What is Inventory Management? Definition, How To & Examples of Success
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Inventory management is the foundation of a well-functioning retail business, and is a fundamental building block to a company’s success and longevity. When inventory is organized and accessible, the entire supply chain will function with ease.
But without inventory management software, companies risk making any number of mistakes due to human error — and unfortunately, are more likely to disappoint their customers in the process (with inventory management costs increasing, as well).
In this article, we’ll take a look at the importance of keeping a close eye on your inventory, and review a few ways to incorporate this practice at your own place of business.
What is Inventory Management?
Inventory management describes the system businesses use to ensure optimal inventory levels at all times by organizing sourcing, storing and selling both raw materials and finished product. Good inventory management leads to optimal stock levels at the right price at all times and reduces overall costs.
With inventory management techniques, businesses can oversee both raw materials and finished products, and can regulate the warehousing and processing of these items, as well.
Why are Inventory Management Systems Important?
Implementing a good inventory management system is critical to the success of companies of all sizes, yet too many small business owners use outdated practices or neglect tracking their inventory levels altogether. Inventory management isn’t solely about your finished goods; it’s about accounting for your company’s cash flow, labor, and overall assets.
With a viable system for inventory management in place, your company can optimize supply chain management, obtain more accurate inventory data, get better at managing inventory, and experience exponential growth across all departments.
Optimize inventory tracking and fulfillment
Ensuring product availability goes hand-in-hand with optimizing your fulfillment potential, and thankfully, ecommerce inventory management supports both of these objectives.
With proper inventory tracking, you’ll know exactly how inventory is moving so you don’t miss out on sales or ruin a customer’s experience because you’re unable to complete their order.
Inventory management systems and apps also allow you to account for buffer stock, which you can use for fulfillment while you wait on additional shipments. This buffer stock will largely prevent you from running out of stock — even though stockouts aren’t always the worst thing, as discussed in our article on out of stock vs. back to stock inventory.
What’s more, order management helps meet customer demand by ensuring orders are fulfilled on time. This keeps customers happy and translates to better sales performance as a whole.
Inventory management reduces costs
Your products are the core of what you do, but if you’re not tracking inventory counts, you risk incurring excess inventory and unnecessary costs that can negatively affect your bottom line.
One benefit of inventory management not to be overlooked is how it reduces costs by offering a detailed look at your stock levels. This helps you maintain the right amount of product and avoid mispicks (and other shipping mistakes) that can be costly and time-consuming to rectify.
Vendor managed inventory can also benefit your business by helping you avoid some of the mistakes mentioned above. Human error can easily cost you money, but when you have these figures at your fingertips (via vendor managed inventory), you’ll be much more prepared when making inventory-related decisions.
Every company should be looking for practical, attainable ways to lower their operating costs, and incorporating an inventory control system is one of the best ways to do exactly that.
Improve inventory turnover
For the last few years, days inventory outstanding (DIO) — that is, the average number of days a company holds onto its physical inventory before turning it into sales — has been on a steady upswing. Many times, an increasing DIO will directly contribute to spoilage and dead stock.
Common sense tells us if you continue to invest in your inventory when you have a surplus of unmoved products, you stand to lose money in both the short and long-term.
Fortunately, tracking inventory in real-time keeps surplus and waste to a minimum, while also ensuring the production and storage of said inventory is handled efficiently. By preventing aging stock, you can avoid gratuitous losses and gain more control of your finished goods.
Provide better customer service
Excellent customer service is a hallmark of any great company, yet it’s difficult to provide quality service if you don’t have a good grasp on the products you sell. But with an understanding of your inventory levels and an accurate way to keep track of the different types of inventory, you can provide more consistent and proactive customer service to your entire customer base.
When customers reach out to your call centers, they expect to get definitive answers about the availability of the products they want to purchase. If they’re out of stock, you need to be able to provide information on when they’ll be replenished.
Inventory management tools equip your company to serve customers with confidence, since you’ll have the knowledge and metrics needed to take care of their concerns. And this way, you can prevent customer frustration, or worse — the total loss of a customer due to poor service.
Inventory Management Methods
Inventory management is all about tracking and controlling your inventory as it's bought, sold, manufactured, and stored. With that said, there are a few key methods and inventory software you can implement to support your inventory management (and ensure its accuracy).
Inventory spreadsheets keep track of your inventory levels and record any changes due to inventory turnover. Using spreadsheets, companies can get a better stock take and identify where there’s room for improvement with product performance. Whether you’re sourcing, storing, or selling inventory, spreadsheets organize all your info so it’s readily accessible.
