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Inventory management is a systematic approach to obtaining, storing, and profiting from non-capital assets (raw materials and finished goods). The right stock, at the right levels, in the right place, at the right time, and at the right cost.
Entrepreneurs, founders, and independent brands now live in a native commerce world where small-to-medium businesses compete against global conglomerates.
We’ve put together this definitive guide to inventory management to level the playing field and help you grow your brand with speed, scalability, and smart insights. You’ll find everything you need from inventory control basics to best practices and formulas to advanced automation processes.
As a part of your supply chain, inventory management includes aspects such as controlling and overseeing purchases — from suppliers as well as customers — maintaining the storage of stock, controlling the amount of product for sale, and order fulfillment.
Naturally, your company’s precise inventory management meaning will vary based on the types of products you sell and the channels you sell them through. But as long as those basic ingredients are present, you’ll have a solid foundation to build upon.
Small-to-medium businesses (SMBs) often use Excel, Google Sheets, or other manual tools to keep track of inventory databases and make decisions about ordering.
However, knowing when to reorder, how much to order, where to store stock, and so on can quickly become a complicated process. As a result, many growing businesses graduate to an inventory management app, software, or system with capabilities beyond manual databases and formulas.
With these systems, the procedures of inventory management extend beyond basic reordering and stock monitoring to encompass everything from end-to-end production and business management to lead time and demand forecasting to metrics, reports, and even accounting.
Retail is the broadest catch-all term to describe business-to-consumer (B2C) selling. There are essentially two types of retail separated by how and where a sale takes place.
Wholesale, on the other hand, refers to business-to-business (B2B) selling. Knowing the differences and best practices of retail and wholesale is critical to success.
Most businesses maintain stock across multiple channels as well as in multiple locations. The diversity of retail inventory management adds to its complexity and drives home its importance to your brand.
For any goods-based businesses, the value of inventory cannot be overstated, which is why inventory management benefits your operational efficiency and longevity.
From SMBs to companies already using enterprise resource planning (ERP), without a smart approach, you’ll face an army of challenges, including blown-out costs, loss of profits, poor customer service, and even outright failure.
From a product perspective, the importance of inventory management lies in understanding what stock you have on hand, where it is in your warehouse(s), and how it’s coming in and out.
Clear visibility helps you:
In a broader context, inventory management also provides insights into your financial standing, customer behaviors and preferences, product and business opportunities, future trends, and more.
Typically, inventory types can be grouped into four categories: (1) raw materials, (2) works-in-process, (3) finished goods, and (4) maintenance, repair, and operations (MRO) goods.
As you’ll see below, there are other terms such as “decoupling inventory” and “pipeline inventory” used to describe types of stock-based on its theoretical purpose and use. Nonetheless, physical inventory almost always falls into one of the four categories above.
Stock keeping units — commonly known as SKUs — are product codes that you and others use to search and identify stock on hand from lists, invoices, or order forms.
Setting up an easy-to-understand system for SKUs is important because it’s the main way you’ll identify and differentiate product variants; this includes monitoring…
Stick to an alphanumeric system for your SKUs and avoid accents and symbols that can cause formatting issues in Excel or elsewhere. Remember that the more stock you have, the harder it is to go back and develop a naming system, so it’s best to choose one as soon as you start holding it.
If you’re new to inventory, you’ll probably come across a lot of formulas that might seem confusing at first. However, with a little bit of homework, these formulas can be very useful for keeping stock levels optimized.
Here’s an overview of some of the most common inventory formulas…
Your EOQ is the optimum number of products you should purchase to minimize the total cost of ordering or holding stock. Figuring out your EOQ can potentially save you a significant amount of money.
EOQ = √(2DK / H), or the square root of (2 x D x K / H)
D = Setup costs (per order, generally includes shipping and handling)
K = Demand rate (quantity sold per year)
H = Holding costs (per year, per unit)
Looks complicated, doesn’t it?
Days inventory outstanding (DIO), also known as days sales of inventory (DSI), refers to the number of days it takes for inventory to turn into sales. The average inventory days outstanding varies from industry to industry, but generally a lower DIO is preferred.
Determining whether your DIO is high or low depends on the average for your industry, your business model, the types of products you sell, etc.
The reorder point formula answers the age-old question: When is the right time to order more stock?
Calculating your reorder point takes three steps:
To make this practical, we’ve designed a tool that will let you know exactly when it’s time to place an order for a new shipment of products.
As we touched upon earlier, safety stock acts as an emergency buffer you can break out when it looks like you’re on the verge of selling out. You want to have enough safety stock to meet demand, but not so much that increased carrying costs end up straining your finances.
While this sounds like common sense, the trick is to decide on how much safety stock to carry:
Inventory management skills
You’ve got the basics down, so what’s next? That’s the question our eBook — Mastering inventory management — answers in full…