What Is Inventory Management?

Have you ever heard of the Goldilocks principle? It has its foundations in the children’s story of Goldilocks and the 3 bears. In the story, the bears’ preferences are stuck at either extreme (too hot or too cold porridge, too hard or too soft beds, etc.) And it’s always the middle that is always ‘just right’ for Goldilocks. Basically, the Goldilocks principle dictates that the ideal should always fall between certain extremes - basically getting everything ‘just right’.

And getting everything ‘just right’ is exactly what inventory management is all about. Good inventory management is all about having the right amount of product, at the right price, at the right time, and in the right place.


1. The right amount

Stocking the right amount is really important. If you order too little, your customers will start looking elsewhere when you’re out-of-stock of popular items. But 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, respondents were asked how they decided when to reorder… and a resounding 46% of them decided based on information from previous months! If you’re part of that 46%, you’d want to make sure you’ve got the right data - which means looking for a solution that’ll automatically track your inventory movements as much as possible. In fact, even if you’re chose to use forecasting software (15%) or 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 months factor in somewhere though!)

2. The right price

You don’t want to be paying more for your products than you have to, but lower prices aren’t always better. Suppliers often promise price quantity breaks - you just have 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have on hand, the more you’ll have to spend on storage facilities while increasing your risk of having products going out-of-date.

If you’re wondering how to minimize these carrying costs while matching customer demand as much as possible, that’s where the Economic Order Quantity (EOQ) formula comes in.


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


3. The right time

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 take into account the time it takes to get your items picked, packed, and shipped to you (lead time).


But wait. What’s this safety stock and why is it important? It’s 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:

Safety Stock

Basically it aims to cover the difference between extreme situations and the everyday - which should be enough to keep you safe.

4. The right place

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 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 that 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.

To prevent situations like this from occurring, consider an inventory management system that tracks inventory movement across all your sales channels in real time. If you’re looking to reduce your risk of overselling, getting an inventory system that updates your stock movements across all channels will get that down to zero.

If you’re relying on spreadsheets for inventory management, accomplishing the above might sound pretty daunting. Which means it may be time to look into getting an inventory management software - and maybe that’s what brought you here.

spectacled-bear-857433_1920.jpgOne likes it hot, one likes it cold, one likes it just right.

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 software - you won’t have to worry about missing reorder points or overselling by accident.

By automating as much of the process 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. Try out TradeGecko - add your products or connect TradeGecko to your sales channels to automate inventory management instantly!

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

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