Automated inventory management
Automated inventory management is a popular method for modern ecommerce merchants. This type of system automatically tracks and organizes your stock, supplies, and sales — in addition to managing your inventory in real-time (around the clock). With the help of automation, your brand can streamline its supply chain, simplify replenishment, and sync all its inventory data.
Enterprise resource planning (ERP)
Enterprise resource planning (ERP) is a specific software that’s geared towards activities like accounting, procurement, and supply chain operations. Essentially, ERP systems merge a number of business processes and enable the flow of data between them. In that way, ERPs are an effective tool to oversee multiple aspects of inventory management at the same time.
Multichannel inventory management
Multichannel inventory management involves tracking and maintaining customer orders across multiple warehouse locations or selling platforms (like ecommerce, retail, and wholesale). With multichannel inventory management, your brand can easily oversee its stock levels, reorders, and inventory forecasting so you can accurately plan for inventory turnover each quarter.
Inventory Management Channels & Their Unique Challenges
Retailers have a number of options when it comes to the selling channels they partner with — though Amazon, Walmart, and Shopify remain the top three platforms. While each of these hubs has its fair share of benefits, they come with their own unique challenges, as well.
Amazon inventory management
Amazon inventory management uses world-class, machine learning algorithms to deliver customized restocking strategies for your ecommerce brand. Amazon’s suite of inventory management tools is located right in Seller Central, where merchants can quickly access it. Still, selling on Amazon is associated with a few common challenges, like incurring extra carrying costs due to overstocking and experiencing errors in product pricing/product descriptions.
Walmart inventory management
Walmart inventory management uses a vendor managed model where suppliers can access their own inventory data from Walmart’s information system. This data includes things like current inventory levels or the rate at which goods are sold. In addition, suppliers decide when they want to send replenishment to Walmart — giving them more control over their inventory. The drawback is that Walmart.com currently only ships to addresses within the United States.
Shopify inventory management
Shopify inventory management allows businesses of any size to have an ecommerce store up and running in no time. In fact, Shopify provides several native tools for inventory control and inventory tracking that help retailers manage their stock levels with ease. With that said, these proprietary tools start presenting challenges once you expand your operations to new channels (other than Shopify). Simply put, they’re limited in their capabilities outside the host platform.
7 Inventory Management Techniques
The beauty of ecommerce inventory management is that it keeps you from constantly counting your stock, and it ensures you never unexpectedly run out of a product line or accidentally order in excess. It also allows you to track critical inventory KPIs and meet your business objectives.
While there are plenty of management techniques to choose from, look for those which best suit your brand’s needs and will be most effective within your warehouse.
1. Economic order quantity (EOQ)
Economic order quantity (EOQ) is a term for the ideal quantity a company should purchase to minimize its inventory costs — like shortage or carrying costs. The overall goal of economic order quantity is to decrease spending; its formula is used to identify the greatest number of units needed (per order) to reduce buying.
One of the primary gains of the EOQ model is its customized recommendations for your particular company. At times, EOQ may suggest investing in a larger order to take advantage of discount bulk buying (and to cut down on total costs associated with multiple shipments).
2. ABC analysis
ABC analysis is a technique that splits products into three categories based on consumption values and their impact on annual inventory costs.
For example, Category A includes the most valuable products with the largest contribution to overall profit. Category B are ‘interclass’ items, landing somewhere between the most valuable and least valuable products. And lastly, Category C products account for the small transactions that are vital to collective profits, but don’t matter much to your company on an individual level.
With ABC analysis, companies can have better control over their high-value inventory items, experience improvements in availability, and see a reduction in costs or losses.
3. Just-in-time (JIT)
Just-in-time (JIT) inventory management allows companies to order raw materials from suppliers in conjunction with their production schedules. Utilizing the JIT technique is a great way to reduce costs, since companies receive new products on an as-needed basis — rather than ordering too much of something and winding up with dead stock.
Inventory that doesn’t sell is likely to drain your money and resources, and yet, businesses who employ the JIT strategy enjoy an increase in efficiency and a decrease in waste. By only receiving goods as needed for the production process, you’ll cut down on inventory costs and reap the benefits of a more productive warehouse/distribution flow.
