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What is Inventory Management?

What does inventory mean to you? To many businesses, it means total and utter exasperation.

There’s counting involved and you have to make sure that you never run out of stock, order too much and minimize human error.

The thing is, inventory management doesn’t have to be complicated at all.

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In this article, we’re going to simplify and define inventory management so that it’s easy to understand and implement … so you can master this intrinsic part of your business once and for all.

What’s Inventory Management And Why Is It So Important?

Anyone who runs a business that sells goods needs to implement a basic inventory management system. It’s not kinda important, it’s massively important. It gives you a proper oversight over your stock.

Even though shipping and manufacturing are getting more efficient and faster, companies are still holding on to more stuff. “Days inventory outstanding” – the amount of inventory on hand based on average sales per day – has risen 8.3% over the past 5 years.

Put it this way, the management of inventory gives you more internal control so that you don’t miss crucial sales and lose potentially loyal customers.

Picture it: A customer places an order for something that’s apparently in stock. Only, as it turns out, it actually isn’t in stock at all. Both you and the customer loses out, but you lose more - not only have you lost a sale but you’ve also lost a customer. This is poor stock management.

Broken down, optimized inventory stock management means that you know what you have, where it is, and when more stock is coming in. This helps you to keep costs down, ensures that orders are fulfilled and can even prevent fraud.

In essence, inventory management is important because you’re in control of your stock inventories, which means you can provide enhanced customer service and avoid excess inventory.

What Is The Function of Inventory Management?

Believe it or not, inventory management isn’t just about the stuff we sell. It’s also about taking stock of our cash, labor, as well as our company’s assets.

In a nutshell, the function of inventory management is to ensure that your business has exactly what it needs, when it needs it.

Sounds simple? Maybe, but 43% of businesses don’t track their inventory or use a manual, outdated process.

Look at it like this: If you invest more in your inventory than was really needed, you will ultimately lose out. The function of inventory management is to keep surplus and waste as low as possible while also ensuring that the production and storage of your inventory is handled with efficiency.

Another, perhaps less thought-of, function of inventory management is to ensure that we have enough buffer stock in our warehouse in case we happen to run out on the day.

Let’s take a further look into the advantages of inventory management...

Customer Retention

It’s much easier to sell to existing customers than it is to keep on acquiring new ones. In fact, the likelihood of selling to an existing customer is as high as 70%, while existing customers provide as much as 65% of the average company’s business.

In other words, customer retention is important and understanding inventory management helps with this goal simply by ensuring you have in stock what the customer expects you to have. If a customer tries to purchase something that, as it turns out, isn’t in stock, they’re going to shop elsewhere.


New situations arise and retailers have to think on their feet and act on their feet - and an inventory management system helps with this.

Businesses need to be flexible because issues such as warehouse accidents or wrong shipments do happen. And unless you’ve got in place an effective inventory management system, you might react too slowly.

Better Shipping and Delivery Accuracy

Imagine shipping incorrect items to customers? Anyone who’s ran a business knows that, as implausible as this sounds, it really isn’t implausible - especially if you haven’t implemented an effective inventory management system.

By verifying everything at each stage of the shipping and delivery process, an inventory management system improves your shipping and delivery accuracy while reducing your margin for error.

Managing Inventory In An Omnichannel World

One of the biggest challenges managing inventory is the rise of the omnichannel shopping experience. In 2018, customers have more control over how, where and when their orders are carried out, across multiple channels. Unless you adopt an omnichannel shopping experience, you risk losing potential customers to your rivals.

One of the clearest issues this presents is that we might have individual inventory streams that we need to bring together into one easily manageable system. An inventory management solution allows you to do this. We’ll explore these systems a little more later on, but it’s important to use an inventory management solution that allows for cross-channel inventory visibility.

What does this mean? Let’s imagine that a customer wants an item that is out of stock in your store. With cross-channel inventory visibility, a store associate can find said item somewhere else before informing the customer where and how they can order it.

This means that your business is better able to meet customer demand. And with 87% of customers thinking brands need to put more effort into providing a seamless experience, you can't cut corners.

An omnichannel shopping experience also means that your customers are shopping online and offline, and crucially it means that they’re carrying out searches online. This allows you to not just keep up with demand but to actually get ahead of it by responding to consumer interest in a particular product.

For example, if you take a look at your analytics and discover that consumer interest in a particular product is high, you can use this anticipatory demand signal to stock up on said product.

What Is The Process Of Inventory Management?

To make sure that your inventory management is effective, you need to implement a process.

The first steps of the process is to work out forecast demand and customer needs. This not an easy step, but you need to forecast as accurately as possible future demand by taking a look at previous selling patterns, inventory records, as well as previous sales.

What does all this tell you about future demand?

Next, categorize your inventory as this will make your warehouse more efficient in how it is ran. Break down your inventory into 3 categories:

1) Items that sell the most

2) Items that sell at a modest pace

3) Items that take a while to shift

Next, you need to pick a method or technique that works best for you. For example, it’s a good idea to implement safety stock if demand uncertainty is a big worry of yours. On the other hand, maintaining minimum stock levels might mean that you replace your inventory once the minimum threshold is reached.

Then, you need to decide how you will track your outgoing and incoming inventory. If your budget is small and you have the time, you can keep tabs on what’s moving out and in via a spreadsheet or even pieces of paper. However, if this is going to take up too much time, there are software options that will automate the process.

The image below goes into the inventory management process in more detail.

Common Obstacles To Inventory Management

Although we’ve outlined a number of reasons for why inventory management is so important for businesses in this article, it’s also worth us pointing out the common obstacles that you will face. These include:

  •   Deciding who takes control - Who’s going to make your big inventory decisions?
  •   Managing spaces and people - To keep track of your warehouse, you will need to carefully manage your space and your staff.
  •   Oversells - If you make more sales than you have products, you’ve committed oversell, which is potentially damaging to your              business because when you oversell, you need to order extra products super fast and this is not cost effective.


