Chapter 18. Everything to Know About Inventory Management

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.

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.

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.

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, and other inventory management-related tasks. Always start by creating a floor plan and keep it logical and easy.

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 the portion of the inventory they represent.
• Demand forecasting—The practice of forecasting demand for the upcoming period. (More on this soon.)

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 the 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 that the goods arrive at the merchant’s warehouse but are immediately shipped to the customer.

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.

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.

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.

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.

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.

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.

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. 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.

13. There Are Many Common Challenges...

Some of the biggest inventory management challenges include:

• Overstocking—Ordering too much inventory.
• Obsolete stock—This is stock that is now outdated.
• Managing inventory over multiple warehouses—Can be 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.
• Neglecting cycle counts—Failing to conduct cycle counts increases the chances of discrepancies between your physical and digital records.

14. …More Challenges Than You Might Think

Some other inventory management challenges include:

• Not having a warehouse management system (WMS)—A major risk for a fast-growing company with a high order volume.
• Inaccurate reporting—If your reports are inaccurate, you could make bad decisions.
• Limited warehouse visibility—Not being able to see what’s happening in your warehouse can mean missing out on many inefficiencies.
• Unable to forecast demand—Increases 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 fit your business model can mean missing out on features that make your job easier.

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—Associated with storage, insurance, and obsolescence.
• Stock out costs—The cost of lost sales from running out of inventory.
• Overstocking costs—Increases holding costs, takes up space for better-selling products.
• Shrinkage costs—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 inventory management.
• Software costs—The costs associated with your inventory management software.

16. You Should Follow Best Practices

There are many things you should try to do or avoid doing in inventory management. 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.
• Make the most of cycle counts—Always ensure your inventory levels are accurate, physically and digitally.

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.

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. 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.

19. You Should Automate Inventory Management

Always aim to automate as much as possible. Automating inventory management tasks makes them faster, reduces errors, frees up time, and ultimately lowers costs.

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.