Inventory is the lifeblood of your product-driven business. It’s what keeps the customers coming back and money coming in. Internal inventories are equally as essential for service-based business that depend on key products to complete work.
In any scenario, inventory is an essential foundation of your business. And managing this inventory is critical to ensuring the right products are stocked in the correct quantity to balance needs without overextending resources.
Tracking all these moving parts is a near impossible task to complete manually. Inventory management software is critical for businesses of all types and sizes. It’s especially critical for e-commerce businesses that require pinpoint precision in processing and delivering orders.
Continue reading to learn more about inventory management and the software that optimizes the process.
Overview: What is inventory management?
Inventory management is the discipline of tracking and managing the quantity of products as they move in, across, and out of your organization. Inventory tracking balances projected inventory needs with current inventory levels.
The goal is to maintain an adequate stock without risking being out of a product or having an unnecessary product surplus.
Inventory management gets tricky when you track the numbers of products on hand across various locations, warehouses, and different inventory buyers. This is where inventory management software becomes an essential component of your operation.
Inventory apps and software track and manage inventory across your business, projecting future needs and automatically ordering new inventory when necessary.
Many of the best e-commerce platforms provide built-in inventory management tools since it’s an innate component of running an online business. It’s a foundational component of any business’ tech stack, and it’s a requirement to successfully navigate and shift with the dynamic needs of product stock.
Why is inventory management important for small businesses?
Inventory management is essential for small businesses that need to squeeze as much efficiency as possible out of their processes. Plenty of things can derail a business — ahem, looking at you, global pandemic — but a lack of inventory to sell is a surefire way to destroy your business.
Larger businesses and enterprises have more room to error on a lack or surplus of inventory, but this isn’t the case for small businesses. Small businesses need to work within their resources to maximize performance and sustain growth.
This precision and agility is exactly what your inventory system provides. Now more than ever, small businesses must find a way to do more with less.
And software is the key to unlocking the automations and efficiencies necessary for your business to prosper. Even if you have to start with free inventory software, it will be a great improvement over manual spreadsheet management.
Important terminology for inventory management
You’ll need to be familiar with some key terminology when diving into inventory management strategies and software:
- Stock takes - Stock taking is the manual process of verifying the quantity of stocked inventory at a business location or offsite warehouse.
- Categorization - Categorization is the organizing and classifying of content based on varying details and qualifiers.
- Purchase order - A purchase order replenishes inventory from your supplier.
- RFID - Radio frequency identification (RFID) is a method of tagging, tracking, and finding products throughout your supply chain, whether in a warehouse, in transit, or on your store floors.
- SKU - Stock keeping units are a standard way to efficiently catalog and reference products in your inventory.
- Bundle - A bundle refers to a group of products that are packaged together and sold as a single SKU.
- Landed Cost - Landed cost refers to the total sum of costs and expenses incurred from getting products into your inventory, including shipping, taxes, manufacturing fees, and many more.
Techniques for successful inventory management
There is no one right way to manage your inventory. Countless techniques have been employed by leading organizations across the world to optimize their inventory practices.
Here are the most popular techniques for managing inventory:
Technique 1: Backordering
Backordering is the practice of selling products without having the inventory to provide the customer. This requires extreme discipline as a business since you’re essentially taking money based on a guarantee of a product being delivered.
A core component of this technique is managing customer expectations regarding accurate delivery.
Technique 2: Bulk ordering and shipping
Bulk ordering and shipping applies the same principles to inventory management that makes Costco and Sam’s Club appealing to consumers. It’s almost always cheaper to order inventory in as large an amount as possible, which contributes to more positive inventory accounting metrics.
This doesn’t mean you should pour all your operating capital into larger order amounts. You must find an optimal balance between order quantities and capital on hand.
Technique 3: Dropshipping
Dropshipping is the technique of not having to actually hold any inventory as a business. Dropshipping agreements enable you to coordinate delivery between your customers and your product manufacturers or wholesalers.
This technique eliminates the risk you incur as a business by purchasing a ton of inventory in the hope of later selling it. But it increases your costs, and diminishes your profits, since you’re unable to get bulk order discounts.
Technique 4: First-In, First-Out
First-in, first-out (FIFO) is a common inventory technique for the food and hospitality industry. It refers to selling older inventory first or arranging older inventory so that it’s pulled in front of newer products.
This ensures you’re turning products over in a timely manner and none get permanently pushed to the back of the shelf. Though it originates in the food industry, it applies across industries.
