A guide to inventory management for small businesses

Inventory management is an important part of running any small business. With effective inventory management, you can plan to have the right products at the right times to meet your customers' needs.

To help improve your processes, we'll share what inventory management entails and why it's important, along with techniques, best practices, and strategies for success.

What is inventory management?

Inventory management is the process of tracking and optimizing product orders, storage, and sales. The goal of inventory management is to have enough product to meet customer demand but not so much that you pay to store stock that's not selling.

Why is inventory management important?

Inventory management is essential because it helps you avoid running out of stock at inopportune moments. It also helps you keep accurate, up-to-date records of your inventory for business planning and tax purposes.

Say one of your products keeps selling out quickly, costing you valuable opportunities to drive revenue. You can use inventory management techniques to increase your orders at the right time and make sure you have enough supply to meet customer demand.

Meanwhile, if you have excess stock, you risk overpaying for products that won't sell. Depending on where that stock is stored, those products can also be left vulnerable to theft or damage.

Inventory management process

The inventory management process is spread across these key stages:

  • Orders. You decide how much of each product to purchase and place orders with your vendors.
  • Delivery. When the inventory arrives at your business or storage facility, it goes through inspection and sorting processes.
  • Storage. Inventory is safely stored until needed for in-store stocking or fulfilling online orders. It may also be insured against damage and theft.
  • Purchases. Customers purchase products, triggering shipments and reducing inventory. Businesses can use their point-of-sale system to automatically update inventory once a customer makes a purchase.
  • Returns. Track and fulfill return requests, updating inventory accordingly.
  • Repeat. Order new inventory again based on customer demand.

Businesses use inventory tracking to monitor stock levels in real time throughout each of these stages. With this information, they can pinpoint purchase trends, address any snags in the supply chain, and forecast their needs for future sales.

Inventory management techniques

Wondering how to keep track of inventory? It's important to understand how to manage with different inventory management techniques. Ultimately, the method you choose will depend on the type of business you operate.

Here, we'll break down some of the best ways to keep track of inventory:

  1. Just-in-Time Management

    The Just-in-Time Management (JIT) method involves ordering and storing inventory on an as-needed basis or "just in time."

    JIT can help reduce excess inventory and cut costs on storage and insurance. But if customer demand suddenly spikes, the business may not have the stock on-hand to deliver. Any delays could lead to lost revenue and frustrated customers.

  2. Materials Requirement Planning (MRP)

    Materials Requirement Planning (MRP) involves using sales forecasts to plan inventory needs and make orders. For instance, if based on historical sales data you predict a certain number of sales in the next quarter, you can purchase enough inventory to account for those future orders.

  3. Economic Order Quantity (EOQ)

    The Economic Order Quantity (EOQ) technique involves calculating an ideal order size that meets customer demand while reducing spend on holding costs and shortage costs.

    The EOQ assumes that demand remains constant, and it's used as a fixed value for making reorders at the right time. So even if your vendor incentivizes you to purchase more, you stick to the EOQ as a set standard.

  4. Days Sales of Inventory (DSI)

    Businesses can use the Days Sales of Inventory (DSI) method to keep track of inventory. DSI is a calculation of the average time it takes a company to sell its inventory.

    This inventory management technique helps businesses see how well their sales operations are performing, and how much inventory they need for a certain time period. If your DSI is high, for example, then it takes you a long time to sell your products, and you may need to reevaluate how much stock your order going forward.

Inventory management best practices and strategies

When it comes to how to manage inventory, there's no single best way. But you can use inventory control methods and best practices to streamline this process and improve results.

To start, try these inventory management strategies:

  • Use an inventory management system. Automate the steps of your inventory management process to increase efficiency and save time.
  • Keep accurate stock records. Make sure your inventory data stays updated in real time based on new orders, deliveries, purchases, and returns.
  • Track your inventory with SKUs. Create a Stock Keeping Unit (SKU) for each product so you can easily track inventory. It is used to track inventory and is typically associated with a product's barcode. A SKU is a unique, alphanumeric code that can be scanned and entered into your inventory management system.
  • Forecast costs with the right tools. Use business reporting tools to identify sales patterns and predict future expenses, so you can plan ahead of time.

What is inventory control?

Inventory control is the process of managing the stock that a business has on-hand, such as in its warehouse. Meanwhile, inventory management covers the entire inventory lifecycle — from forecasting and ordering products to making sales and reorders.

A business might use inventory control methods, for example, to store certain products in different locations within the warehouse and monitor their condition.

Small businesses can use both inventory management and inventory control techniques to streamline costs and meet customers with their favorite products at the right times.

Learn more about how to run your business with our tools and guides.

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