Inventory Management Process Guide: 15 Inventory Tips

What methods do you use for inventory management? Do you have an inventory management and inventory control system?

If you don't have answers to these questions, you're not making the most informed decisions for your inventory (see: what is inventory). This means you're spending more on storage and making less profit.

Adopting new inventory management methods can help you eliminate waste and focus on growing your business. Part of the inventory management process is understanding how to calculate ending inventory.

We can help you understand how to manage your inventory, some of the best tools to use, and the benefits you can expect. It's an important part of our inventory control guide.

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What Is Inventory Management?

Inventory management is the process of reducing inventory management costs and optimizing your ability to meet customer demand. This can be done using a variety of inventory management methods like reducing dead stock (see dead stock meaning) or calculating an optimal reorder point using the reorder point formula.

This most important part of inventory management is that it requires a dedicated focus on inventory tracking. You can take inventory manually or you can invest in an inventory management system.

Inventory Management System Definition

An inventory management system is a system that manages every aspect of a company's inventory. This includes buying, shipping, tracking, storage, inventory turnover, and reordering. Turnover is calculated with the inventory turnover formula. This type of all-in-one inventory management software can be integrated into your POS system to provide a perpetual inventory count.

The Objective of Inventory Management Is To...

The primary objective of inventory management is to strike a balance between inventory investment and customer service. This means that you should invest as little as possible in inventory while still being able to meet customer demand for your products.

The just in time inventory model (JIT) is a great example of this belief in action. In JIT, no extra products are ever stored in the business' warehouse. Instead, all necessary items and materials are delivered only as needed to fill customer orders. This eliminates all excess overhead expenses and streamlines the supply chain.

Process of Inventory Management

Inventory management requires creating and following a simple set of processes. Once established, these processes limit the chance of improperly managing your inventory and should be found on any warehouse manager resume. Before building your plan, you must first understand the steps that inventory goes through.

Steps in Inventory Management Process

There are eight inventory management process steps that all inventory plans are built around. Here are those steps.

Product is delivered to your facility. This is the point at which goods first enter your inventory.
Product is inspected, sorted, and stored. You may choose to use cross docking, dropshipping, or another strategy for this, whatever works best for your storage space.
Inventory levels are monitored. This can be through physical inventory, inventory cycle count, or a perpetual inventory software.
Customer orders are placed. Customers may make a purchase in person or through your digital storefront.
Customer orders are approved. This is likely an automated process in your POS system. If you participate in dropshipping, this would be the point where you pass the order along to your supplier.
Products are taken from stock. These goods are found by SKU number, packaged, and shipped or delivered directly to the customer.
Inventory levels are updated. A perpetual inventory program will automatically change your stock levels. You can also manually record each sale or discover changes when you take a physical inventory.
Stock levels trigger reordering. Calculating your reorder point for each product you sell can optimize this step and get you the goods you need to meet demand. This is a major component of the just in time inventory model.

Determine Inventory Management Process Flow

These eight steps can be done more efficiently with a properly managed inventory process flow. Each step can be optimized by tracking and reviewing each step. You can eliminate waste, discover flaws, and reallocate resources to any step that needs it to increase your profit and limit your costs.

Create an Inventory Management Process Map

An inventory process map is a flowchart that shows every step in your inventory program. Though the eight steps are fairly standard, there are many variables that are specific to your businesses. By mapping out all steps and options, you can always be prepared for any changes in supply or demand.

For example, if an order comes in and you're out of stock, you need to know what to do. Your inventory process map should include your business's preferred method of dealing with this situation. It may be placing a backorder or refunding the customer. You can even include on your map that you do both depending on the item's value.

What Is the First Step of Inventory Management?

The first step in inventory management is performing demand planning and forecasting. In this step you look at customer demand trends and sales data to determine how much of each product you will need to meet customer demand in the future. Without this step, you'll simply be buying inventory without knowing if you can sell them or if you've ordered enough.

How to Optimize the Inventory Management Process

There are several ways to improve the process of inventory management. Implementing them depends on the type of business, the current inventory process used, and other factors. However, companies should always look for ways to improve their internal processes in order to cut costs, increase efficiency, and boost profits.

