Picture this: A customer orders one of your best-selling products — but you don’t have it in stock. Now, you’re scrambling to find a solution, risking delays, lost revenue, and a frustrated customer who might never return.
On the other side of your warehouse, a product you were excited to start offering has been sitting on the shelf for months, tying up capital and taking up valuable storage space.
Striking the right balance between enough and too much stock is the challenge of inventory management. When done right, it keeps operations running smoothly, reduces costs, and improves customer satisfaction.
Here’s how to make inventory management work for you so you always have the right products in stock at the right time.
What is inventory management?
At its core, inventory management is the process of tracking, storing, and replenishing stock to meet customer demand while avoiding shortages and waste. It’s an essential part of supply chain management, helping businesses reduce costs, improve efficiency, and enhance customer satisfaction.
A well-structured inventory management system allows you to:
- Monitor stock levels and make informed purchasing decisions
- Forecast demand to avoid overstocking or running out of high-demand items
- Optimize warehouse management to streamline storage and order fulfillment
- Use strategies like ABC analysis to prioritize essential products
- Minimize inventory costs while ensuring smooth operations
Many businesses rely on inventory management software to automate these processes, giving them real-time visibility and control over their stock.
How inventory management works
Effective inventory management is about optimizing every stage of the inventory process to ensure you have the right products in the right quantity when you need them. Here’s how it works.
- Buying inventory: First, businesses forecast demand before ordering goods so they don’t waste money on extra stock or lose sales due to shortages.
- Storing and tracking inventory: Next, products move into a warehouse or fulfillment center. From there, an optimized warehouse layout makes it easy for teams to know where to find certain products. Teams also set reorder points and monitor inventory turnover (how quickly you’re selling and replacing goods) to make sure they’re always carrying what customers want.
- Selling and shipping orders: When customers place orders, businesses pull products from their locations in the warehouse, pack them, and ship them.
Smart inventory management techniques
Businesses can use smart inventory management techniques to keep inventory under control and ensure smooth operations.
- Perpetual inventory systems automatically update stock levels in real time, helping businesses prevent shortages and overstocking.
- Economic order quantity (EOQ) helps businesses calculate the ideal order size to reduce costs while meeting demand efficiently.
- ABC analysis allows businesses to prioritize inventory by focusing on the most valuable products.
- RFID tracking and barcodes improve warehouse management by making it easier to track inventory and speed up order fulfillment.
Types of Inventory
To stay efficient, businesses categorize inventory into four main types. Understanding these categories helps them track inventory, improve order fulfillment, and reduce costs.
- Raw materials: These are the essential building blocks of a product for any organization that manufactures. For example, a furniture company’s raw materials include wood, nails, and fabric. A bakery needs flour, sugar, and eggs. Without these, there’s nothing to manufacture or sell.
- Work-in-process (WIP): WIP inventory includes partially completed products still in manufacturing. Picture a car on the assembly line or a batch of soap that hasn’t been packaged. Managing WIPs efficiently can help minimize inventory costs and speed up production.
- Finished goods: These are the products ready for customers. Whether they’re sitting in a warehouse, displayed in a store, or listed online, finished goods are waiting to be sold. Keeping the right stock balance prevents overstocking or running out of items when demand spikes. Most companies that don’t manufacture will stock and distribute finished goods.
- Maintenance, repair, and operations (MRO) supplies: MRO inventory keeps the business running smoothly but isn’t part of the final product. Think of cleaning supplies, tools, or even office equipment. Proper MRO tracking helps companies manage inventory and avoid unexpected disruptions.
Why is inventory management important?
Inventory management helps businesses avoid costly mistakes by keeping stock levels optimal. Here’s why it matters.
Avoids stockouts and overstocking
Running out of products frustrates customers, while excess inventory takes up space and ties up money. Good stock management ensures you have just the right amount to meet demand.
Improves cash flow
Inventory that sits too long is money wasted. A smart inventory management system helps businesses invest wisely, keeping cash available for other needs.
Speeds up order fulfillment
Customers expect fast shipping. A well-organized inventory control process ensures products are always available, meaning orders are processed quickly and delays are minimized.
Reduces costs
Overordering leads to high storage costs, and last-minute purchases can be expensive. Strategies like EOQ and demand forecasting help businesses reduce costs by optimizing stock levels.
Increases efficiency
Manually tracking inventory can lead to errors. Robust inventory management software lets businesses track inventory accurately in real time, improving warehouse management.
