
  • Lowering depreciation of inventory

Step 3. Track your products

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.

Step 4. Invest in automation with connected inventory performance

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.

Step 5. Audit regularly

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.

How to level up your inventory management game with Cin7

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. 

FAQ

Still have inventory management questions? We answer some of your most frequently asked questions below.

What is meant by “inventory management”?

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.

What are the four types of inventory?

The four main types of inventory refer to raw materials, work-in-process inventory, MRO inventory, and finished goods.

How do you reduce inventory costs?

You can reduce inventory costs by investing in an automated inventory management system, centralizing stock, setting reorder points, eliminating deadstock, and avoiding overstocking.

What is the 80/20 rule in inventory?

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.

Can you use Excel for inventory management?

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.

What problems does inventory management software solve?

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.

Why use inventory management software?

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.

Stop managing your inventory.
Start connecting it.