Did you know that reducing stock outs and overstocking can lower your stocking costs by 10%? Managing inventory successfully is essential to meet customer demand and prevent negative reviews for your business.

If you don’t manage inventory successfully, this could harm the reputation of your business, and you could lose valuable customers.

This article will discuss the basics of inventory management and the best tips for simplifying and improving inventory management.

What Is Inventory Management?

The inventory management process refers to managing different types of inventory in line with sales orders from your various sales channels. If you’re running an online store or small business, you must ensure that your stock levels line up with the number of sales orders you receive to replace the goods sold.

Effective inventory management ensures that your cash flow is never inhibited by stock outs or overselling. To manage inventory efficiently, you can implement software systems to automate inventory management processes or use tools that improve your insight into your stock levels and sales channels.

Inventory management requires you to create an ideal economic order quantity EOQ, which is the perfect order quantity for each purchase order – based on the safety stock levels established. Ordering inventory and raw materials too frequently can cause an increase in inventory costs and carrying costs and impact the efficiency of your supply chain.

Why Is Inventory Management Important?

An inventory management system is essential to build a reputable brand and achieve excellent customer satisfaction. Poor inventory decisions can lead to many issues for your business’s supply chain and manufacturing productivity, including the following consequences:

  • Stock levels do not meet customer demand – if your stock levels are insufficient to meet customer demand, you will need to list your products as sold out on your site, which will negatively impact your sales figures. You may also be unable to fulfill existing orders, and your customers will be unhappy with your service. Maintaining a solid inventory management system can help you to avoid stockouts.
  • You have too much stock – if your stock levels are too high compared to your customer demand, you will face excess inventory sitting on the shelves in your fulfillment center. Since fulfillment centers charge for the room your products occupy, you’ll be overspending on fulfillment charges. This will have negative consequences on cash flow.
  • Negative customer reviews – if you are not consistently attaining customer satisfaction and your customers don’t receive their orders on time, you will likely receive negative comments and reviews on your sales channels. Negative reviews are one of the leading causes of discarded baskets.

Maintaining a perpetual inventory system is a significant component of the success of your business and will improve your overall supply chain management. In the rest of this article, we will discuss the best ways to achieve effective inventory management.

How To Manage Inventory

Here are the best steps and practices to implement when managing inventory for your eCommerce store or raw materials for your manufacturing and warehouse management system.

Prioritize Your Inventory

As your sales increase, you will begin to notice trends and key sales figures. You’ll know which products in your store are most popular with your customers and which are less popular. You should categorize your inventory into three tiers:

  • The A tier – the inventory in this tier will take up a small portion of your stock but will be your highest-selling items. You should prioritize restocking and security for the products in this tier.
  • The B tier – your B tier inventory will be the items that take up the most significant portion of your stock and generate moderate sales figures. In the inventory management process, you should consistently evaluate the B tier to see whether the products need to move to the A tier or C tier.
  • The C tier – this tier is made up of the items in your inventory that have a low turnover ratio. You should evaluate the products in this tier to determine whether you should discontinue the product.

Track Inventory

You need to know where your inventory is. If you implement a barcode system for your inventory management, the staff will scan the barcode, providing you with an instant update for good inventory management. Knowing your inventory’s location can prevent lost sales which would inhibit cash flow.

Tracking inventory levels will also help to inform you when you’re running low on certain raw materials or products for proper inventory management. You can implement an inventory management program or software to manage supplier relationships and improve inventory tracking.

Inventory Management Software Systems

You can implement good inventory management software to automate the inventory management process and minimize inventory costs. With the inventory management software, you can automate the following operations:

  • Establishing a reorder point – the reorder point indicates how much inventory you need to meet average daily usage. When your inventory reaches the reorder point, the software will automatically replenish your inventory levels by ordering more stock.
  • Demand forecasting – inventory management software helps you to perform demand forecasting by analyzing your existing sales data. You can create inventory management formulas for each item, predicting the inventory turnover ratio to inform your stock decisions.
  • With inventory management software, you can identify where to optimize your cash flow based on inventory cost with selective inventory control and streamlining your product offerings to reduce fulfillment expenditure.

Small business owners or retail businesses with limited staff can benefit by delegating the inventory management process to a software system, freeing up their time to help focus on business growth.

Common Inventory Management Techniques

There are several different approaches and strategies to choose when managing your inventory. Here are some of the most common inventory management techniques:

  • Periodic inventory system – with a regular inventory system, you order your inventory periodically, checking the stock for inventory items regularly. Depending on the average daily usage, you might check your inventory levels daily or weekly when demand exceeds your safety stock level.
  • Perpetual inventory system – with this system, your inventory management decisions are based on your inventory data rather than your physical inventory. This system updates based on purchase orders, and you order stock when you’re close to your reorder point. With RFID inventory management software, this process is much simpler.

Choosing an inventory management plan is essential to ensure you regularly and successfully manage your physical and average inventory levels. It can also be helpful to understand your maximum daily usage and average daily usage figures to understand how much stock and raw materials you should maintain. A base level of safety stock and a set reorder point are paramount to inventory control.


Inventory management and forecasting are essential to determine how much safety stock you need to keep up with customer demand and fulfill the quantity sold. You can appoint an inventory manager or employ inventory management software to prevent excess stock and stockouts. All your inventory records will educate you on how to minimize costs and streamline your product offerings in the future.

Frequently Asked Questions

Here are some of the questions people frequently ask about inventory management.

What Is An Economic Order Quantity?

An economic order quantity EOQ is the ideal amount of stock in each order to justify the charge. If businesses order too much inventory or too little, this could cause overstocking or may not justify an order.

What Is Inventory Management Software?

Inventory management software automates inventory management processes to reduce the manual oversight and input required to maintain ideal stock levels.

How To Improve Inventory Management

You can improve inventory management by implementing an inventory management plan or inventory management software. An inventory management strategy ensures you’re always up-to-date with your stock levels in line with sales orders.

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