Inventory Management Guide

Chapter 18. Everything to Know About Inventory Management

We run through the top 20 things to know about inventory management from our inventory management guide. Knowing all 20 will be an advantage.

Welcome to the penultimate Chapter of our inventory management guide. In our second to last Chapter, we thought it would be helpful to summarize many of the concepts we have learned.

Not only will this help you remember many of the most important concepts, but it will also help you gauge which are the most important to follow daily and how together they can shape your approach to inventory management.

Let’s get started.

Alternatively, head back to the inventory management guide homepage and refresh on whatever you want to refresh your knowledge on.

Top 20 Things to Know About Inventory Management

If you can remember all 20 of these principles, you will be on the right track to succeeding in inventory management.

1. What Is Inventory Management and Why Is It Beneficial?

Inventory management is the practice of storing and managing a company’s products. It involves handling incoming orders, preparing deliveries, ordering replenishment, and maintaining product quality.

It is beneficial because it speeds up the inventory flow through the warehouse, prevents losses, keeps companies reactive to change, and enables them to meet customer demand and plan for the future.

Read more: Chapter 1. What Is Inventory Management?

2. There Are a Lot of Inventory Management Terms and Abbreviations

It’s hard to remember them all. Some will fall out of use and evolve as time goes by. Some of the most important include:

  • Purchase Order—Often shortened to ‘PO,’ a purchase order is a document a merchant sends to a vendor to order products. It lists the types of products, variations, and quantities.
  • Stockout & overstocking—A stockout is when you run out of inventory for a product while overstocking is the opposite when you have too much inventory. Both are bad.
  • RMA number—Stands for ‘Return Merchandise Authorization.’ Companies use it to track a product that is being returned.
  • Picking—The warehouse task of going around and collecting products that need to be shipped out.
  • Safety stock—Additional stock is stored separately from your primary inventory to be used in emergencies and to prevent stockouts.
  • SKU—Stands for Stock Keeping Unit. It is the alphanumeric code used for inventory management to refer to a specific product.

Read more: Chapter 2. What Are the Concepts of Inventory Management?

3. How to Set up Storage Areas

For success in inventory management, there must be logic to where and how you store your products.

However, sometimes, how you arrange your storage areas depends on the shape and amount of space you have. On top of that, there are different layouts for different approaches.

Your warehouse layout can depend on how you classify and group products (based on what is usually sold together, for example), if they are similar products, or what leaves the warehouse faster.

You’ll also need space for equipment, returns handling, packaging, kitting, and other inventory management-related tasks. Always start by creating a floor plan and keep it logical and easy.

Read more: Chapter 2. What Are the Concepts of Inventory Management?

4. There Are Many Different Inventory Management Techniques

You can manage your inventory in many different ways. Use the approach that best suits your business. It may take time and a lot of trial and error to decide what works for you.

Some of the most common inventory management techniques:

  • JIT—Stands for ‘Just In Time’ and is a strategy where inventory is only ordered just in time to meet customer demand.
  • ABC analysis—A method of sorting inventory into A, B, or C categories based on the number of sales or portion of the inventory they represent.
  • Demand forecasting—The practice of forecasting demand for the upcoming period. (More on this soon.)

Note that there isn’t necessarily a perfect approach. There are always pros and cons to consider.

Read more: Chapter 3. What Are Inventory Management Techniques?

5. Dropshipping and Cross-Docking Reduce the Need for Storage

Inventory doesn’t always need to enter the warehouse! With dropshipping and cross-docking, products can bypass sellers, going from vendor straight to the customer.

  • Dropshipping is where the merchant acts as a middleman. Though customers purchase from the merchant, the product is sent from the vendor straight to the customer.
  • Cross-docking is similar. The primary difference is the goods arrive at the merchant’s warehouse but are immediately shipped to the customer.

Read more: Chapter 3. What Are Inventory Management Techniques?

6. Perpetual Inventory Management Control Systems Are the Standard

There are two main control systems used in inventory management—perpetual and periodic.

  • Periodic is where you manually track inventory at decided intervals. For example, weekly or monthly.
  • Perpetual is a real-time tracking method where inventory is constantly tracked electronically, reducing the need for manual checks.

