Inventory Management Guide

Chapter 13. What Are the Best Inventory Management Practices?

Efficient inventory management is crucial for business success. Following inventory management best practices can keep inventory in order.

Welcome to Chapter 13 of our inventory management guide. This chapter will focus on some of the best inventory management practices.

These best practices can help make inventory management easier and cheaper and avoid some of the challenges mentioned in Chapter 11.

Overwhelmed? Head back to the inventory management guide homepage!

Top 17 Inventory Management Best Practices

Keep to these 17 inventory management best practices to control costs, make tasks easier, and prevent a great deal of problems.

It may feel like we’re repeating some of what we explained in previous chapters, and for some points, we are. 

We’ve thrown a lot of information at you in this guide, so it may be hard to determine how important all that information is without context.

Think of this chapter as a refresher, summarizing many of the most important points from previous chapters. (But don’t worry, we’ve also thrown in a few new concepts for you to consider.)

1. Actively Track and Check Your Inventory

Chapter 7 covered inventory tracking, which is when you track inventory around the warehouse. Tracking inventory is a best practice because it helps you with many tasks. Some include:

  • Forecasting.
  • Finding missing inventory.
  • Low inventory alerts.
  • Determining the best place to put incoming inventory.
  • Tracking how inventory (and staff) moves throughout the warehouse.

Inventory tracking also includes doing physical cycle counts and comparing those counts to what is recorded (cycle counts).

You will need warehouse inventory management software to do this, but it is a best practice because it will help you optimize inventory dramatically.

2. Set up KPIs

Remember those KPIs we told you about in Chapter 9? You should use them! It’s very easy to learn about these KPIs and metrics but get out of the habit of using them (or never applying them in the first place).

You cannot work towards improvement without KPIs and metrics to help you reflect on how well your team works. You could be focusing on the wrong issues or not even know that there are any.

You may even think that a product is leaving shelves particularly fast when, in actuality, there is no data to support that.

KPIs and metrics, when applied correctly, can help you boost your efficiency and get more out of your team and the software and infrastructure you have currently in place.

3. Use (Lean) Six Sigma in Inventory Management

Six Sigma is something we have not mentioned so far in our inventory management guide. While it is more of a manufacturing strategy, it has since crept into many other facets of business, including inventory management.

Practiced by many Fortune 500 companies, Six Sigma is a data- and statistic-driven decision-making method, and while it is often seen as better for larger organizations, it can be useful for smaller firms, too.

For starters, Six Sigma can help identify and rectify issues related to overstocking or understocking, leading to better cost control and improved customer satisfaction further down the line.

On top of that, Six Sigma can help enhance accuracy in demand forecasting and reduce carrying costs.

4. Have a Consistent Process for Receiving Stock

Like clockwork, processing incoming inventory should be easy. You shouldn’t even have to think about it. 

The process you set up should be like a reflex, which is what happens when you make the process consistent.

Consistent processes can also be faster, so you can receive stock at a faster rate if you have multiple deliveries to handle at the same time.

When receiving stock is handled faster, your team can move more quickly onto the next task, improving warehouse efficiency.

Consistent processes also reduce errors when receiving stock, and you won’t inherit any issues in the inventory later.

When defining your inventory-receiving process, ensure that you do practice runs with your team to ensure the process is possible and efficient.

You should also prepare for situations where receiving inventory may require additional or different steps.

Your process should also occur in a dedicated, tidy zone where it is easy to sort arriving orders. In this space, there should be an initial check to ensure it is okay—correct stock, amount, variations, and good quality.

Lastly, if staff are unsure about something or have questions, they should have a process to escalate these issues.

5. Have a Consistent Process for Picking, Packing, and Shipping Stock

Just like receiving inventory, you need to ensure that inventory exits the warehouse as smoothly as it arrived, and you can only do that with a consistent and well-rehearsed process.