4. Safety stock
Safety stock is a technique wherein extra inventory is ordered beyond expected demand, in hopes of preventing stockouts caused by inaccurate forecasting or unforeseen changes. Safety stock can be looked at as an insurance plan, protecting companies against uncertainties in supply, demand, or manufacturing yield.
By using a safety stock approach, businesses can maintain an adequate amount of inventory at all times, and their daily operations can proceed according to plan.
Similarly, buffer stock is an invaluable asset whenever sales are greater than anticipated — or when the supplier is unable to deliver product by the agreed upon date.
5. Reorder point (ROP)
The reorder point (ROP) in inventory management is the minimum unit quantity a company should have in stock before they need to place another order. This idea is based on a brand’s unique purchase and sales cycles, which likely varies per product. Typically, a reorder point is higher than a safety stock number, as it has to factor in order lead time.
Placing orders at the reorder point ensures replacement products arrive in good time so stockouts don’t occur. Additionally, ROP helps avoid holding costs from placing orders too early, which can also cause an inventory pile up at your warehouse.
6. FIFO and LIFO
FIFO (First-in, First-out) and LIFO (Last-in, First-out) are methods to help determine the cost of goods sold. While FIFO encourages the oldest inventory to be sold first, LIFO assumes the last unit to arrive — in other words, newer inventory — has priority. FIFO is an excellent way to keep inventory fresh, whereas LIFO can prevent products from going bad.
Although there are advantages to each approach, LIFO is not always practical for some companies (since they’d rather not leave their older inventory sitting idly in stock). That’s why FIFO is used more often, as it assures the oldest products get out the door before anything else.
Even with online retail on the rise, some consumers prefer to collect orders on their own, in person. Collection-in-person is excellent for customers since it saves on shipping costs and guarantees their package arrives at a secure location. These benefits also apply to retailers, many of whom (like Walmart and Amazon) have already hopped on board with this approach.
Collection-in-person is one of Walmart’s primary inventory management techniques, as it helps them stay at the top of their industry. They offer pick-up at over 2,000 retail locations, and they also allow online orders to be returned in-store (thus solving a big problem with ecommerce).
Common Obstacles Faced by Inventory Managers
From saving you time and money, to mitigating mistakes and keeping customers happy, there are plenty of reasons why inventory management is so heavily praised.
And while most companies easily leverage inventory management to their advantage, it’s important to note a few of the common obstacles you may encounter. This way, you can be proactive in addressing these issues before further problems can occur.
1. Deciding who takes control
Deciding who takes control and who’s responsible for making inventory decisions needs to happen before anything else can fall into place or be put into motion. Will decisions be made by an individual, or will things be decided on by a team of people? Outlining the structure and authority for who controls inventory can boost accountability and prevent confusion later on.
2. Managing spaces and people
Warehouse management is an essential ingredient to running a smooth operation. If the staff or the space itself are not properly managed, it can present a lot of obstacles to your success. Since the warehouse team is directly handling your inventory, they should be given clarity around all operating procedures at any given time so everyone is working from the same page.
3. Accurate demand forecasting
Making more sales than you have products available is not only damaging to your bottom line, but it hurts the customer experience, as well. Once you’ve oversold, it’s difficult to reconcile those oversold items and maintain customer satisfaction. If this happens, you’ll need to quickly order more inventory to restock (which can be costly), and alert your customers to any delays.
4. Running out of stock
Although stockouts aren’t as harmful as overselling, they still have similar consequences. If a particular product is out of stock for too long, your customers might purchase from a competitor (which then makes it possible they’ll never return to your brand). Running out of stock is certainly less than ideal, but companies should start restocking right away if/when it does occur.
4 Examples of Successful Inventory Management
While inventory management is widely practiced around the world, there are a few companies who really stand out for how they’ve utilized inventory systems. The following brands have all employed various inventory management software and automated inventory management techniques to achieve exponential growth and to excel in their respective industries.
In 1970, Toyota became the first company to effectively implement the just-in-time technique, and they’re still using JIT systems today. Their strategy ensures raw materials are not brought to the production floor until a customer order is received and the product is ready to be built.
Once production is underway, no parts are included in the next station unless they are required to. This keeps the amount of inventory to a minimum, thus lowering total costs and allowing Toyota to quickly adapt to customer demands.
Apple is another company who has successfully incorporated JIT principles within their manufacturing process. Unlike Toyota, Apple’s approach is to leverage their suppliers to achieve their JIT goals; Apple has one central warehouse in the U.S., but 150 key suppliers worldwide.
