Inventory Management Guide

Chapter 1. What Is Inventory Management?

Inventory management is tracking and organizing the products sold by a company. We explain why inventory management is essential and list the benefits.

Welcome to Chapter 1 of Sellercloud’s inventory management guide! Starting at the very beginning, we will go over what exactly inventory management means.

We will dive into more advanced and complex topics as you progress through our inventory management guide (only 18 more chapters to go!).

By the end of Chapter 1, you’ll be able to define inventory management and list the reasons inventory management is important and beneficial to e-commerce businesses.

Read Chapter 1 already? Or maybe your level of knowledge is a bit more advanced? Head back to the guide homepage and check out the more advanced topics, or click here to jump to Chapter 2.

What Is the Best Definition of Inventory Management?

There are many ways to define inventory management. Here we’ll keep stuff simple with a short and long definition to make sure the term is crystal clear.

The short definition of inventory management: Inventory management means keeping track of and organizing the products a company has to sell. It’s that simple.

The long definition of inventory management: The term ‘inventory management’ is made up of two words ‘inventory’ and ‘management.’

Inventory refers to the products that you’re selling. In e-commerce, appropriate synonyms for inventory include:

  • Stock.
  • Supply.
  • Catalog.

That said, inventory is still the most commonly used word regarding this topic.

Management refers to how you deal with or control something—in our case, inventory. Merriam-Webster’s definition of management:

“the act or art of managing : the conducting or supervising of something (such as a business)”

Merriam-Webster’s definition of inventory:

“an itemized list of current assets: such as
(1) : a list of goods on hand
(2) : a catalog of the property of an individual or estate”

You may also have come across the term ‘inventory control,’ but know that the two are not the same thing.

Inventory control is a sub-category of inventory management specific to operational tactics and strategies to maintain stock levels—essentially, ensuring that you don’t run out of inventory (or order too much).

Inventory management is a broader term encompassing inventory control and a range of other inventory-related topics.

Why Is Inventory Management Important? 20 Reasons

Inventory management is central to running a retail business, whether online or offline. In short, it prevents mistakes and makes things easier.

Here are 20 reasons why inventory management is important.

1. Meeting Customer Demand

Inventory management ensures that sellers have enough products to meet customer demands which is vital for customer satisfaction and loyalty.

You don’t want people buying products you don’t have available or can’t find (and you especially don’t want to send customers the wrong products!).

2. Minimizing Stockouts

‘Stockouts’ are when your business runs out of a product and is not usually good news.

Keeping track of inventory levels and implementing efficient replenishment strategies, inventory management helps reduce stockouts, ensuring products are consistently available for purchase.

3. Optimizing Cash Flow

Efficient inventory management prevents excess stock and ties up capital, enabling businesses to allocate resources more effectively and maintain a healthy cash flow.

Too much stock can be expensive—it costs money to store and can take up space for other products that sell better or have better margins.

4. Reducing Holding Costs

Proper inventory management helps shrink holding costs associated with storage, insurance, and obsolescence, leading to improved profitability.

You want to ensure you’re correctly allocating storage space to the right products, ideally, those that make the most money and leave shelves the fastest.

5. Efficient Production Planning

By accurately tracking inventory levels and demand patterns, businesses can plan production activities more efficiently, avoiding bottlenecks or excessive production that can lead to inventory pile-ups.

6. Avoiding Overstocking

Overstocking is where a business has too much of a product, more than they can sell in a reasonable amount of time—the space it takes can be burdensome.

Inventory management prevents excessive stock accumulation, reducing the risk of products becoming obsolete or deteriorating before they are sold.

7. Streamlining Order Fulfillment

Effective inventory management enables businesses to process orders quickly and accurately, resulting in faster order fulfillment and improved customer satisfaction.

If your inventory is a mess, it can make it much harder to get products to customers effectively and increases the chances of mistakes.

8. Enhancing Supply Chain Efficiency

By managing inventory levels and collaborating with suppliers, inventory management optimizes supply chain operations, reducing lead times and improving overall efficiency.

You want products to travel between the vendor, your business, the carrier, and onwards to the customer as smoothly as possible, and that can only happen with proper inventory management.

9. Identifying Trends and Patterns

Utilizing trends and patterns is a huge benefit that will become majorly important as you advance in inventory management.

Inventory data analysis within inventory management systems helps businesses identify trends, demand patterns, and seasonality, enabling proactive decision-making and improved forecasting.