Perpetual is the standard today. Young companies with little inventory management experience might not use perpetual inventory management yet.

They may even still be using pen and paper to track inventory. However, as they grow, they’ll need something more sophisticated.

That said, businesses, no matter the size, shouldn’t forget to do manual cycle counts to ensure records are correct.

Read more: Chapter 4. What Is an Inventory Control System?

7. You Must Have a System

You must decide how to input data, store products, and process them. Without a process in place, all sorts of problems can occur.

A system often needs hardware and software to function and be effective. Most involve a way of scanning barcodes. 

Having real-time tracking and automation features that dramatically simplify inventory management is also beneficial.

Read more: Chapter 5. What Are Inventory Management Systems? 

8. You Should Be Using Software

Software is the backbone of your inventory management. Inventory management should ideally be digitalized as it is the standard today.

Adopting inventory management software makes tasks easier, especially reporting, reordering, automating, tracking, managing product variations and kits, and much more.

The software can also include a wealth of other features beyond inventory management that make running an e-commerce business much easier.

Note that many types of software can be used for inventory management. Some are designed for larger or smaller companies, while others, such as ERPs, are more designed for manufacturers.

Read more: Chapter 6. What Is Inventory Management Software?

9. You Should Track Your Inventory Movements

Inventory moves around a warehouse often, and tracking those movements is highly recommended. There are many examples of inventory moving around a warehouse:

  • When it arrives.
  • When it’s processed.
  • When it’s added to the rest of the stock.
  • When it’s picked.
  • When it’s packaged.
  • When it’s shipped.
  • If it expires or becomes obsolete.
  • Any other movements as you reorganize the sections of your inventory.

Tracking inventory movements tells you how much inventory you have and where it is stored. Plus, it makes it easier for staff to find and forecast replenishment.

You can also learn which products sell the fastest and reorganize your layout to better accommodate those products and make it easier for your staff.

Read more: Chapter 7. What Is Inventory Management Tracking?

10. Multichannel Selling Makes Inventory Management More Complex

Multichannel selling is where your company sells products through multiple sales channels. For example, one channel may be your brick-and-mortar store. Others might be the different marketplaces you sell online.

Successful multichannel selling can mean you will make more sales, but it also brings several challenges. Some of the biggest challenges of multichannel selling for inventory management are:

  • Decreased inventory visibility and accuracy.
  • Increased demand forecasting and planning complexity.
  • Increased order fulfillment complexity.

Read more: Chapter 8. What Is Multichannel Inventory Management?

11. Use KPIs and Metrics to Measure Performance

KPI stands for ‘Key Performance Indicator,’ and along with metrics, they help you measure the performance of inventory management tasks.

They can help set a certain level of performance to provide or set goals for improvement. They can help you set:

  • Reorder points.
  • Minimum and maximum order quantities.
  • A desired lead time.
  • A desired service level.

Read more: Chapter 9. What Are Inventory Management KPIs and Metrics?

12. Learn How to Handle Returned Inventory

Customers will return inventory to your warehouse, so you must have a process to handle these products.

Because of this, you should have a proper protocol in place that both customers and warehouse staff can understand, such as RMA labels.

On top of that, there will be certain products that can’t be returned, and there should be conditions, such as time periods, and warehouse staff should be trained to spot this.

Returned products need to be checked by someone with product experience who can determine if they can be resold, destroyed, or returned to the manufacturer. There also needs to be a dedicated space to handle returns before being mixed with other products.

It’s also worth mentioning that customers may also return products through a different channel. For example, if they purchased it online, they may return it to a brick-and-mortar store. This can lead to some inventory management confusion.

Finally, if a product is getting returned frequently, an issue from the manufacturer may need to be addressed.

Read more: Chapter 10. How Do You Handle Returned Inventory?

13. There Are Many Common Challenges…

Some of the biggest inventory management challenges include:

  • Overstocking—As mentioned above, overstocking is where you order too much inventory. It becomes a challenge because offloading it all can be difficult, and you lose vital space.
  • Obsolete stock—This is stock that is now outdated. Often, this is because it is no longer fashionable or technologically useful. It can be difficult to sell and can be a result of overstocking.
  • Managing inventory over multiple warehouses—This can be a major headache when locating stock and keeping track of inventory levels.
  • Poorly organized storage areas—Without proper storage areas, your inventory will end up all over the place, making it hard to find and increasing the chances of it going missing.
  • Neglecting cycle counts—Failing to conduct cycle counts increases the chances of discrepancies between your physical and digital records.

