What is inventory management?

Inventory management involves handling all aspects of inventory, from raw materials to finished products. It’s part of your supply chain process and lets you know where your inventory is at any time.

Tracking your inventory is essential for providing customers with the items they want without wasting money on excess products. Accurate inventory management is necessary for related tasks, such as anticipating demand to avoid excesses or shortages. Different inventory management methods dictate how you order, store and use your inventory.

Related: Maximizing Warehousing Space for Your Small Business

Why is small company inventory management important?

Inventory management is essential to small businesses for two reasons: reputation and finances. Small businesses rely on effective inventory management techniques to save money while consistently supplying customers with the products they want—when they want them.

A solid inventory system for small business use can help with:

• Wasted products: Excess inventory can result in wasted products that don’t sell. This is especially true if you sell perishable items with a short shelf life. Nonperishable products might become less popular over time, which could also leave you with unused products.
• Lack of products: Too little inventory can cost you financially. By managing your stock, you can retain your customers’ business and maintain a positive reputation.
• Cash flow control: Even if you sell a nonperishable product, excess inventory can tie up funds you could use toward growing your business. Learning how to manage your inventory ensures you have enough stock without interfering with your cash flow.
• Understanding of profitability: Inventory management helps you understand where your business makes the most money. Having an accurate list of products that sell out can help you refine your selection.
• Space management: Keeping more inventory than you need requires warehouse space. If your small company inventory management practices show you should keep fewer goods on hand, you could better utilize your space or move to a smaller building.

Challenges of inventory management

Knowing inventory management challenges helps you avoid inaccuracies and save time and money. Common challenges may include:

• Outdated processes: Using old processes could slow your inventory management tasks. Manual methods could also lead to inaccurate counts and projections.
• Changes in demand: Economic changes, seasonal influences and industry changes can affect demand for your product. A sudden drop in demand could leave you with excess inventory, while an increase makes it challenging to fill orders quickly.
• Accuracy: Having accurate data is essential for making effective inventory management decisions.
• Organization: How you organize your physical space affects how accurately you manage your inventory. Making items easy to find allows your inventory team to do their job effectively.

Inventory management methods

Businesses can choose from several inventory management methods, such as budget, product types and customer demand. Let’s take a look at some common inventory management methods to see which might be the best fit for your organizational needs.

Just-in-time (JIT)

JIT inventory management means you only keep enough inventory on hand to meet customer demand within a specific time frame. It may increase cash flow and minimize potential waste, but it could be challenging if you experience a sudden increase in demand.

First in, first out (FIFO)

Companies using the FIFO method track and store inventory so the oldest inventory gets used first. This method cuts down on spoilage.

Materials requirement planning

When you use the materials requirement planning method, your inventory team utilizes sales records to forecast inventory needs. This option requires accurate forecasting to ensure you get the needed materials on time.

ABC analysis

With this management method, you rank your products in order of importance. Your A items are products with high demand and high cost. B items include your medium-value items based on moderate demand and cost. Your low-end items fall into the C category and have low demand and cost. This helps you determine how much of each item to stock to optimize your ordering.

Ways to handle inventory management in small business settings

You can manage your inventory data using manual methods, such as spreadsheets, or through integrated software systems that automate some steps. Spreadsheets are simple and inexpensive but generally work for small businesses with limited products.

While your small business could use a simple spreadsheet to track inventory, software programs help you keep up with many moving parts, especially if your business is growing. Inventory logistics software automatically adjusts inventory levels when customers make a purchase. They can update shipping information, automatically fulfill purchase orders, process returns and integrate with item barcodes. Programs also offer data and analytics that show patterns in your inventory.

Tips for effective inventory management

The following tips can help you create an efficient and accurate small business inventory management system.

Create standardized practices

Creating standardized inventory management processes helps create consistency. Standardized inventory practices can improve how you receive stock, organize and store inventory, accept orders, pick products, pack goods and ship packages.

Formal written procedures make it easier for staff to learn the processes. Include this documentation as part of your new employee training and as a reference for existing team members.

Track your inventory

Bar code scanning and shipping numbers help you keep track of your inventory and how many units are available. Create a cycle counting schedule where employees take a count of various products and compare that number to the inventory records. This helps account for human error so you can catch discrepancies before they impact sales and storage costs.

Make accurate forecasts

Accurate sales forecasting helps manage your inventory so you can make data-driven decisions. It makes it easier to prepare for busy times of the year, such as holidays or periods with new product launches. Predicting increases or decreases in demand lets you capture all available customers without over-purchasing.

Your sales records show the historical demand for your products, which might change seasonally. Analyzing upcoming contracts and new marketing initiatives may help you anticipate impacts on inventory. You could also assess market trends, economic changes, weather and other factors that influence buying habits.

Look at individual products

Part of inventory management is learning what sells well and what doesn’t. Check for low-turn items that don’t sell during a certain period. Consider whether you want to keep offering those products, get rid of them or use special promotional methods, such as discounts, to sell them quickly.

Back up your data

Protect your inventory information with regular backups. Regularly make copies of your inventory reports and back them up in multiple digital or physical locations.

Roles to hire for inventory management

As your company grows, you may need an inventory management team to keep up. Team members may include the following professionals.

Inventory manager

Inventory managers handle the tracking, storage and distribution of stock. They coordinate with warehouse workers to implement best practices for tracking inventory and producing accurate reports. Other duties may include ordering inventory, sourcing suppliers and preparing units to ship. Inventory managers guide day-to-day operations and develop strategies to meet sales goals.

Inventory specialist

Inventory specialists improve the efficiency of your supply chain. They identify surplus stock and high-selling items and make recommendations to help you optimize ordering procedures.

Inventory clerk

Inventory clerks generally work under inventory managers to update inventory counts, record stock movement, check the quality of incoming inventory, compare purchase orders to receipts and handle inventory logistics. They confirm orders are accurate upon arrival, preventing returns or miscounts.

Stock controller

Stock controllers specialize in tracking and recording inventory within your warehouse, so you always know where your inventory is. While inventory managers forecast sales to decide how much inventory to purchase, stock controllers keep track of which products are in stock. They organize the warehouse, determining where to store each item and documenting layout changes.

FAQs about inventory management

What are the four types of inventory?

The four types of inventory are raw materials, work-in-progress (WIP), finished goods and maintenance, repair and operating (MRO) supplies. Raw materials are the individual components of your finished products before they’ve been used. WIP covers your inventory during production. MRO refers to items you use within your facility as part of your operations, such as tools and cleaning supplies.

What is the best program to keep track of inventory?

Inventory software automates many processes for streamlined management. Some software options include QuickBooks, Veeqo, Zoho and Oracle. To choose inventory management software, consider your budget and the features each solution offers. For example, you might prefer a program that provides demand forecasting, barcoding and software integration.