How To Track Inventory in 5 Steps (Including Tips)

Updated February 3, 2023

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Warehouse showing rows and tiers of boxed containing products ready for shipping.

Inventory is the raw materials, merchandise and parts that a business uses in production, and it plays an important role in nearly every organization, regardless of the industry. Keeping track of inventory helps ensure the company can continue to fulfill customer needs. Knowing how to track inventory can help you enhance efficiency in the company you work for and better meet the needs of customers.

In this article, we explain what inventory tracking is, describe how to track inventory effectively, offer tips for tracking it and highlight the benefits of tracking stock.

What is inventory tracking?

Inventory tracking is the process of keeping a record of all of the products in a company’s possession, regardless of location. Your organization stores products in the hopes that it can use or sell these goods to meet customer needs, allowing them to see a return on investment (ROI). Tracking inventory helps you avoid running out of the products you need, investing money in excess stock and having products spoil or become obsolete before you can use them.

By effectively tracking inventory, you can minimize the costs associated with storing excess goods while maximizing potential sales. An organization might store and track different kinds of inventory, depending on the industry and purpose. Companies may even decide to divide their stock into categories and track them separately. Some of the primary types of inventory include:

Raw materials: These are the raw materials that an organization uses to manufacture other products.
Unfinished products: Unfinished products are goods that first started the manufacturing process but are still incomplete and not ready for consumers.
Unfinished products: Unfinished products are goods that have begun the manufacturing process but are still incomplete and not ready for consumers.
MRO goods: Maintenance, repair and operating supplies (MRO) are the goods that an organization relies on to support operations, namely the production process.
Cycle inventory: This classification refers to products that an organization receives from a manufacturer or supplier and then sells to consumers.
In-transit goods: These are products that are currently being taken to their final destination.
Decoupling inventory: Decoupling inventory refers to the products, supplies or parts that are reserved in preparation for an interruption in production.
Anticipation inventory: When an organization is anticipating a surge in sales, like during the holiday season, they often stock excess products in preparation.
Buffer inventory: Sometimes referred to as safety stock, this is excess inventory that is meant to protect the organization in case of unexpected needs for more stock or issues.

How to track inventory effectively

Here are some steps you can take to start tracking inventory:

1. Choose an inventory management tool

There are many different options when it comes to inventory management tools, and the right choice depends on the individual needs of your organization. By choosing an inventory management tool that meets your organization's needs, you can streamline the tracking process and make more informed decisions regarding the management of your stock. Some of your options include using:

Pencil and paper: If you’re not ready to invest in an inventory tracking system, you might instead choose to track inventory manually using a pencil and paper. With this method, you can create a master data sheet and update it as necessary to categorize your inventory at regular intervals.
Specialized inventory management software: Using specialized Inventory tracking software can provide you with real-time analytics and help you forecast demand for different product categories. Many of these systems can also integrate with payment processing and accounting systems.
Spreadsheet software: Spreadsheets are useful for organizing large amounts of data, including inventory. You can manually enter information about your level of inventory and create reports using this type of software.
Cloud-based software: This type of software can also provide you with useful analytics and may allow multiple users to track stock across different locations. Many tools can also adjust inventory levels automatically after a sale and integrate with other software.
Open-source software: Open-source software may provide basic tracking tools and dashboards. While they might not be as advanced as other tracking methods, they’re still useful for integrating with other systems.
Third-party provider: Outsourcing inventory management to a third-party provider can allow smaller companies that may have a more difficult time tracking inventory on their own to save additional time and avoid the expense of paying for a large warehouse. The third-party functions to receive, move and manage inventory on behalf of its clients.

2. Focus on forecasting

Forecasting involves analyzing your past sales figures, marketing strategies, promotions and predicted growth as well as the overall trends of the economy and market. It helps you to better predict future needs. When you effectively forecast, you can track how much inventory you might need for certain seasons, months and even weeks.

3. Sell goods chronologically

Though selling goods in the order they’re made or purchased is especially important for perishable items, like makeup or food, it's a good idea for nonperishable items as well. This is because even nonperishable goods can sustain damage or become unsellable if they sit for too long. The chronological, or first-in, first-out (FIFO), approach involves organizing your products so that the oldest items are more readily accessible by adding the newer goods to the back, which shifts the older items to the front.

4. Consider the demand for goods

Keeping track of inventory helps you become familiar with the goods you have in stock and how quickly they sell. An important aspect of tracking your inventory involves identifying the goods that have a low turnover. When an organization has excess stock, it monopolizes funds, space and resources.

By recognizing products that rarely sell, you can develop creative strategies to help get rid of these items and perhaps consider not stocking these goods in the future. Some popular methods for encouraging the sale of low-turn stock include promotions and discounts. Depending on the industry you’re in, you may notice that demand undergoes seasonal changes. For example, winter clothing may not sell as well during the summer months.

5. Perform inventory counts

Even if you choose an inventory management software that tracks your stock for you, it's still important that you periodically perform inventory audits. This allows you to compare how much inventory you think you have with how much you have on hand. You can use different techniques for this depending on your organization and how quickly it goes through stock. For example, some companies do an inventory count every month, while others may perform an annual audit and occasionally review their inventory throughout the year.

Tips for tracking inventory

While there are many ways to track inventory, it’s useful to follow a few best practices so that you can account for all stock easily. Effective inventory tracking methods allow you to reduce costs and improve cash flow while reducing production shortages. Here are a few key tips for inventory tracking:

Create key performance indicators (KPIs): KPIs allow organizations to develop specific goals for their inventory. A few common KPIs organizations might use in inventory tracking include economic order quantity, inventory turnover ratio and stock-to-sales ratio.

Automate tasks: When possible, try to automate inventory tasks. For example, if you use an inventory management software system, you could save time by programming the software to replenish inventory automatically.

Invest in safety stock: Safety stock is additional inventory organizations usually keep in storage in case there’s a sudden increase in demand for certain items. This stock can make it easier for you to complete customer orders and avoid shortages in case demand rises unexpectedly.

Improve efficiency: Focus on improving the efficiency of your inventory tracking method by establishing a system for providing automatic alerts when there’s a supply chain shortage and engaging in regular inventory audits. If you use software for inventory tracking, you also may be able to generate customized reports to better manage fluctuations in demand.

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Benefits of inventory tracking

Here are the primary benefits of inventory tracking:

Improved decision-making

Inventory tracking allows organizations to make better decisions about what they sell by providing them with enhanced insights into which items sell the best. It makes it easier for them to calculate the best times of the year to order new goods and forecast demand for certain products. This improved decision-making allows them to maximize sales and increase revenue.

Enhanced customer satisfaction

In addition to better decision-making, inventory tracking can allow organizations to improve customer satisfaction by making it easier for them to provide customers with more information about when their order is likely to arrive. It also allows for faster delivery times, which can further enhance customer satisfaction. Some inventory tracking software can even provide automated updates to customers.

Potential for improved productivity

Inventory tracking can help organizations improve productivity by enabling them to provide warehouse staff with additional information about inventory levels. This information can make it easier for them to move inventory and complete tasks, which can increase order fulfillment efficiency. It allows them to spend less time searching through large amounts of inventory and more time filling orders.