Inventory control systems. Barcode scanners and RFID technology are among the most used ways to track inventory levels, reduce errors, provide real-time visibility, and automate data collection.
Regular audits. They help reconcile the actual stock with the quantities in your software. If you find large discrepancies, you should consider improvements of your inventory management process.
Adopt just-in-time inventory. Also known as the JIT inventory management process, it essentially means receiving inventory only when it’s needed for sales or production. This lowers holding costs and assures optimal warehousing process and space usage.
Reorder points and safety stock levels. Based on demand, a business can determine optimal reorder points. Preventing stockouts is one of the important things in improving the inventory process.
The FIFO method. Inventory should be arranged in a way that older stock is used first. That’s the so-called first in, first out (FIFO) method. It’s especially important for industries where items have shorter shelf lives.
Vendor management. A business is as strong as its weakest link. That’s why, when it comes to choosing wholesalers and suppliers, a company needs to build strong relationships with reliable businesses. Negotiating terms such as reduced lead times and priority deliveries can help improve the inventory management process.
Invest in technology. Nowadays, there are various solutions in the field of inventory management. A business should strongly consider investing in advanced technology to improve its inventory process. Always adapt your business according to the latest trends and technologies in your market niche.

Inventory Management Methods

Inventory management methods, or inventory management techniques, are tools you can use to better track your inventory. These run the gamut from ordering products to shipping methods and each offer unique benefits if done correctly. Managing your inventory levels is paramount in achieving the most profit and ensuring you can fulfill your customers's orders.

Explain the Various Techniques of Inventory Management

The four major devices of inventory management are ABC inventory analysis, economic order quantity (EOQ), safety stock, and reorder points. These devices are ways of ensuring your supply of goods is sufficient for meeting customer demand. They offer their own benefits based on the business you operate. Here's a brief guide on each of them.

ABC analysis evaluates the value of all goods in your inventory. This allows you to reallocate resources and put your effort behind your best items. EOQ is an inventory model that determines the ideal order quantities to minimize storage costs. Buffer stock is an additional supply of goods that you keep on hand in the event that demand increases quickly. Reorder points are the precise point that you should reorder products to meet demand without holding more goods than necessary.

Kanban Method of Inventory Management

The kanban method of inventory management is an inventory scheduling system that keeps inventory levels minimal. It is built around “bins” which separate the materials used in production. This is a major component of the just in time, or lean manufacturing, model. It only allows you to keep just enough supplies on hand to fulfill active orders. Each time a new order is placed, you then receive a delivery of the components needed to fill it.

Here’s an example of how the kanban method works. Let’s say you operate a meat packing plant. Under the kanban method, you only want to keep enough meat and packaging materials on hand to meet your order fulfillment needs (see order fulfillment meaning). So, when a new order for 500 lbs of beef comes in, you use the meat and supplies on hand first. Once this “bin” of materials are used, you place an order with your supplier to finish filling the order. This is repeated as needed every time an order is received.

Inventory Tracking Methods

One of the most important things you need to do to control and manage your inventory is to track each individual product.

Here are the most common ways to track inventory:

Monthly physical counts. Manually counting your inventory is the oldest, and most time-consuming way to track inventory. You need to shut down all operations and establish teams who walk through your warehouse accounting for all inventory. This information is tracked either using a dedicated tool or in an excel spreadsheet. While this method is a good place to start, it can become overly burdensome as your inventory grows.
Inventory cycle counts. Cycle counts are like miniature physical counts of inventory. Instead of manually counting all of your products each month, you count only the most valuable ones every few days. This allows you to keep an eye on the products that are most important to your business and will let you act more quickly whenever there’s an issue. It also lets you count inventory without having to shut down operations. However, you won’t know your overall inventory levels, so it should be paired with another inventory tracking method for maximum impact.‍
Using perpetual inventory management software. The best way to track your inventory is to invest in a perpetual inventory management system. This software automatically updates whenever products arrive, are sold, or are considered lost or destroyed. You will always have the most accurate inventory count at your disposal and can help you adjust course and meet customer demand before any issues arrive. There's a price tag attached, so the only true drawback is that it is an added expense.

Latest Trends in the Inventory Management Process

Thanks to technological advancements, the inventory management process has changed drastically throughout the years. If you’re interested in optimizing your inventory process, following the latest trends is a good way to do so. Let’s examine some of the new advancements and trends in the field of inventory management.