Here are four ways to optimize your picking process in the warehouse:

  • Batch picking—Gathering multiple orders simultaneously to improve productivity and minimize travel time.
  • Wave picking—Picking orders in predetermined waves or groups for better organization and efficiency.
  • Zone picking—Assigning specific zones to workers for picking. This strategy can optimize order fulfillment within those areas.
  • Discrete order picking—Selecting items one order at a time. This reduces errors but drastically slows down overall efficiency.

The process shouldn’t be different with every arrival or exit of stock unless the stock has unique requirements or there are special circumstances.

Don’t let staff devise their own way as it might not focus on efficiency and it could be different with every employee.

There should be a designated process, and they should stick to it. That said, listening to your staff’s ideas can help make the process more efficient. They will see things that you might not.

Again, having a process for escalating problems is helpful, and an inventory tracking system can help decide the most effective strategy.

6. Practice the 80/20 Rule (the Pareto Principle)

The 80/20 rule is a strange phenomenon that can be applied to various situations and industries. It suggests that in many cases, 80% of outcomes result from 20% of the causes or inputs.

Applied to inventory management, it suggests that approximately 80% of your sales will come from 20% of your inventory.

So, with this in mind, it is a best practice to prioritize the stock that 20% that’s generating 80% of your sales.

You can prioritize this inventory in several ways, from ensuring it is handled first when it arrives from suppliers to making it the most accessible product in the warehouse.

7. Take Charge of Reordering

Your suppliers may offer to handle reordering, which might sound like a relief—you’ll have one less thing to worry about—but the reality is that giving up reordering responsibility can be a huge headache.

Don’t let suppliers handle ordering for you because it is in their best interest to send you as much as possible, which can be very costly.

Your suppliers don’t necessarily have access to your sales data and could start automatically sending you inventory you don’t need, and it’s not their responsibility if you can’t sell it.

You’ve got to wear the pants in the relationship with your supplier and order what you know you need based on what you know you are capable of moving.

8. Avoid Holding Too Much Inventory

Many companies invest too much of their finances in inventory, which can be highly risky.

To avoid this, it is a best practice to find the perfect reorder point so you do not hold too much and have just enough inventory not to be understocked.

As we explained in Chapter 12, carrying costs will be lower, and ordering costs will be higher, but perhaps it’s worth having higher ordering costs to mitigate the risk of having too much stock tied in inventory that is yet to be sold.

Having empty space in your warehouse shouldn’t make you panic—unless it stays empty for too long.

9. Manage Supplier relations

The relationship between suppliers and businesses must be built on trust. They cannot make money alone, so suppliers and merchants should be able to depend on each other.

Inventory management professionals are right in the middle between merchants and suppliers as they order and process inventory when it arrives, so they must help manage this relationship.

Key to this relationship is effective communication. You must have a process in place for when an issue arises, and you must work together to solve it.

If a relationship between a merchant and a supplier sours, it can be difficult for inventory management professionals to deal with challenges alone.

Conversely, it can be a bad sign if suppliers are distant and not helpful when problems arise. So, it is also important to analyze the performance of suppliers occasionally.

Lastly, you should have backup suppliers if your primary supplier has issues.

10. Categorize Stock Appropriately

Categorizing stock appropriately is a golden rule for any inventory management professional. Determining how to logically categorize inventory is one of the first steps for most companies.

As a best practice, similar products and items often bought together should be stored closely.

Many refer to ABC analysis for logical stock categorization, which is where products are classified as:

  • A—Generates the most sales.
  • B—Generates an average number of sales.
  • C—Generates the fewest sales.

However, there are many more ways you can categorize inventory in terms of product type and how quickly it leaves the shelves.

Head back to Chapter 3 for more on inventory management techniques.

11. Check Products for Quality

Inventory should always be checked for quality as part of your process for receiving orders.

Accidents can happen to products in transit, before leaving suppliers’ doors, or there could be manufacturing errors, or the wrong stock could be sent by mistake.

Quality checks reduce the need to deal with customer returns if you spot issues with inventory before it leaves the warehouse.

However, you should also do occasional quality inspections around the warehouse, checking on inventory that may have been around for a while.