As your products are updated and improved upon, customers begin to expect those new products. Ensuring that you’re flipping inventory and restocking from the back forward ensures older products are always sold first.
Technique 5: Par levels
Par levels are inventory 101, but they shouldn’t be overlooked. Setting par levels provides you and your team with the bare minimum stock level you need to have on hand for a given period of time.
It’s another classic technique for managing inventory in professional kitchens. Every station owner is responsible for getting their par prepped for the upcoming service. But the technique works just as well for store fronts and other businesses as well.
It requires details of past inventory needs as well as predictive analysis to accurately estimate required inventory levels for the given time period.
Technique 6: Just-in-Time management
Just-in-time (JIT) inventory and manufacturing processes are designed to eliminate waste and boost efficiency. The core tenant of JIT is to streamline inventory costs and warehouse needs by depleting and then ordering goods as needed rather than stockpiling inventory.
The technique mostly originated with Toyota Motors in Japan in the 1960s and 1970s. The technique reduces overhead on-hand, which leaves more resources to go around while also reducing storage, insurance, and other costs associated with extra stock.
JIT does introduce some levels of risk. If you have an increase in manufacturing needs, you must be able to scale up your inventory to match the demand. The inability to quickly bring in increased inventory can result in missed revenue and lead to a damaged reputation with consumers and clients.
Technique 7: Materials requirement planning
Materials requirement planning (MRP) is an inventory management technique that’s rooted in sales-forecasting. There are unique layers to this process, as manufacturers must have complete and cleaned sales data that has been accurately forecasted.
Another layer of MRP is that manufacturers and inventory managers must work with their material suppliers to ensure the materials are on hand for future inventory needs. As with JIT, the main benefits with MRP is that you don’t have more invested in your inventory than absolutely necessary. But the downside is that you have to have accurate forecasting to scale with demand or you risk missing out on opportunities.
Technique 8: Economic order quantity
The economic order quantity (EOQ) inventory technique is a batch ordering process that’s designed to ensure adequate inventory and materials are on-hand over a given time frame. The EOQ model is designed so that companies only need to worry about making orders a few times a year. It works by assuming a constant consumer demand and then factoring in the bulk savings costs for each batch order.
EOQ is based on the assumed trade-off between costs associated with inventory holdings as well as setup costs. EOQ strives to minimize these costs with each accurate batch order.
Technique 9: Day sales of inventory
Days sales of inventory (DSI) is less an inventory management technique and more of a financial formula. It identifies the average number of days that it takes a company to sell through their inventory. The goal of DSI is measuring how long a certain amount of inventory will last across an organization before needing to be replenished.
A lower DSI is ideal since that means that your business has healthy sales and are selling through inventory quickly.
DSI is also known as the average age of inventory as well as other acronyms such as days inventory outstanding (DIO) and days in inventory (DII).
Inventory Management Frequently Asked Questions
What is dead stock?
What is dead stock?
Dead stock is any item that can no longer be sold. This happens for many reasons, such as passing an expiration date, inclusion in a product recall, or simply company policy not to sell products past a certain age.
What is 3PL?
What is 3PL?
“3PL” is an acronym for third-party logistics. This refers to the inventory and supply chain management practice of outsourcing various components to third parties, such as warehouse management, shipping, and more.
It offers a lower up-front cost to unlock these services, but it’s typically more expensive in the long run than building your own supply chain infrastructure.
What are key inventory KPIs?
What are key inventory KPIs?
A few critical inventory management KPIs (key performance indicator) include inventory turnover ratio, average inventory, and holding costs. Your inventory turnover rate refers to the amount of time it takes to completely sell out of an order of inventory.
This shows you the health of your inventory sales as well as if you’re ordering the proper amount of products.
Average inventory refers to the average amount of inventory on hand at any given time. This could refer to a particular item, group of items, or your entire inventory. It’s a means of measuring if you’re over or understocked on average.
Holding costs essentially quantifies the monetary value of the amount of inventory on hand at any given time. This provides insight into appropriate resource allocation.
Don’t overlook inventory management
You’ll encounter a barrage of sexy components, technologies and dashboards that come with opening a business. But you’ll also run into seemingly less sexy foundational business components that must not be overlooked.
Inventory management is one of those foundational, perpetual things that you will always need to tweak and keep an eye on.
And in defense of inventory management, you can choose from many groundbreaking platforms to help you optimize all parts of your inventory management system. And real savings can be had from these optimizations.