Everything You Need to Know (2024)

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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 keeping stock levels consistent and getting products into customers’ hands faster.

Not sure where to get started 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. 

Types of inventory management

Inventory management looks different for every business. For retail stores, factors such as seasonality, promotional events and sales, and competitive returns policies determine much of a merchant’s inventory management strategy. 

For businesses with multiple locations, maintaining an accurate, centralized view of inventory is essential. Alongside ensuring stores have adequate stock, you also need to organize warehouse storage so that a majority of your customers receive an equivalent level of service.

Benefits of inventory management

Whether you’re a small business or company using enterprise resource planning (ERP), inventory management helps your business do several important things:

1. Avoid 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.

2. Avoid 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.

3. Save on 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.

4. Improve 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.

5. Optimize 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.

Inventory management systems: Software and apps

Today’s inventory management systems are digital and cloud-hosted. They work across devices and users to keep everybody interacting with the supply chain on the same page.

An inventory management system (IMS) is a program that monitors and organizes all the elements involved in inventory management and syncs data to your point-of-sale system. There are three main types of systems: perpetual, periodic, and manual inventory systems.

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—only a viable option if your monthly sales are in the single digits.

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 keep tabs on the live status of your stockroom. Apps are handy for employees involved in the active running of your business—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:

11 inventory management techniques

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

1. Implement 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. 

2. Set par levels

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 how long new stock takes to arrive (your IMS will track information like this in a retail sales report).

3. Follow the first in, first out principle

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. Manage 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’re expecting an increase in sales or generating lots of purchase orders so they can adjust production and lead times. 

5. Make contingency plans

Don’t wait for inventory problems to happen before planning a solution. Have strategies in place to deal with:

  • Overselling due to an unexpected sales spike
  • Cash shortages
  • Busy or full warehouses
  • Lack of product
  • Slow-moving products
  • Unfulfilled sales orders
  • Discontinued products

6. Conduct regular auditing

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.

7. Prioritize with 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.

8. Practice accurate forecasting

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.

9. Apply the last in, first out (LIFO) method

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.

10. Try the just-in-time approach 

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.

💡 Tip: If you need to receive direct notifications of low stock levels, install an inventory alert app from the Shopify App Store.

11. Outsource your inventory storage and fulfillment

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.

Inventory management on Shopify 

Every business should strive to remove as much human error from their inventory management processes as possible, which means taking advantage of inventory management software. 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.

Screenshot of the Shopify inventory page

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

Screenshot of the Shopify reports page

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.

Inventory management tips for retail

Whether you’re a new business or opening yet another retail store location, keep these inventory management tips in mind:

  • Update inventory records in real time. Access to fresh, correct inventory data is key to moving products quickly and efficiently.
  • Audit inventory regularly. Run monthly and annual audits to ensure accuracy between your stock quantity and financial records. 
  • Go over supplier performance. Identify where suppliers can improve or when to cut them off. 
  • Put one person in charge of inventory management. It helps to give one person ultimate responsibility for ordering restocks, negotiating with suppliers, and paying invoices.
  • Invest in inventory management software. Look for software that works with your business tools and can integrate with future multichannel sales.

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:

RFID

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.

AI

Artificial intelligence 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 inventory

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.

Inventory management FAQ

What is the meaning of inventory management?

Inventory management is the process of tracking inventory to control the ordering and storage of goods, the use of parts and materials, and the distribution of finished products and purchases.

What are the four types of inventory?

The four main types of inventory are raw materials; works-in-process; maintenance repair, and operations (MRO), and finished goods.

What is an example of inventory management?

An example of inventory management is a retail store using a bar code scanning system to keep track of product stock levels. The store utilizes demand forecasting to predict sales trends and determine optimal stock quantities. They employ an automated replenishment system to reorder products when stock reaches a predetermined threshold. The store also maintains an organized warehouse, ensuring efficient order processing and fulfillment. Finally, they analyze sales and inventory data to make informed decisions on product assortment, pricing, and promotions, ultimately optimizing their inventory management process.

What is the main purpose of inventory management?

The main purpose of inventory management is to avoid stockouts, minimize surplus inventory, and maximize efficiency in business operations. In the long run, this saves companies time and money.

What are the 5 stages of the inventory management process?

The five stages of inventory management are: Demand forecasting, which predicts future demand to optimize stock levels. Replenishment, which ensures timely product restocking. Order processing, which streamlines order fulfillment. Storage and organization, which maintains an efficient warehouse. Reporting and analysis, which informs data-driven inventory decisions.

What is the best way to manage inventory?

The best way to manage inventory is by implementing a comprehensive inventory management system that combines demand forecasting, efficient replenishment strategies, streamlined order processing, organized storage, and data-driven reporting and analysis, all while utilizing technology and automation to optimize stock levels and reduce costs.

What is vendor-managed inventory?

Vendor-managed inventory (VMI) is a business model where the supplier or vendor takes responsibility for managing and replenishing the inventory of their products at the customer’s location. In VMI, the vendor monitors inventory levels, forecasts demand, and initiates replenishment without relying on the customer’s input. This approach allows for better coordination between the vendor and customer, reducing stockouts and excess inventory while improving overall supply chain efficiency.

What is the first step of inventory management?

The first step of an inventory management plan is to assess and analyze the current inventory situation accurately. This involves conducting a comprehensive inventory audit, which includes gathering data on existing stock levels, and categorizing inventory items and evaluating their value and demand patterns. By understanding the current inventory status, businesses can identify areas of improvement, set realistic goals, and develop effective strategies for inventory control, such as optimizing reorder points, safety stock levels, and replenishment methods.

What is EOQ in inventory management?

Economic order quantity (EOQ) is a formula used in inventory management to determine the optimal order quantity that minimizes total inventory costs. EOQ considers ordering costs, carrying costs, and demand rates to find the quantity that balances the cost of holding inventory and the cost of ordering new inventory. You can calculate your EOQ as follows: EOQ = √((2 * D * S) / H) Where: D represents the annual demand for the product S represents the ordering cost per order H represents the holding cost per unit per year By calculating the EOQ, businesses can make informed decisions about how much inventory to order at a time, striking a balance between minimizing holding costs (costs associated with storing inventory) and ordering costs (costs associated with placing orders).

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