Learn everything you need to know about inventory management with our free series of comprehensive guides. Starting at the very beginning: What is inventory management?

What is inventory management?

Inventory management is how you track and control your business’ inventory as it is bought, manufactured, stored, and used. It governs the entire flow of goods — from purchasing right through to sale — ensuring that you always have the right quantities of the right item in the right location at the right time.

What is inventory?

Inventory is the goods that your company handles with the intention of selling. It might be raw materials that you buy and turn into something entirely new, or it might be a bulk product that you break down into its constituent parts and sell separately. It could even be something completely intangible: software, for instance.

Every venture that handles inventory will need inventory management of some form. Let’s take a simple business as an example.

Inventory management example

Sam decides to set up a business selling her handcrafted dining chairs. Each chair she makes requires 6 different sizes of wood, plus a cushion. She goes to her supplier and buys 10 planks of each size of wood she needs, plus 10 cushions. These are all now included in her business’ inventory.

As she turns raw materials into chairs, then sells them, Sam’s inventory levels will change. She’ll need to keep track how much of each material she has at any one time, how many chairs she can make, how fast she can make them, where her materials are, how many chairs she is selling and much more. This is all inventory management.

Don’t worry if that seems daunting — inventory management is much easier to digest once you break it down into the 5 key stages that your goods will go through.

Inventory management: 5 key stages

  1. Purchasing: This can mean buying raw materials to turn into products, or buying products to sell on with no assembly required
  2. Production: Making your finished product from its constituent parts. Not every business will get involved in manufacturing — wholesalers, for instance, might skip this step entirely
  3. Holding stock: Storing your raw materials before they’re manufactured (if required), and your finished goods before they’re sold
  4. Sales: Getting your stock into customers’ hands, and taking payment
  5. Reporting: Every business needs to know how much it is selling, and how much money it makes on each sale
inventory 5 stages

Inventory management vs. inventory control

While they may sound similar, inventory management and inventory control shouldn’t be confused. Inventory control only looks at the stock that you currently have in storage: it doesn’t take purchasing, manufacturing, selling or reporting into account. So while inventory control is a key part of inventory management, it isn’t the same thing.

Learn more about inventory control.

Why is inventory management important?

As long as your business is based around selling products, you’ll need to manage inventory efficiently. Whether you’re in the business of brewing, food manufacturing, wholesale selling or distributing, inventory management is a crucial part of your operations.

Run your business smoothly

If your business doesn’t manage its inventory properly, it will quickly fall apart.

Sam, for instance, needs to match her supply of materials and production to customer demand. If she makes more chairs than she can sell, she’ll need to find somewhere to store the excess: which could end up cutting into her margin. On the other hand, if she runs out of any one of her raw materials, production will cease entirely until she restocks.

inventory guide 2

Keep customers happy

Inventory management dictates:

  • How quickly you can get your products to your customers
  • How reliably you can fulfil orders
  • How much visibility you can give your customers

Customers will confidently buy from you, knowing you have the inventory to meet their needs. This is especially true when it comes to business-to-business transactions.

Grow your business

As your business grows in complexity, its inventory management needs will get more complex as well. When Sam adds new product lines, hires staff, opens new production facilities and grows his customer base, keeping track of her materials and stock will get harder.

That makes it important to get control over your inventory early if you plan on scaling: the later you leave it, the harder it will be.

Here are 3 tips to help you start improving your inventory management today.

Improving inventory management: 3 simple tips

1. Focus on your needs

A warehouse full of inventory can be a daunting task. One way of making managing it all easier is to identify the items that are the most important and focus on them first. It’s highly unlikely that every item in your warehouse will have the same demand from customers. Keep the top-selling items in stock, and you’ll have made a great start at keeping your customers happy.

2. Engage with suppliers

In any stock-based business, it is crucial to manage supplier relationships well. Developing constructive relationships with your business’ key suppliers is important to secure reliable supply, unlock competitive pricing and to understand emerging trends that may impact on your business.

3. Develop an inventory management system

Managing your inventory on an ad-hoc basis will only ever get you so far. To really keep on top of your stock, you’ll need an inventory management system.

Every company will have its own unique inventory management needs, so picking a system that matches your business is important. In the early days of his business, for example, Sam might be able to manage her inventory using spreadsheets. But a global stock-based business like Amazon requires a bespoke, multifaceted solution that caters to the huge number of orders processed every single day.

Deciding when you might need dedicated inventory management software is a key step in the growth of your business. To find out more about how to manage your inventory better, take a look at our guide to inventory management systems.