Read more: Chapter 11. What Are Common Inventory Management Challenges?

14. …More Challenges Than You Might Think

Some other inventory management challenges include:

  • Not having a warehouse management system (WMS)—In today’s age, not having a WMS can be a major risk, especially for a fast-growing company with a high order volume.
  • Inaccurate reporting—If your reports are inaccurate, you could make bad decisions based on irrelevant information.
  • Limited warehouse visibility—Not being able to see what’s happening in your warehouse can mean missing out on many inefficiencies that could be amended.
  • Unable to forecast demand—If you cannot estimate demand, you increase the likelihood of ordering too much or too little inventory for the coming period.
  • Not using the right software—Using dated software or software that doesn’t quite fit your business model can mean missing out on tons of features that make your job easier.

Read more: Chapter 11. What Are Common Inventory Management Challenges?

15. There Are Plenty of Costs Associated with Inventory Management

Keeping on top of inventory management costs is important. Here are the most common ones that you should certainly be watching:

  • Ordering costs—The costs associated with placing and receiving orders from suppliers.
  • Carrying/holding costs—These are the costs associated with storage, insurance, and obsolescence.
  • Stock out costs—The cost of lost sales from running out of inventory.
  • Overstocking costs—Overstocking increases holding costs, takes up space for better-selling products (costing you money) and can cost even more if it becomes obsolete or expires.
  • Shrinkage costs—These are the costs of missing inventory, such as expiry, damage, or even employee theft.
  • Third-party costs—The costs of using third-party services to handle any part of your inventory management.
  • Software costs—The costs associated with your inventory management software.

Note that not all will apply to your business. Furthermore, depending on how your business operates, some will be higher than others.

Read more: Chapter 12. What Are the Costs of Inventory Management?

16. You Should Follow Best Practices

There are many things you should try to do or avoid doing in inventory management. They are not necessarily rules (no one will force you to do any of them), but they are beneficial to follow.

Here are five of the most important inventory management best practices:

  • Actively track and check your inventory—You’ll have a better idea of where your inventory is, where it’s going, how much there is, and how to improve inventory management processes.
  • Set up KPIs—KPIs help you set up a standard for inventory management tasks, reflect on how your team works, and work toward improvement.
  • Have consistent processes for picking, packing, and shipping—You’ll be able to handle the workload faster, reduce errors, and have more time to work on other tasks.
  • Avoid holding too much inventory—Ordering too much inventory is expensive and risky. Instead, focus on finding the perfect reordering point.
  • Make the most of cycle counts—Always ensure your inventory levels are accurate, physically and digitally.

Read more: Chapter 13. What Are the Best Inventory Management Practices? 

17. You Should Forecast Demand

Forecasting has a wealth of benefits when it comes to inventory management. Based on historical data and trends, forecasts can tell you if you should order more or less stock for the coming period.

There are four types of inventory forecasting: quantitative, qualitative, trend, and graphical.

You should forecast and update forecasts regularly as you enter the period to see how accurate they are and make adjustments. You can even measure the effectiveness of your forecasts.

Forecasting potential demand for new products is difficult, though it can be done using data for similar products and lifecycles.

Read more: Chapter 14. What’s Inventory Management Forecasting?

18. Have a Contingency Plan

Inventory must flow in and out of your warehouse to keep your business running. However, something unexpected will occasionally disrupt your normal workflow and threaten the pace of your work when receiving and preparing deliveries.

Creating a contingency plan starts with doing a risk assessment so you know what the biggest problems are likely to be. You can then set objectives for how to keep operations moving smoothly. Next, you need a strategy to meet those goals.

Your contingency plan must be documented, though it should leave room for flexibility. You will also need to train your employees how to follow it.

Read more: Chapter 15. Inventory Management Contingency Planning

19. You Should Automate Inventory Management

Always aim to automate as much as possible. There’s no shortage of things to automate in inventory management when you have good, reliable software.

