What is Inventory Management?

Inventory management is a crucial aspect of business profitability. However, many small businesses don’t effectively manage their products or materials. Some stock too little inventory, driving customers away. Other businesses overstock items just in case, causing cash flow issues.

Effective inventory management strikes a balance between these two extremes. We’ll share tips for stocking what your customers need while maintaining a solid financial position for your business.

Tips for managing your inventory

Smart inventory management techniques can increase a business’s profitability and cash flow. Consider the following 10 tips to improve your inventory management. 

1. Prioritize your inventory for better inventory management. 

Categorizing your inventory into priority groups can help you understand your ideal ordering quantities and frequencies. You can also determine which items are essential to your business but may cost more and move more slowly. 

Experts suggest segregating your inventory into A, B and C groups. 

  • A group: Items in the A group are higher-ticket items. You need fewer of these items. 
  • C group: Items in the C category are lower-cost items that turn over quickly. 
  • B group: The B group consists of in-between items. These moderately priced items move more slowly than C items but faster than A items.

2. Track all product information to manage inventory better.

Keep product information for all items in your inventory. This information should include the following: 

  • SKUs
  • Barcode data
  • Suppliers
  • Countries of origin 
  • Lot numbers

You might also consider tracking each item’s cost over time so you’re aware of factors that affect pricing, such as scarcity and seasonality.

FIFO (first in, first out) and LIFO (last in, last out) are two common ways to value inventory. FIFO aims to reduce inventory waste by selling older products first. In contrast, LIFO helps businesses with nonperishable inventory take advantage of price increases on new stock.

3. Audit your inventory for better inventory management.

Some businesses do a comprehensive inventory count once a year. Others do monthly, weekly or even daily spot checks of their hottest items. Many do all of the above. 

Regardless of how often you do it, prioritize physically counting your inventory regularly to ensure it matches what you think you have.

4. Analyze supplier performance for better inventory management.

An unreliable supplier can cause problems for your inventory. If you have a supplier that’s habitually late with deliveries, frequently shorts an order or is the source of supply chain delays, it’s time to take action. 

Discuss the issues with your supplier and find out what the problem is. Be prepared to switch partners – or deal with uncertain stock levels and the possibility of running out of inventory.

Supplier diversity – accessing vendors from various places or with diverse routes and ports – can build supply chain resilience and present options when a supplier is unreliable.

5. Practice the 80/20 inventory rule for better inventory management.

As a general rule, 80 percent of your profits come from 20 percent of your stock. Prioritize managing this 20 percent of your inventory.

You should understand these items’ complete sales cycles – including how many you sell in a week or a month – and closely monitor them. These items make the most money, so managing them correctly is crucial.  

6. Be consistent in how you receive stock for better inventory management.

It may seem like common sense to ensure your team processes incoming inventory. However, do you have a standard process that everyone follows, or does each employee receiving and processing incoming stock do it differently? Minor discrepancies in receiving new stock can leave you scratching your head at the end of the month or year, wondering why your numbers don’t align with your purchase orders. 

Use effective employee training tactics so all team members receive stock in precisely the same way. Ensure all boxes are verified, received and unpacked together; counted correctly; and checked for accuracy.

7. Track sales for effective inventory management.

Tracking sales may seem obvious. However, effective sales tracking goes beyond adding up money at the end of the day. You should understand, on a daily basis, what items you sold and how many you sold, and update your inventory totals. 

You must also analyze your sales data. For example: 

  • Do you know when specific items sell faster or drop off? 
  • Do specific items sell according to seasons? 
  • Is there a specific day of the week when you sell certain items? 
  • Do some items almost always sell together? 

Understanding the broader picture of how items sell is essential to controlling your inventory.

8. Order restocks yourself for better inventory management.

Some vendors offer to reorder inventory for you. On the surface, this seems like a plus. Your time – and your team’s time – is freed while someone else manages the restocking process.  

However, your vendors don’t always share your priorities. They want to move their items, while you want to stock the most profitable items for your business. Take the time to check inventory and order all restocks yourself.

Amid positive consumer spending trends, consider expanding your current inventory if you’ve experienced increased product demands recently.

9. Invest in inventory management technology.

Very small businesses might be able to handle inventory management efforts with spreadsheets and notebooks. However, as your business grows, you risk spending excessive time on inventory instead of running your company. 

Good inventory management software makes inventory tasks easier. Before choosing a solution, ensure you understand your needs and that the product is easy to use with essential analytics features. (We’ll explain more about inventory management software below.) 

10. Use inventory management tools that integrate with your other solutions.

Inventory management software isn’t the only technology for managing stock. For example, mobile scanners and POS systems can help you stay on track. 

When investing in technology, prioritize systems that work together. For example, the best POS system for your business should communicate with your inventory management software. You won’t have to transfer data from one system to another and risk inaccurate inventory counts.

Built-in POS inventory management features include automated inventory tracking, POS report generation and remote management tools.