Artificial intelligence. Naturally, AI is a hot topic in every sector of the economy. The multiple applications of this technology are the reason why every business should pay attention to the development of artificial intelligence. When combined with automation, AI can help companies reduce human error, improve accuracy, and optimize all stages of the inventory process.
Omnichannel inventory management. The rise of multi-channel sales has brought challenges to managing inventory. That’s why one of the latest trends in the field of inventory management process is to improve tracking and integration of omnichannel sales. This ensures consistency and prevents stock losses and discrepancies.
Analytics. Companies that collect different types of data on sales, marketing channels, and other stats can easily analyze them. This helps businesses forecast sales and anticipate inventory needs. Thanks to data analytics, companies can optimize the inventory management process, prevent lost sales, reduce storage costs, and have optimal stock levels at different locations.
Outsourcing. Small and starting businesses might not have the resources to have an optimal inventory management process. In that case, they can outsource warehousing and inventory management to a third-party logistics company (3PL). This allows the business to leverage its efforts and focus primarily on marketing and sales. The reason why this inventory management strategy has become so popular is because of the growth of the dropshipping business model.‍
Proper risk management. The Covid pandemic and the supply chain disruptions that followed showed why risk management is of paramount importance. Companies should consider potential risks when managing their inventory.

Internal Audit of Inventory Management Process

Managing inventory requires conducting an inventory audit of management processes regularly. Whether monthly or weekly, you need to keep a close eye on your inventory processes. Any anomalies or wasted efforts can be caught quickly and any losses can be mitigated. This can be achieved by doing an inventory management assessment.

Inventory Management Assessment

An inventory management assessment is an evaluation of the efficiency and practices in your inventory process flow. There are tools on the market you can use for this and some inventory management software have one built in. If not, you can evaluate your processes by using your physical inventory counts to discover stock level issues. You should also review your process map to ensure all variables are accounted for and processes are followed.

How to Improve Inventory Management Process

There are many ways you can improve your inventory management and get the most out of your inventory.

Here are a few options:

Coordinate with suppliers. The better relationship you have with your suppliers, the better your inventory management. If you communicate demand changes and product needs regularly, they can ensure you're always supplied. Companies should also consider conducting a SKU rationalization every so often, to lessen costs from excessive inventory and suppliers.
Hire an inventory control manager. A dedicated person to manage inventory will always be better than someone with multiple responsibilities. This person can stay on top of supply issues and react more quickly than you may be able to. Inventory management is the primary factor in creating an inventory manager salary and job description.
Track product lead time. Product reordering can best be timed if you know the lead time to expect (see lead time definition). This will also help you avoid running into issues with meeting customer demand.
Purchase inventory management software. The larger your inventory gets, the harder it will be to manually track. Inventory management software is a great option for lowering your workloads and increasing profits.

Quiz: The Primary Goals Of Inventory Management Do Not Include…

Before we finish up here, let’s take the chance to see how much you’ve learned about inventory management.

The primary goals of inventory management do not include:

Minimizing the costs associated with maintaining inventory.
Maintaining a large inventory for long periods.
Maintaining a sufficient quantity of inventory to keep customers satisfied.
Maintaining sufficient quality of inventory to keep customers satisfied.

If you chose B, you’re right! The size of your inventory only needs to be enough to meet customer demand. All other options will help keep your business successful and customers happy.

Frequently Asked Questions about the Inventory Management Process

The inventory management process has changed a lot over the past few years. Software solutions have helped businesses automate various tasks from the inventory process. Whether you’re looking for ways to streamline the inventory management process of your company or to improve stock management, check the answers to some of the commonly asked questions.

What Are the Benefits of Inventory Management?

Proper inventory management can reduce various risk and operational costs such as the risks of spoilage and inventory damage. Here are some additional reasons why businesses should invest in improving their inventory management process.

Knowing when is the optimal time to restock and what products to purchase helps companies improve their warehousing;
Having a proper inventory management process reduces human errors as it streamlines various processes;
Choosing the right technique for your inventory management process is crucial in order to avoid shortages and inventory glut.

What Are the Main Methods of Inventory Management?

Innovations and research have led to the development of various inventory management techniques. However, there are four methods that are the most commonly used.

Just-in-time inventory management process (JIT). This method allows companies to reduce their storage costs by ordering raw materials or other inventory when it’s needed.
Materials requirement planning (MRP). Sales and manufacturing forecasting plays an important role in this inventory management method. It relies on effective planning based on past sales data and future marketing plans.
Economic order quantity (EOQ). The EOQ model allows companies to order the optimal amount of units needed in their inventory.
Days sales of inventory (DSI). This method can be referred to as days in inventory (DII) or days inventory outstanding (DIO). According to it, the company should always have inventory for a set number of days ahead.

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Can You Manage That?

Inventory management can make or break a business. Losses can quickly pile up and your inventory can cost more than it's worth. If you don't spend a proper amount of time reviewing your inventory levels and making adjustments in your online marketplace or eCommerce platform, your business can suffer.

Follow our guide above and try out new management methods to find the best method for your business. Your hard work can optimize your inventory flow, lower costs, and increase profits. Inventory forecasting is also important so you can purchase the optimal economic order quantity.‍