Automating inventory management tasks makes them faster, reduces errors, frees up time, and ultimately lowers costs. On a simpler level, it can even mean setting up alerts for when certain actions are needed.

There are not many reasons to avoid automating tasks. It almost always makes lives and work easier. You will also be more efficient, giving you an advantage over your competitors.

Read more: Chapter 16. How to Automate Inventory Management? 

20. Always Work toward Improving Inventory Management

Inventory management processes can always be improved and made more efficient.

Always emphasize the importance of inventory management practices among your staff and senior management—explain why it is important and how it makes work more efficient.

Remember that not all of the products you sell have equal standing. Some sell much better than others. Ensure that the products leaving shelves faster are well accommodated.

Learn the ins and outs of your supply chain and establish a good working relationship with your suppliers. This can help in a plethora of ways.

Ensure the tech and equipment you are using are up to the job. Do you have everything you need? Could adopting new technology or software improve your efficiency?

Finally, never forget to plan for the future.

Read more: Chapter 17. How to Improve Inventory Management?

Where to Go from Here?

Now that you’ve virtually completed our inventory management guide, you may ask yourself where to go from here or where to continue to hone your inventory management skills.

When you get into the groove of things, it can be easy to overlook certain inventory management processes and best practices.

So, you may want to occasionally return to this guide for a refresher. Who knows, you may remember a few good tips.

There are a lot of complementary skills you can learn that can improve your inventory management expertise that you can consider. Here are a few you can look into learning next:

  • Reporting and statistics—With a solid understanding of reporting and statistics, you can make better inventory management decisions.
  • Finance—By developing your knowledge of finance, you’ll learn more about the costs involved and innovative ways to reduce them.
  • Supply chain management—Learn how your company’s products are made and how they reach you. This can help improve relationships with suppliers.
  • Software skills—You may even get to the point where you can develop a few unique things of your own or just customize software to your needs.
  • Logistics—Moving outside inventory management, you learn more about how products change hands and reach the customer, which may inform some of your inventory management decisions.
  • Order fulfillment—How orders are fulfilled once they leave the warehouse.

You may even want to consider a college degree in some of these areas and combine a few. It all depends on what you think will be most beneficial to you and the direction you want your career to take.

Or you may want to learn more about the products you work with and the industry. A better understanding of products you work with daily can go a long way.

You can always come back to this guide if you need to! We will have more guides soon covering order fulfillment.

On top of that, Sellercloud has other useful resources, such as webinars, blog posts, white papers, and ebooks, that can help you develop your learning further.

Now you’re an inventory management pro, you’ll need pro inventory management software (though you don’t need to be a pro to use it).

With Sellercloud, you can run all your inventory management operations and other vital tasks related to running your business from one interface. Sellercloud boasts:

  • Hardware built to help with inventory management—Skustack and Skublox.
  • Designed to be customizable, with a team dedicated to helping merchants develop custom solutions to their challenges.
  • An impressive 280+ integrations, including the top marketplaces and US shipping partners.
  • Shipping (Shipbridge) and receiving (Receivebridge) software at no additional cost.
  • Multidimensional scaling system 4D Scale to speed up the shipping process.
  • Top-rated reporting features.

Book a demo today and find out what Sellercloud can do for you. You can also check out Sellercloud’s transparent pricing here.

Key Points

You have just read the most important inventory management concepts you need to know. Take these key points with you.

  • There are many different inventory management terms, phrases, and acronyms, and thousands of more inventory management techniques to keep on top of it all.
  • In today’s day and age, you must use perpetual inventory management software. It will make many of your inventory management tasks enormously easier.
  • You will run into many common problems in inventory management, but there are many best practices that can help you avoid them in the future.
  • There are many ways you can head now to continue improving your inventory management skills.
  • Sellercloud’s software makes inventory management tasks easier and can help with various tasks related to running a business.

Next, in our final (bonus) chapter, we’ll run through many of the most frequently asked questions about inventory management that we couldn’t get to in this guide.

Chapter 17. How to Improve Inventory Management?
Chapter 19. Inventory Management Frequently Asked Questions