The strong relationships Apple has built with these suppliers allows them to outsource production, resulting in reduced costs and less product overstock. In fact, with only one domestic warehouse, most of Apple’s inventory is kept within their own retail stores.
IKEA is a global retail business that has a replenishment process with maximum/minimum settings for their reorder points. For each of IKEA’s products, they’ve determined the minimum number available before reordering, and the maximum amount to order at one time.
Thanks to IKEA’s inventory management software, managers can easily access point of sale (POS) data for every product. With these advanced inventory optimization methods for streamlining the supply chain and overseeing their inventory, IKEA has remained highly competitive within a very saturated market.
Glossier is a direct-to-consumer (DTC) beauty brand who released its first four products in late 2014. Their initial launch was met with such incredible demand, Glossier actually sold a years’ worth of product in just three months — with a waiting list in the 10,000s.
To prevent these massive stockouts from happening again, the company hired experts to oversee their inventory levels, assist with forecasting, and overcome supply chain challenges. Today, Glossier continues to prioritize inventory management, working closely with vendors to secure a good margin for growth and shorten their lead times.
Skubana + Inventory Management
Skubana exists to empower companies of all sizes by integrating their products, fulfillment centers, and sales channels into one seamless platform. With Skubana, companies can introduce clarity with multichannel inventory management across multiple selling channels, manage inventory counts in real-time, and speed up their fulfillment process with ease.
Request a demo today, and see for yourself why Skubana is one of the best inventory management software solutions and how it can enhance your plan for inventory management and help you exceed expectations for growth!
The inventory management process is rooted in quality control, by tracking the life cycle of products as they continually come and go from your supply chain.
To put it lightly, an effective inventory management strategy is vital to any company looking to optimize their sales and increase their profits. Without an established approach to managing existing and future inventory, you’re in danger of frustrating customers, losing vital sales, or wasting money on products that simply don't sell.
Inventory Management Glossary
Below you’ll find a list of the most common inventory management terms and definitions that every brand and seller should know.
Method for classifying inventory items based on their value and use.
Bill of materials
List of all materials that are a part of a product and the order in which they are used.
When an item is broken down into smaller amounts before it is delivered to the customer.
Groups of products that are sold together as one product under one SKU. For example, brands might bundle a video game console, a few video games, and an additional controller.
Materials that are not part of the final product but that are needed to support operations.
Cost of goods sold (COGS)
Direct costs of producing goods that are sold by a company — including the cost of materials and the labor used to create said goods.
Items that have never been sold to a customer, likely because the item is outdated.
Process of reducing the amount of held stock at a warehouse or fulfillment center.
Costs associated with storing inventory that has yet to be sold.
Inventory management software
Programs specifically designed to automate repetitive tasks and reduce the human labor requirements for retail operations.
Inventory management system
Combination of technology, practices, and procedures that support the monitoring and maintenance of stocked inventory items.
Difference between the time an order has been made and the time of its delivery.
All the steps from when an item is received to the moment that item has been sold.
Purchase order (PO)
Document shared between a supplier and buyer that outlines the types, quantities, and prices for products or services.
Transactional document that customers receive after they have made a purchase but before their order is fulfilled.
Stock keeping unit (SKU)
Unique tracking code assigned to each product that indicates the size, color, and other relevant attributes of the product.
Frequently Asked Questions
How does inventory management work?
Unlike enterprise resource planning, inventory management focuses on one supply chain process. It optimizes the entire spectrum of said supply chain, from purchase orders with the vendor to order delivery with the customer — mapping the complete journey of a product across a multichannel network. Plus, inventory management platforms typically integrate with other retail software so you can customize the system to meet your specific needs.
What are the methods of inventory management?
There are a wide variety of inventory management methods on the market, mostly used as single entities but sometimes used in collaboration with one another. Among these diverse options, the most popular techniques are economic order quantity, ABC analysis, just-in-time, safety stock, reorder point, and First-In, First-Out/Last-in, First-Out.
How do you measure to see if you are successfully managing inventory?
When it comes to measuring your company’s inventory management success, there are a few key components that’ll help determine if you’re on the right track. These components include inventory turnover, average days to sell inventory, return on investment, and relevant carrying costs. By looking closely at each of these metrics, you can make better decisions about how and when to scale your business (and identify important areas for improvement).
Chad Rubin is the co-founder and chief executive officer of Skubana, a multichannel e-commerce software the enables brands to unlock growth by unifying their back-office operations.