Key takeaways:
- An inventory management system may help you improve profits and keep your fulfillment processes running smoothly.
- There are many methods to manage inventory, from economic order quantity to safety stock alerts.
- Good inventory control helps reduce costs, avoid mistakes, and better meet customer demand.
Inventory management is how businesses keep track of what they have, what they need, and when to restock. A solid inventory management system ensures the products that are most in-demand are available at the right time.
It prevents the business from losing money by helping avoid excess inventory, stockouts, and missed sales. IInventory management involves ordering, storing, including raw materials, parts, and finished products.
Understanding the inventory management process helps you track inventory, fulfill orders, and keep customers happy, no matter your niche.
Why inventory management is important
When you handle inventory management the right way, your whole operation runs better. It’s that simple. It keeps you from attempting to sell things that are already out of stock and having to deal with customer complaints. It removes unnecessary ad spend if you’re running them, avoids backorders that upset customers, and much more.
You also improve cash flow. When you’re not sitting on excess inventory, you’re not freezing your money on slow-selling items. It may boost customer satisfaction, too. Quicker delivery and constantly available products may make people want to return.
Finally, when it’s time to grow, a smart inventory management system can scale with you without breaking. In short, it’s worth investing in a proper inventory management system.
Key types of inventory
To manage inventory right, you’ve got to know what you’re working with:
- Raw materials. These are your basic components that you buy to produce your end product.
- Work-in-progress (WIP). Items that are currently being made or assembled.
- Finished goods. Products sitting on your shelf or warehouse, ready to be sold.
- Maintenance, repair, operations (MRO). Supplies needed to keep machines and systems running but not sold to customers.
Each type is important to your supply chain, depending on what business you are running.
Top 10 inventory management methods
Here are some of the best methods to manage inventory in 2025:
- Economic Order Quantity (EOQ). A formula that tells you how much to order at a time. It helps balance holding costs with order costs.
- Just-in-Time (JIT). Only order items when you need them. It saves storage space and produces less waste.
- Last in, First out (LIFO). You account for the newest stock first. It works well when prices are rising to reduce taxable income.
- First-in, First-out (FIFO). You sell the oldest stuff first. This approach helps avoid spoilage.
- Demand planning. You use sales trends to predict what customers will be most likely to buy next.
- ABC analysis. Sort products into groups – A for high value, C for low. Focus more on the A-list items.
- Barcodes. These speed up scanning and help you track inventory quickly.
- Reorder point formula. It tells you when to restock before you run out.
- Dropshipping. You don’t keep products in stock at all. You only send orders straight to the supplier.
- Safety stock alerts. These help keep a buffer in case of sudden customer demand or supply chain delays.
Choosing the right method for your business may help reduce costs, improve the inventory turnover rate, and maximize efficiency.
Inventory management process
If you want to build a solid inventory management process, follow these steps:
- Forecast demand. Use data to predict what your customers are most likely to buy. You won’t get it perfect, but it will give you a better understanding of your customer base.
- Order stock. Make orders using one of the methods listed above, or by following trends, inventory levels, and customer demand.
- Store products. Make sure your storage is organized so you can find and ship your products fast.
- Track inventory. Use tools and methods to see what you have and where it is.
- Analyze reports. Check your inventory data and sales performance to analyze problems and patterns.
Each part of the process helps improve inventory control and avoid issues like excess inventory or late shipments. In many cases, inventory management software will help you automate at least part of the process.
Tools & KPIs for SMBs
Small businesses don’t need massive systems in place. You can start simple. Use tools like spreadsheets, barcode scanners, and inventory apps.
Spreadsheets do still work, especially if they’re set up properly and don’t contain a lot of clutter. If you don’t want to set it up yourself, there are tons of templates online. Also, there are lots of good apps for inventory tracking to choose from that are cloud-based and mobile-friendly.
Once you’ve set up your tools, you may want to follow some key inventory management system KPIs:
- Inventory turnover ratio. Shows how fast you’re selling through your stock.
- Stockout rate. Shows how often you run out of stock.
- Holding costs. Shows how much it costs to store your inventory.
These numbers will help you track inventory more efficiently, reduce costs, and improve inventory value in the long run.
Common challenges & solutions
Even though it’s highly beneficial to have such systems in place, inventory management also has its headaches.
- Inaccurate tracking. You can fix it with barcodes and better software. It’s a mistake to rely on memory or sticky notes.
- Overstocking. It happens when you ignore inventory data or keep guessing. Try demand planning or implement the EOQ method.
- Poor forecasting. Talk to your sales teams and use tools to help with forecasting. Look at historical data throughout the year and learn from it.
- Multi-channel complexity. If you’re selling on several platforms, try to sync your inventory management system across them all.
These problems can mess with your supply chain and disrupt your product fulfillment processes. It’s important to fix them as early as you notice them.
Conclusion
When you truly understand what inventory management is, and pair it with the right tools and methods, you begin running your business operations more smoothly and efficiently.
Focus on your supply chain, keep your inventory control tight, and don’t ignore your inventory data. These things are imperative if you want to manage inventory successfully.
Frequently Asked Questions
What is an inventory management system (IMS)?
An inventory management system is software or a setup that helps you organize, track inventory levels, order, and analyze stock across your business.
What is buffer stock in inventory management?
It’s the same as safety stock. You keep extra on hand in case of unexpected customer demand or shipping delays. It helps you maintain inventory levels.
What is the difference between inventory and stock?
Stock usually means finished products that are ready to be sold. Inventory includes raw materials, tools, and anything else used to make or sell these products.
What inventory method is best for e-commerce stores?
It depends, but FIFO, dropshipping, and demand planning are popular because they work well with fast-moving items and tight margins.