Aging inventory can be costly as inventory can expire, break, and become obsolete as it waits to be sold in the warehouse.

12. Make the Most of Cycle Counts

While we love to sing the praises of using software to manage inventory better, sometimes you need to go out and manually check that the inventory you’re supposed to have is really there.

Like many other best practices we have listed, cycle counting prevents problems later. For example, it reduces the chance of selling a product that’s not there.

Companies with enormous warehouses can’t do cycle counts all in one go, so they must decide how to divide their warehouse and schedule checks for those areas.

You may do this by product type, or you may decide to do your cycle counts based on the value of products or how quickly they leave the warehouse.

13. Practice the ‘First-In-First-Out’ (FIFO) Rule

The first-in-first-out rule is pretty much what it sounds like—inventory that has been in the warehouse for longer should leave before fresher inventory.

Ensuring older items leave before newer items reduces the chance of inventory expiring or becoming obsolete because older inventory is usually closer to becoming outdated.

Read this blog post for more on FIFO vs. LIFO.

14. Employ Continuous Inventory Monitoring over Periodic

We covered the difference between periodic and perpetual inventory systems early on in Chapter 4. Nine chapters later, you should realize that perpetual inventory management (AKA, continuous) is far more effective than a periodic inventory system.

In fact, much of the standard of modern inventory management relies on continuous, real-time monitoring, which you can only do with a perpetual inventory system. Cloud-based software is, by default, perpetual.

So, if you really want to step up your inventory management game, you must change from periodic to perpetual.

Many smaller, less experienced businesses might not realize early on how much a periodic system hinders them until they make the switch.

That said, as we mentioned earlier, don’t forget to carry out physical cycle counts!

15. Always Have Safety Stock

Mistakes are going to happen, regardless of whose fault it might be. Don’t get caught off-guard by not having a few items of safety stock lying around.

Safety stock has multiple use cases and can be a lifesaver for businesses.

Did a customer return an item because it’s broken, but you no longer have the product in stock? It’s a good thing you have safety stock, just in case that happens.

Similarly, if you’re a multichannel seller, you may accidentally sell stock online that you don’t have because it was just sold moments ago on another channel.

Remember to keep safety stock separate from the rest of your stock so it is only used in emergencies.

16. Forecasting Is Your Friend

We’ve dropped the term ‘forecasting’ many times in this guide (and we will discuss it at length in the next chapter), and it’s enormously helpful in inventory management.

The most important thing about forecasting is that it keeps your inventory balanced, so you have the correct amount of inventory according to the available space and customer demand.

You should regularly check your inventory forecasts. If you’re not forecasting inventory demand, you’re at risk of falling behind your competitors and more likely to under or over-order inventory from suppliers.

Again, you must have software to forecast. In many ways, it is the pinnacle of inventory management.

17. Good Software Solves Most of Your Problems

Software helps aid inventory management personnel with many of the best practices we have listed in this article. It is at the heart of modern inventory management and keeps businesses efficient.

If a business doesn’t adopt inventory management software, it will hinder its growth because the software makes complex, large tasks easier and removes the chance of human error.

Software is particularly important for:

  • Balancing inventory.
  • Reporting and forecasting.
  • Ordering inventory from suppliers.
  • Tracking inventory throughout the warehouse.

Sellercloud is a great example of top-rated software that can handle all that and much more.

Key Points From Chapter 13

You’re now a master of inventory management best practices. Remember these key points.

  • Actively track inventory and use KPIs and metrics to ensure products are moving as smoothly as possible.
  • Don’t forget to utilize cycle counts to ensure stock numbers are correct and conduct quality inspections.
  • Six Sigma can help improve warehouse efficiency, and the 80/20 rule can help inventory managers prioritize stock that sells faster.
  • Sellercloud is an example of an inventory management software that can simplify following these best practices.

Next up, in Chapter 14, we’ll dig deeper into inventory management forecasting.

Chapter 12. What Are the Costs of Inventory Management?
Chapter 14. What’s Inventory Management Forecasting?