What is inventory management?

Inventory management is the management of inventory and stock. As an element of supply chain management, inventory management includes aspects such as controlling and overseeing ordering inventory, storage of inventory, and controlling the amount of product for sale.

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The definition of Inventory Management is easy to understand. Simply put, inventory management is all about having the right inventory at the right quantity, in the right place, at the right time, and at the right cost. But how do you implement the best inventory management techniques to ensure the best results? Read on to find out our insights for inventory management best practices.

1. How do I calculate the “right amount” of inventory to stock?

Stocking the right amount of inventory is crucial. If you order too little, your customers will start looking elsewhere. If you order too much, there’s a chance you’ll be stuck with lots of extra stock that you’ll be forced to sell at clearance prices, or risk having them become obsolete.

In a poll by GetApp, business owners were asked how they decided when to reorder inventory. A resounding 46% of them decided based on information from previous months. If you’re part of that 46%, you want to make sure you’ve got the right inventory data - which means looking for a solution that’ll automatically track your inventory movements as much as possible.

In fact, even if you chose to use inventory forecasting software (15%) or Excel formulas (13%), you’re still going to need information from the previous months. (If you’re wondering about the remaining 26%, they selected “Other” - we’re still betting information from previous month’s factor in somewhere though!)

2. How do I determine the “right price” for my inventory?

You don’t want to pay more for your products than you have to, but lower prices aren’t always better. Suppliers often promise price quantity breaks - you just need to order 20% more stock to save 10% - and you may find yourself digging into your savings to make this purchase.

But is that the best choice for your business? After all, purchasing stock is only the beginning. There’s a whole host of carrying costs attached to your products. The more stock you have on hand, the more you’ll have to spend on storage facilities, while increasing your risk of having products going out-of-date. This is where the Economic Order Quantity (EOQ) formula comes in.

Economic Order Quantity is a formula that calculates the number of units your business should be adding to inventory order. This question is aimed at reducing the total costs of inventory management – including factors like order costs, holding costs, and shortage costs.

Economic order quantity formula

We know it can be challenging to do all the calculations manually, so to help you out, we've built an EOQ calculator.

EOQ Calculator Excel Download

3. How do I know the reorder point for new inventory?

Knowing your EOQ lets you know the inventory level you want to maintain, but how do you decide when it’s time to place a new order? Of course, you want your shipment to arrive just in time… ideally when your previous batch is about to sell out. If it arrives too early, you’ll be looking for space to store these items. And if it arrives too late, well, you’ll be forced to announce that you’re out of stock.

Opening backorders offers a way to deal with out-of-stock situations, but there’s a chance your customers will prefer looking elsewhere to find the products that they want. So, you always want to make sure you’ve got stock on hand, which is where your reorder point comes into play.

When it comes to calculating your reorder point, you need to account for:

  • The time it takes to get your items picked
  • The time it takes to get your items packed
  • The time it takes to get your items to be shipped (lead time)

Reorder point formula
Head here to use our Reorder Point Calculator

But wait. What is safety stock and why is it important? Safety stock is the emergency stock you need to endure unexpected occurrences - like seasonal acts of nature like blizzards and typhoons. And if you’re curious about how to calculate your safety stock, we’ve included this easy formula.

Safety Stock Calculation

This safety stock formula aims to cover the difference between extreme situations and the everyday - which should be enough to keep you safe.

4. How do I figure out the right place to sell and distribute my inventory?

Do you sell on multiple channels? If you do, ensuring you’ve got the right amount of products in the right place is probably a challenge you face constantly.

The great thing about selling products online is that you’re fulfilling all orders from the same pool of stock. So, you don’t have to think too much about how many items you want to allocate to individual sales channels.

But this can come with a whole different host of problems: If your online inventory shows five items available, you want all five ready for sale in your warehouse - not traveling the country in a mobile shop or lying idle in your consignment store at the opposite end of the country.

5. What is the best tool for optimal inventory management?

To prevent situations like the above from occurring, consider an inventory management system that tracks inventory movement across all your sales channels in real time. Many small businesses will try to manage their inventory through excel spreadsheet and formulas. However, once your business starts to grow, relying on Excel spreadsheets for inventory management becomes extremely limited.

An inventory management system that updates your stock movements across all channels will significantly reduce your risk of overselling – and that’s what we’re aiming for.

One recurring theme to good inventory management highlighted above is the need to track inventory movement constantly, instead of doing it periodically. Automation is one of the biggest advantages of making the move to inventory management software - you won’t have to worry about missing reorder points or overselling by accident.

By automating the inventory management process as much as possible, you’ll be able to reduce the likelihood of human error. Once you take the plunge and make the move to inventory management software, you’ll have more time on your hands, giving you more time to focus on what’s really important - growing your business.

The best place to start is a free trial of inventory management software. Try out TradeGecko - add your products or connect TradeGecko to your sales channels to automate inventory management instantly!

GetApp: Inventory management apps save small businesses more than five hours a week

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