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 means 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. For some companies, it could even be something completely intangible: software, for instance. But for product businesses, inventory will always be something physical.

Types of inventory

There are lots of different types of physical inventory, and which ones you’ll deal with depends on the goods you sell. Here’s an overview of some of the categories you’re more likely to encounter:

  • Finished goods/for-sale goods: The products you sell to your customers
  • Raw materials: The inventory you use to make your finished goods
  • Work-in-progress: Essentially, unfinished goods — inventory that is part-way through the manufacturing process
  • MRO goods: MRO stands for maintenance, repair and operating. This is the inventory you use to support the manufacturing process
  • Safety stock: The additional inventory you keep in store to deal with supplier shortages or surges in demand

Every venture that handles inventory will need inventory management of some form. Let’s take a look at how that works in principle.

How does inventory management work?

At a basic level, inventory management works by tracking products, components and ingredients across suppliers, stock on hand, production and sales to ensure that stock is used as efficiently and effectively as possible. It can go as deep as you need it to: for example, by examining the difference between dependent and independent demand, or forecasting sales to plan ahead. But at the end of the day, it all goes back to your stock.

Example: Sam’s chairs

Sam decides to set up a company 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. She’ll need to store these items correctly, and include them in her business’ inventory.

As she turns raw materials into chairs, then sells them, Sam’s inventory levels will change. Maintaining a steady flow of finished goods will require tracking 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 five key stages that your goods will go through.

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Inventory management process: Five key stages

The inventory management process involves tracking and controlling stock as it moves from your suppliers to your warehouse to your customers. There are five main stages to follow:

  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 company 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: Businesses need to know how much it is selling, and how much money it makes on each sale

Continuing with our example from earlier, here’s how Sam’s company utilises each stage of the inventory management process:

Inventory Management Guide — Working example of the 5 key stages of the inventory management process

Inventory management vs. inventory control

While they may sound similar, inventory management and inventory control shouldn’t be confused. Control is a key part of inventory management, but it isn’t the same thing.

What is inventory control?

Inventory control is how you manage the stock you currently have in storage. This involves knowing your stock inside and out — how much is available, where it is and what condition it is in. It’s also about ensuring that you are storing stock efficiently, keeping inventory costs down and minimising the time spent counting and controlling inventory.

Learn more about inventory control.

Which comes first — management or control?

Inventory management is much broader than control: it takes your supply chain, manufacturing, fulfilment, sales and reporting into account. Almost any business will have to get an inventory management system in place before they drill down to control. Otherwise, you’ll have no way of managing suppliers, production or sales.

After that, there are countless methods for storing and selling your products better. Whether you focus on optimising purchasing, control, production or sales is up to you. You might, for instance, want to plan improvements based on previous operating experience — say, by changing how you count stock. Or you might want to tweak processes to reflect product and order profile changes, customer gains and losses or shifts in demand.

Why is inventory management important?

Inventory management dictates how you run your business, serve your customers and grow sales. For businesses based around selling products, managing inventory efficiently is crucial. Here are three key reasons why.

Running 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 chain 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.

Illustrated example of mismatched supply and demand

Many small businesses rely on manually counting stock to track what’s in store. But stock counts are disruptive and time-consuming, taking time away from making and selling products. So putting a system in place that doesn’t require stocktakes for accurate figures is imperative.

Find out more:

Keep customers happy

Inventory management dictates:

  • How quickly you can get your products to your customers
  • The reliability of your order fulfilment
  • How much visibility you can give your customers

Customers will be much more likely to come back for more if they know your organisation can consistently deliver orders on time and let them know what’s available. This is especially true when it comes to business-to-business transactions. For a consumer, a missed deadline might mean an inconvenience. For a business, it can mean lost sales and profits.

Find out more:

Grow your company

As businesses grow in complexity, their inventory management needs get more complex as well. When Sam adds new product lines, hires staff, opens new production facilities and grows her customer base, the organisation of materials and stock will get harder.

That makes it important to get control over your physical inventory from day one if you plan on scaling. Rapid growth tends to bring a lot of time consuming tasks: hiring staff, moving to bigger premises and negotiating with new suppliers. So putting an effective stock system in place early is key. The later you leave it, the longer it will take — and you’ll have less time to do it.

Find out more:

But these aren’t the only advantages of inventory management. It can also bring several direct benefits to your business’ bottom line:

  • Make it easy to add new products and channels, analyse performance and empower salespeople with up-to-date product information, so you can grow sales revenue
  • Eliminate the inefficiencies that lead to lost stock, overstocking, and stockouts — reducing holding costs and growing margins
  • Reduce the time and manpower spent on inventory admin, saving on staff costs

Here are 6 methods to help you start improving your inventory management today.

How to improve inventory management

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. Pay attention to the small details

How your business deals with order quantities, replenishment cycle times, safety stock, forecasts, seasonality and more is important. Tweak each operation according to your specific business — making sure to keep track of what works and what doesn’t. Making a dramatic improvement in one area can be better than a few small improvements across the board.

4. Utilise real-time data

Information is a powerful tool, but only when it’s accurate and up to date. Real-time data and analytics — from layered inventory tracking right through to forecasting data, automatic ordering and individualised safety stock — can make a real difference to your business. For the most accurate data, consider using perpetual inventory management software, as it is the best way to ensure the information you need is always at your fingertips.

5. Go mobile

Mobile technology has revolutionised inventory management. Barcode scanning, for example, makes receipting and tracking goods far faster — and helps eliminate unnecessary errors. Sales apps, meanwhile, empower salespeople with inventory data on the road. The days when your inventory management is tethered to a computer in your warehouse are over. You can keep track of key business processes from home, on holiday, or wherever you need.

6. 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 her company, 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.

Inventory management techniques

No matter the size of your business, employing some of these common inventory management techniques can be a great way to take control of your stock. Here are a few to consider:

  • Just-in-time (JIT) inventory. JIT involves holding as little stock as possible, negating the costs and risks involved with keeping a large amount of stock on hand
  • ABC inventory analysis. This technique aims to identify the inventory that is earning you profit, by classifying goods into different tiers
  • Dropshipping. Businesses that use dropshipping essentially outsource their inventory management — with several benefits but a few key drawbacks

Learn more about all these inventory management techniques and methods.

Deciding when you might need dedicated inventory management software is a key step in the growth of your company. To find out more about how to manage your inventory better, take a look at our guide to inventory management systems.Or if you’d like more information on the fundamentals of stock, read our inventory management basics blog.

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