In the world of business, inventory management is a crucial element that can significantly impact a company’s success. Whether you are a small retailer, an e-commerce business, or a large multinational corporation, effectively managing your inventory is essential to ensure smooth operations, maximize profitability, and satisfy customer demands.

What is inventory management?

Inventory is the product stock you own and plan to sell through your business. Inventory management is the process of tracking and storing products to meet customer demand quickly and efficiently. It applies to how you source, store, and process products to get them ready for sale.

Inventory is an investment. The results of poor inventory management may not show up for weeks or months. When they do become apparent, it can be ugly: spoiled products, dead stock, high storage costs—or worse, depleted stock and unfulfilled customer orders. Additionally, storage fees and holding costs can decrease your profitability.

What are inventory management systems?

Inventory management systems track products from procurement to shipment. An inventory management system can help you make critical business decisions such as how many units you need, your optimal inventory levels, when to reorder items, and which products to liquidate or remove.

The right inventory system can give you a realistic picture of what you have available and help you run your business efficiently. An inventory system can be a manual count and ledger combination, a spreadsheet, or an automated digital solution.

Choosing the right solution for your needs will depend on:

  • The size of your business
  • The nature of the products you sell
  • The industry you serve
  • Your selling channels
When the system works correctly, you know what products you have available, along with important metrics like available shelf space, the amount of units in stock, and the precise storage location of individual products.

Why is inventory management important?

Product stock on hand is a business asset. But inventory can also hurt your business if mismanaged. As your business grows, you may run into issues such as:

  • Excess inventory
  • Low stock levels
  • Stranded or dead stock
  • Spoilage
  • High storage costs

Common inventory problems and ways to avoid them

  1. Excess inventory. Having enough stock to ship out customer orders quickly is a good thing; however, having too much inventory can hurt your business.

    Excess inventory sucks money out of your business by tying up resources and running up storage costs. There’s an opportunity cost to holding too much stock. Aside from incurring unnecessary fees, you may be unable to respond quickly to shifts in customer demand, while aging inventory could force you to liquidate.

  2. Low stock levels. On the flip side, it’s essential to have enough units to meet demand. Low stock levels can hurt your sales and brand. No one likes to order an item only to find it’s out of stock.

    The right inventory level for your business may depend on seasonality, sales history, or customer demands. Run a demand planning analysis to arrive at the optimum inventory level.

  3. Stranded or dead stock. Stranded inventory is sellable inventory that may be in a fulfillment center or warehouse but isn’t listed for sale on your site. It hurts your business because it ties up your cash. You paid for the products, you are paying for storage, yet customers can’t buy it.

    Stranded inventory is a triple whammy: lost sales, storage costs, and lost storage capacity.

  4. Spoilage. Some items like food products, supplements, or cosmetics have a sell-by or expiration date. When you hold inventory past its sell-by date, your investments go down the drain.

    Tracking your items through a system can help you avoid spoilage, allowing you to run promotions or discounts on items at risk of spoiling in the near future.

  5. High storage costs. Optimizing your storage space can help you lower costs and stock fast-selling items. Not tracking your inventory can lead to higher costs of storage, removal, and liquidation. Even if you use a third-party inventory management system like FBA, you still want to track how much inventory you have in storage to avoid incurring unnecessary fees.

Tips to help you manage your inventory effectively

There are several small yet effective steps you can take to optimize your inventory processes. For instance, how much product information can you track? In addition to tracking individual units, maybe you could boost sales by tracking the dimensions and weight of products, or barcodes. Data like this can, in turn, allow you to make the most of empty storage space or avoid ending up with too much stock on hand.

To push sales in the right direction and delight customers, follow these top inventory management tips.

  1. Build and maintain relationships with suppliers. Your suppliers are vital stakeholders in your business. Your success can help their business too.

    A few ways to sustain healthy relationships with suppliers include:

    • Paying your bills on time
    • Treating your suppliers with respect
    • Communicating frequently and regularly
    • Offering constructive feedback
    • Building goodwill by referring business
    • Promote positive interactions with the key players in your supply chain to get the right products on time and anticipate any manufacturing or shipment issues.
  2. Monitor your sell-through rate. Sell-through rate measures how well you’re balancing your inventory levels. The key is to strike a healthy balance between incoming and outgoing inventory.

    Use a sales forecasting method or gauge past order quantities to anticipate demand. Don’t stock more than you may be able to sell, as this will run up your warehousing costs.

  3. Restock popular products quickly. While you want to avoid excess inventory, it’s also essential to keep enough stock on hand to meet customer demand even during your busiest seasons. Monitor sales in order to strategically plan how much inventory you will need throughout the calendar year. You will also want to keep enough backup units to ensure you won’t run out of inventory due to supply chain mishaps, whether a storm that snares shipments or a mistake in fulfilling orders.

    Tracking the days of supply for bestselling products will help you plan and reorder to avoid running out of stock and losing potential sales. Stocking popular products can also help your business earn or maintain profitability and grow.

  4. Run promotions to reduce aging inventory. Avoid spoilage or unnecessary storage fees. Zero in on products eligible for promotions to increase sales and free up storage space in your warehouse.

    When products haven’t sold in over 90 days, you can take action to avoid aging stock. Amazon’s Inventory Performance Index can provide custom recommendations such as removing items or liquidating stock with promotions or limited-time offers.

  5. Keep an eye on your margins. Healthy sales margins are a sign of your business’s vitality. Track all your operating costs, including the cost of procuring goods, shipping, storage, and order fulfillment.
  6. Reduce excess inventory to increase your profitability. Mark down products or create special deals to liquidate aging inventory or overstock products. While you may be selling products for less than you envisioned, this will help you avoid sunk costs of continuing to stock the products in your storage facility.
  7. Choose the right inventory management system. Inventory management software can help maintain appropriate inventory levels.

    There are many software options out there to choose from. Be sure to select a system that:

    • Syncs with your order fulfillment or selling website
    • Provides demand forecasting
    • Alerts you when items are running low
    • Allows quick and easy barcode scanning
    • Tracks all relevant product information
  8. Maintain four weeks of inventory cover. It’s no surprise ecommerce sellers who offer faster delivery commonly see higher conversion rates on their products.

    Having enough inventory to meet demand on a rolling four-week basis is generally ideal. Four weeks is a sweet spot because it provides enough time to:

    • Distribute inventory and save on order fulfillment costs
    • Facilitate faster delivery speeds to please customers
    • Minimize lost sales opportunities and stock shortages
    • Avoid excess inventory, helping you save on storage costs

In conclusion, mastering inventory management is a critical factor in achieving business success. It ensures that you have the right amount of inventory, in the right place, at the right time, and in the right condition to meet customer demands while minimizing costs and maximizing profits.