  •   Running out of stock - In contrast to overselling, running out of stock isn’t as damaging but it can put customers off purchasing          from you.

Let’s be clear about one thing: Inventory order management isn’t easy. It’s time consuming, can be complex and problems will arise.

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However, with data showing that U.S. retailers are currently sitting on about $1.43 in inventory for every $1 of sales they make, businesses can’t stall any longer on implementing an effective inventory management system.

Analytics Options and Reports

Analytics can enhance inventory management greatly by offering ample data that can help your marketing strategies.

With inventory management software you should have a variety of analytics options and reports available to you, such as:

  • Aged products
  • Sales velocity
  • Inventory quantities
  • Full suite forecasting report per FBA warehouse
  • Performance

Having this data in one place, you will be able to identify new opportunities to cut on inventory liabilities. Proper analytics offers clear insights into purchasing behavior.

Inventory Management Integrations

In order to know what you have in your warehouse and where your stock is located, your inventory management must be integrated with your back-end systems. This provides a competitive edge, allowing your company to minimize labor costs, optimize inventory handling plan effectively and avoid data entry errors.

A good Inventory management software can be integrated with:

  • Apps
  • Marketplaces
  • Shipping providers
  • Shopping carts

Through successful integration, your inventory management can be fully optimized with your back-end systems and you will create more streamlined business processes.

Be prepared to see a complete 360-degree view of your inventory and supply chain.

Inventory Management Software And How To Choose The Right One

It’s well worth investing in inventory management software because while it’s possible to manually manage inventory, software removes inevitable human error out of the equation. But how do you choose the one that’s right for you? Here are some tips:

  •  Consider your product - The exact type of product you’re selling can dictate the type of software you purchase. For example, if you run a clothes store you’ll want software that lets you categorize according to color and size
  •  Features - What features do you want from a piece of inventory management software? Do you need your data synced in real time? How much support will your team need?
  •  Distribution channels - If you’ve already implemented an omnichannel shopping experience, you’ll need to go for a piece of software that brings your channels together into one place
  •  Integrations - If you run, say, an eCommerce store, it will be super useful if a piece of stock and inventory management software is able to integrate with your existing systems

Simply make sure you are within your budget, know what data integrations you need, and are aware of your current and day-to-day inventory challenges.

9 Inventory Management Control Methods

The exact inventory management techniques you implement for your company will be different to the ones another company might implement.

However, these 8 techniques can help any company to better manage their inventory so they can continue to grow and retain their customers.

Develop Relationships

Having a strong working relationship with your suppliers is key. When items are selling slowly or you need to purchase new items quickly due to an oversell, a good relationship with your suppliers will prove handy. Be friendly and communicate often.

Determine Par Levels

A par level is the minimum amount you must have in stock of a product at all times. If you have less than your par level, it’s time to make a fresh order. Par levels help prevent item shortages without excess units.

Whether you sell online, offline or both - setting par levels is an imperative task. This will take a bit of market research on your part, but it will save time and hassle later on.

Fast, Slow & Non-Moving (FSN)

The FSN method is good for controlling obsolescence since not all inventory is required at the same time.

It classifies inventory into three categories: non-moving inventory, fast moving inventory and slow moving inventory.

The higher the stay of an item in the inventory, the slower the movement.

First In, First Out (FIFO)

When it comes to inventory management, oldest stock should always get sold first. While newest stock should get sold last. This is crucial for items with expiration dates, such as food.

But even without perishable goods, boxes that have been sitting in your inventory for way too long can get worn and damaged.

When boxes have been received into your warehouse, ensure the old ones are placed in front of the queue.

Last-In-First-Out (LIFO)

Known as the LIFO inventory method, last-in-first-out is best for business that sell nonperishable goods. Think retail and eCommerce businesses that sell shoes, clothes and furniture.

It is the opposite of FIFO, ensuring the most recent items purchased are sold first. Investing in a  strong inventory management system can keep track of your inventory method.

Manage Returns Effectively

One of the biggest issues faced by many businesses is the handling of returns. If you have to restock an unwanted item, make sure all of your labelling systems are in place.

If stock has been returned because it is defective, make sure you don't adjust your stock levels upwards. Instead, get in contact with your suppliers and account for it with them.


Dropshipping can be great because, in theory at least, it means that you don’t have any inventory to manage. This is definitely true if you rely on a supplier such as AliExpress from China. The caveat is that you’re relying on just one supplier and they might either run out of stock themselves, or they might discontinue a popular product.

On the other hand, if you rely on more than one supplier, there’s less chance that you’ll run out of stock. Either way, drop shippers have to perform a balancing act between keeping their clients happy and making sure their suppliers don’t run out of stock.

Prioritize with ABC

AVC stands for Always Better Control technique. Carry out an ABC analysis to identify what needs prioritizing in your inventory.

Classify your inventory into the following three categories:

  •   A - High value products that don’t sell well
  •   B - Moderate value products that sell okay
  •   C - Low value products that sell well

9) Take Advantage of Technology

Technology is rapidly expanding in the eCommerce, 3PL and retail industries.

Even though it is not easy to adapt to these technological changes in inventory management, companies cannot afford to wait any longer. 54% of them expect an increase of number of SKUs they carry/manage will increase.

With proper inventory management human error will be reduced, costs will be minimized and  inventory will be synchronized across multiple channels.


Now is the time to reign in your inventory management. It will save you time, hassle and - more importantly - money. Choose the techniques that work for you, invest in the right software and be wary of the obstacles.


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