Learn about inventory management and why it’s important
For companies that sell products, inventory management is essential to everyday operations, powering key purchasing, storing, and shipping processes that keep business moving. The right inventory management system can save a company time and money while improving the customer experience.
If you work in or around inventory management, you know how impactful it is. Ecommerce managers and business leaders need to understand the value of inventory management too, and the tools that are available to help manage inventory more effectively.
In this article, you’ll learn what inventory management is, why it’s important for your business, the different types, and some solutions that can make managing your inventory easier.
This post will explore:
- What inventory management is
- Why inventory management is important
- The benefits of inventory management
- Inventory management techniques
- Inventory management systems
- How to make inventory management easy with the right platform
What is inventory management?
Inventory management refers to the processes a business uses to acquire, store, track, and ship items it sells. It involves managing a physical space (typically a warehouse) where inventory is stored, as well as the people and processes moving items through that space.
Inventory management is related to — but different from — supply chain management. A supply chain is the network of suppliers a retailer uses to acquire products it sells. Inventory refers to the products and their storage once they’ve been acquired.
Approaches to inventory management vary depending on the type of business you operate and the items you sell. But no matter whether your company is B2B or B2C and regardless of what or how much you sell, you need to manage your inventory efficiently and accurately.
Why is inventory management important?
A critical factor of inventory management is a company knowing how much inventory it has on hand. Maintaining the right amount of inventory prevents selling out of items and upsetting customers or over-ordering and having overstock that costs money.
Businesses that don’t manage inventory effectively face several risks, a big one being poor application of financial resources. Inventory is the lifeblood of a business, and it represents a huge investment. Businesses incur costs to acquire inventory and for the taxes that may be due on items stored within inventories. There are additional costs such as utilities, insurance, and other security expenses associated with warehouses and associated storage spaces.
Inventories also represent a significant investment of time and effort. Employees must perform periodic inventory counts, which may occur only once per year for seasonal items. They may also happen as often as every few weeks for other types of inventory types.
Poor or nonexistent inventory management puts a business at risk of undercutting all of the time and money invested in its merchandise. But when conducted correctly, inventory management can provide a business with an incredible array of advantages.
The benefits of inventory management
The benefits of inventory management range from greater financial efficiency to improved customer satisfaction. Overall, these benefits add up to greater business success. A well-managed inventory provides many important advantages, including:
Cost and time savings
Inventory management helps to make the monetary and time investments associated with this activity more efficient. If you have a precise accounting of the stock on hand at any time, you don’t need to perform frequent, time-consuming recounts. Nor do you need to spend money reordering items when your existing stock is sufficient to meet consumer demand.
How your inventory is physically organized impacts the time it takes for employees to find and ship items, which affects how quickly you can fulfill orders and grow customer satisfaction. Inventory management lets you know which items are most popular, which are frequently combined in the same orders, and which take the longest to transit in and out of storage. You can use this data to determine how to arrange inventory efficiently.
Difficulty finding or picking items from inventory leads to slow delivery and unhappy customers. Inventory management enables faster shipping by helping a business manage the storage and movement of items. It also minimizes the risk of having to cancel an order or list items as out of stock due to insufficient inventory, which causes customer frustration.
Automation and analytics
Automated tools provide opportunities to systematically track and analyze inventory data. By using inventory management software, a business can automatically collect data about existing stock, how frequently and quickly it moves through the inventory, and more. This information can offer insight into sales patterns, highlight opportunities for improving inventory management practices, and help automate processes like estimated shipping times.
Thousands of items are recalled in the United States each year. If an item sold is subject to a recall, the seller must accept returns from customers who purchased it while identifying and removing any unsold products affected by the recall. In these difficult situations, inventory management tools that quickly identify where and when the seller acquired the product are critical for responding to the recall effectively.
Inventory management techniques
Inventory management can be broken down into a number of different processes and strategies. The following techniques can help you get started.
With JIT inventory management, commerce companies receive the exact amount of inventory they need, right when they need it. The goal is for companies to retain little to no excess stock at any given time, solving the common issue of overspending on materials that aren’t yet needed. This strategy relies on constant communication between the business and manufacturers, and it requires dedicated, streamlined software to work smoothly.
Economic order quantity (EOQ)
Using EOQ, companies order inventory so that they have neither too much nor too little at any given time. EOQ calculates the number of items a business needs to add to its inventory with each order to reduce the total costs of inventory while assuming steady customer demand. This technique helps balance the cost of ordering inventory and the cost of storing inventory.
Safety stock is a more conservative approach to inventory management that leans toward having more inventory than needed. This approach works well when supply chains may be inconsistent and inventory does not always arrive on time, as it ensures there’s always extra stock set aside in case a company can’t replenish certain items.
Forecasting helps determine how much inventory to have in stock for a given period. It’s a proactive approach that allows you to stock the right items before you need them, rather than acting when your stock falls below a certain threshold. When forecasting inventory needs, the most basic data to consider are past sales trends and their correlation with future expectations — this includes factoring in seasonal fluctuations on demand.
Minimum stock levels
A minimum stock level is the smallest quantity of each item you should have in stock at any time. This baseline can help to systematize product orders from your suppliers based on a simple metric. When inventory levels get close to your predetermined minimum level, you know it’s time to reorder. Keep in mind that minimum stock levels are not necessarily the ideal quantity you should maintain — you may need more items to ensure steady order fulfillment.
First in, first out (FIFO)
With FIFO, the oldest stock in your inventory is the first stock you sell when a new order is placed. To use this technique, your warehouse should be set up so your picking system ships the oldest items first. FIFO is often used to reduce the impact of inflation by assuming the purchase price of inventory sold at retail is lower than the purchase price of recent inventory. It helps minimize the risk of dead stock and is common for items with short expiration dates.
Last in, first out (LIFO)
The opposite of FIFO, the LIFO method means the newest items are sold first. The main benefit is a tax advantage. This approach generates a higher cost of goods sold and a lower balance of remaining inventory, which results in a lower net income that creates a smaller tax liability. The chief disadvantage of LIFO is it leaves you at risk of letting products expire, so it’s typically used only with items that don’t expire, such as electronics or building materials.
It’s wise to audit inventory on an ongoing basis by verifying that your records correspond with what’s actually on hand. The two major types of audits are spot checks and cycle counts. A spot check is an audit of a certain portion of your inventory, and performing them frequently can help identify inaccuracies. A cycle count is a deeper check — a systematic analysis of your entire inventory that’s usually performed at regular intervals spaced further apart.
An ABC analysis involves placing all your inventory items into one of three categories. Category A is essential items that are purchased frequently and should be readily available. Category B is for items of moderate importance. Category C is for rarely purchased items or those that offer minimal business value. ABC analyses help you determine which items to prioritize when restocking inventory, as well as how to organize items within your warehouse.
Inventory management systems
An inventory management system consists of different tools that go beyond simply tracking your inventory. In a system, inventory management integrates with your accounting or sales program, shipping software, and enterprise resource planning (ERP) tools while also allowing you to see how much inventory you have on hand at various locations.
Make inventory management easy with the right platform
Inventory management is vital because it allows businesses to understand how much inventory they have on hand, place orders correctly, and meet the needs of their customers.
When you’re ready to get started, make a list of the pros and cons of your current inventory management system — if you have one. Think about the biggest pain points in your inventory management process and which of the techniques above seems best suited for your business.
Adobe Commerce not only helps your business track the on-hand quantity of products but also can provide sales trend reports to help your team create forecasts and order more accurately.