10. Cost Control and Profitability

Efficient inventory management allows businesses to optimize stock levels, reduce waste, control costs, and ultimately enhance profitability by improving overall operational efficiency.

Inventory management helps you find that perfect middle ground where your business can excel.

11. Preventing Stock ‘Obsolescence’

In inventory management, obsolescence is when a product becomes outdated because it is no longer in demand—this could be because of changing customer preferences or technological change.

Effective inventory management helps avoid product obsolescence by ensuring that older or slower-moving items are monitored and addressed promptly.

12. Minimizing Carrying Costs

By optimizing inventory levels, businesses can reduce carrying costs associated with storage, handling, and inventory depreciation.

13. Improving Order Accuracy

Proper inventory management helps curtail order picking and shipping errors, improving order accuracy and customer satisfaction.

Order picking is the process of staff receiving an order and going into the warehouse to pick up the product from the shelf.

In inventory management, we want to reduce the chances of someone picking up the wrong product by implementing an efficient system to clarify what product needs to be picked.

14. Enhancing Decision-Making

Inventory management provides businesses with data and insights, enabling data-informed decision-making regarding purchasing, pricing, promotions, and product development.

15. Supporting Financial Reporting

Accurate inventory records are crucial for financial reporting, including calculating the ‘cost of goods sold’ (COGS), inventory valuation, and assessing the financial health of a business.

16. Mitigating Supply Chain Disruptions

Effective inventory management strategies, such as safety stock and buffer stock, help businesses mitigate the impact of supply chain disruptions, such as delays or disruptions in the availability of raw materials.

17. Supporting Scalability and Growth

Proper inventory management practices enable businesses to scale and grow more effectively by maintaining control over inventory levels, reducing operational inefficiencies, and meeting increased demand.

18. Enabling Strategic Partnerships

Businesses with robust inventory management systems can establish strategic partnerships with suppliers and distributors, improving collaboration and fostering long-term relationships.

If you can’t get inventory management right, partners will struggle to take you seriously, and it may lead to some partnerships crashing and burning.

19. Regulatory Compliance

Inventory management helps ensure compliance with regulations and requirements related to product tracking, expiration dates, safety standards, and recalls.

20. Waste Reduction and Sustainability

Effective inventory management minimizes waste by optimizing inventory turnover, reducing the likelihood of products expiring or becoming obsolete, and promoting sustainability in supply chain operations.

Sustainability can also be marketed to customers and is becoming increasingly important to consumers.

What Are the Benefits of Inventory Management? Top 5

The above list can be a lot to absorb at the beginning, so there’s no need to try to remember it all—much of it will become more apparent as we progress in the guide.

So, let’s cut it down to the most important benefits of inventory management. Here are the top five benefits of inventory management.

Of course, there are more than just these five, but these are the most vital for any business.

1. Cost Reduction

Efficient inventory management helps businesses reduce holding costs associated with excess inventory, storage, and obsolescence.

Businesses can allocate capital more effectively and slash unnecessary expenses by optimizing inventory levels.

2. Improved Customer Satisfaction

Inventory management ensures that products are available when customers need them, reducing stockouts and enhancing order fulfillment.

This leads to improved customer satisfaction, loyalty, and the potential for repeat business.

3. Enhanced Efficiency and Productivity

Employing proper inventory management techniques streamlines processes and reduces the amount of time spent on inventory-related tasks.

It enables businesses to operate more efficiently, freeing up time and resources and increasing your company’s productivity.

4. Better Decision-Making

Inventory management provides businesses with accurate and up-to-date data on inventory levels, demand patterns, and supplier performance.

Without solid data to analyze, you can’t be sure of the decisions you are acting on.

5. Increased Profitability

By optimizing inventory levels, reducing holding costs, improving customer satisfaction, and making data-driven decisions, inventory management directly contributes to increased profitability.

It helps maximize revenue, control expenses, and improve overall financial performance.

Key Points From Chapter 1

Here are the key things to remember from Chapter 1 of our inventory management guide.

  • The crown jewel of running a successful e-commerce business is proper inventory management!
  • In simple terms, inventory management is defined as keeping track of and organizing the products a company has to sell.
  • Inventory management is important because it impacts your relationship with your customers, suppliers, partners, and your bottom line.
  • The most important benefits are cost reduction, improved customer service, enhanced efficiency and productivity, better decision-making, and increased profitability.
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Introduction to Inventory Management
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Chapter 2. What Are the Concepts of Inventory Management?