Strengthens supply chain management
A smooth inventory process keeps operations running more efficiently. Whether dealing with raw materials, finished products, or safety stock, businesses know what’s in the warehouse to meet demand without disruption — or act quickly to find a plan B.
Common challenges of inventory management
Managing inventory efficiently is no easy task. Businesses of all sizes face obstacles that can lead to lost revenue, operational inefficiencies, and dissatisfied customers. Here are some of the most common inventory management challenges:
Inaccurate inventory counts
Errors in inventory counts can lead to stock discrepancies, making it difficult to know how much product is available. Mistakes often happen due to manual data entry, system glitches, or theft, resulting in overstocking or stockouts that hurt business operations.
Poor demand forecasting
Predicting customer demand is a constant struggle. If businesses underestimate demand, they run out of stock and miss sales. If they overestimate, they get stuck with excess inventory.
Studies show that applying AI-driven forecasting to supply chain management can reduce errors by 20-50%, helping businesses optimize stock levels and improve accuracy.
Supply chain disruptions
Supply chain disruptions are a significant challenge for businesses, affecting everything from stock management to order fulfillment. One study found that 93% of companies reported supply chain disruptions, with businesses that diversified suppliers seeing a 30% reduction in delays. Additionally, companies that adopted digital technologies improved demand forecasting by 35%, helping them better manage inventory and reduce shortages.
Rising inventory costs
Holding too much inventory ties up capital and increases expenses. Between storage, insurance, and depreciation, companies can spend 15-30% of inventory value on carrying costs. These costs eat into profits, especially when inventory turnover is low.
Lack of supply chain visibility
Many businesses struggle to track inventory across multiple warehouses, leading to inefficiencies, delays, and misplaced stock. Without real-time tracking, businesses may fail to spot bottlenecks or optimize their fulfillment process, making inventory management even more challenging.
Types of inventory management
Every business has its own way of managing stock, depending on how often it sells products, how much storage it has, and how much control it needs over inventory. Here are three of the most common types of inventory management systems businesses use.
1. Perpetual inventory management
A perpetual inventory system automatically updates stock levels every time a sale, return, or new shipment occurs. Businesses use barcode scanners or RFID tracking to track inventory. This system works best for businesses with high sales volume, like retail stores and ecommerce brands.
2. Periodic inventory management
Instead of updating stock levels constantly, a periodic inventory system relies on scheduled inventory counts — whether weekly, monthly, or quarterly. Businesses track stock manually or through spreadsheets, which makes this method simpler and cheaper than a perpetual system. But, it comes with the risk of inaccurate numbers between counts, which can affect inventory control and cash flow.
3. Dropshipping inventory management
Dropshipping takes a different approach: Businesses don’t store or manage inventory. When a customer places an order, the business buys the product from a supplier, who then ships it directly to the customer. This eliminates storage and inventory costs, but it also means firms depend on third-party suppliers for order fulfillment and delivery times.
Inventory management methods
Choosing the right inventory management method helps businesses maintain the right stock levels, prevent shortages, and avoid unnecessary costs. Here are four commonly used approaches.
Just-in-time (JIT) inventory
With JIT inventory, businesses order stock or raw materials only when needed, reducing storage costs and waste. This method works well for companies with predictable demand but requires accurate demand forecasting to avoid stockouts.
Material requirements planning (MRP)
MRP helps manufacturers plan inventory by analyzing demand forecasting, production schedules, and supplier timelines. It ensures they have the right raw materials without disrupting production.
ABC analysis
This method categorizes inventory into three groups based on value and sales frequency:
- A-items: High-value products with high sales volume
- B-items: Mid-value products with moderate sales
- C-items: Low-value products that sell slowly and don’t account for much of a company’s revenue
Focusing on A-items helps businesses manage cash flow efficiently while controlling stock for low-value items.
EOQ
EOQ calculates the ideal order size to balance ordering costs with inventory costs. It helps businesses reorder efficiently without overloading their warehouse or disrupting the supply chain.
Streamline your inventory management with Fishbowl
Managing inventory shouldn’t be a constant challenge — and it won’t be with Fishbowl. Fishbowl’s robust inventory management software gives you real-time visibility into stock levels, automates tracking, and simplifies purchasing and order fulfillment so you can focus on growing your business.
Plus, it integrates with dozens of other platforms, including QuickBooks — so you can keep your inventory and financial management in sync for better cash flow control.
Stop wasting time on manual inputs and time-consuming inventory counts. Book a demo today and see how Fishbowl can help you optimize inventory today.
