What Is Inventory Management?

Picture this: You see an ad online for a product you really, really want — so you take it as a sign from the universe to treat yourself. But when you click the Buy button, you get an irritating out-of-stock message: “Currently unavailable.” How frustrating. The backstory here is all about inventory management.

Inventory management systems and strategies allow companies to keep track of all their products as they’re received, stocked, ordered and delivered. From the warehouse to the customer’s hands, successful inventory management helps your business deliver stellar customer experiences. It’s what makes it possible to always know what’s in stock — and what’s not.

Inventory management is how companies track and control the goods they buy, store, sell and use. For some companies, like manufacturers, “goods” are the raw materials or components they use to make products. For others, like retailers, it’s ready-to-sell stock. Inventory management strategies and needs differ from company to company. But regardless of your business or industry, the objective is identical: Get the right amount of the right goods in the right place at the right time.

The goal sounds simple enough. However, the data tell a different story: 43% of retailers rank inventory management as their #1 day-to-day challenge. So, how can businesses find success despite difficulties like supply chain issues and changes in demand? Here’s everything you need to know.

The underlying challenge behind inventory management is clear: Buy too much and risk accumulating outdated stock, but buy too little and you won’t have anything to sell — resulting in unhappy customers who will shop elsewhere. Knowing when and how much to order is key to successfully managing inventory. With real-time inventory data and the right inventory management tools, companies can apply AI, automation and predictive analytics to surface key moments earlier. Automating inventory management saves money and avoids wasted labour.

The inventory management strategies you use will depend on your company’s business model. Here are a few popular techniques.

Dropshipping: This technique involves outsourcing your warehousing and manufacturing. However, just because dropshipping allows you to bypass these steps doesn’t mean there aren’t other inventory management tasks to take care of. Focus on monitoring your supplier’s stock levels in real time. Implement automated order processing systems and maintain clear communication channels with your suppliers to ensure timely fulfilment of customer orders and avoid stockouts or delays.

Demand forecasting: Demand forecasting is the art and science of predicting customer demand for particular products. Accurate, timely forecasts are critical for businesses of all sizes. Factors such as seasonality, competition, geography and the types of products you sell can all affect demand. All business decisions should be based on data, so forecasters should consider investing in the right tools for trend projection, market research and more.

Perpetual inventory management: This technique relies on inventory management software to continuously track inventory levels in real time. By digitising and automating the inventory management process, businesses can improve accuracy, maintain better control over stock levels and reduce costs. Another key advantage of a perpetual inventory system is its ability to integrate with other systems across your business, like order management, accounting, customer service and more.

Economic order quantity (EOQ): With this technique, you crunch the numbers to determine your ideal order quantity, which helps you to meet demand while minimising the total costs associated with ordering, receiving and holding inventory. The EOQ formula is an equation that can be used to pinpoint the optimal amount of inventory to request from a manufacturer or supplier.

EOQ is best used in situations where demand, ordering and holding costs remain constant. Although the formula can be altered to determine varied production levels or order intervals, most businesses with extensive supply chains and high variable costs rely on algorithms within their computer systems to calculate EOQ.

Minimum order quantity (MOQ): This technique prioritises purchasing the least amount of inventory possible. MOQ can be based on either the number of units or a dollar figure. It’s crucial to understand the impact of MOQs on your inventory and profitability. If you’re a buyer, you need to consider your inventory needs and storage capacity before committing to an MOQ. If you’re a seller, you should carefully set your MOQs to ensure profitability without deterring potential customers.

Just-in-time inventory management: This technique involves ordering the exact amount of inventory you need, precisely when you need it. The objective is to have as little excess inventory as possible at any given time. It’s an ideal solution for companies without ample storage space and those with smaller margins or for those that want to reduce overspending on materials. To make JIT inventory management work, sellers must stay in constant communication with suppliers and manufacturers. Time is of the essence and this method requires committed, streamlined software to operate smoothly.

When done correctly, JIT can decrease costs and waste and increase efficiency. Just-in-time inventory management also has its drawbacks. Supply chain disruptions, order errors and damaged items can cause delays, leading to frustrated customers. That’s why this technique requires the right tools and meticulous tracking to keep things running smoothly.

No matter what inventory management techniques your business chooses to use, it’s critical to keep an eye on your operations during every phase of inventory management.

Every step of the inventory management process builds on the next, so it’s crucial to have all your ducks in a row from the start. Here are the key moments of inventory management:

Step 1 — Receive inventory and input data: When suppliers deliver materials or products, relevant data must be recorded and uploaded into your inventory management system. Pro tip: Implement AI tools to help your teams automate the data entry process. This reduces administrative tasks and improves accuracy.

Step 2 — Strategic storage: During this step, key considerations include storage space, the traffic flow of the facility and how to make your most popular products easily accessible. AI-powered generative models trained on warehouse details and historical sales data can help here. AI can quickly uncover insights that help you to optimise storage and make the best use of your space.

Step 3 — Order management and fulfilment: Once a customer makes a purchase, order management kicks in. This process involves everything that happens after the Buy button; It’s what controls all the downstream operational processes, people, systems and partnerships that help fulfil orders. Order management is what makes it possible to give your customers real-time updates about where their order is (“Your order has left the warehouse and is on its way to your doorstep!”)

Step 4 — Update inventory levels: When your inventory and order management systems are in sync, the entire post-purchase process is transparent for your employees as well as your shoppers. Inventory is updated automatically in real-time, so you always know what’s in stock and what’s not. This gives your merchandisers and inventory managers an accurate view of orders and makes it easier to manage and co-ordinate packaging, delivery and fulfilment processes.

Step 5 — Reordering and restocking: As orders are fulfilled and inventory levels decrease, reorders allow you to maintain a continuous supply of products. It’s crucial to know when and how much to reorder. Ordering too much too soon could result in deadstock (inventory that is no longer sellable because it’s expired, obsolete or out of season). Waiting too long to order or not ordering enough could mean stockouts — and frustrated customers. AI-powered tools can help you monitor inventory levels, generate reorder alerts based on predefined thresholds and even automatically place orders with suppliers.

To help you to get the right amount of inventory to the right place at the right time, leverage AI technology throughout the various steps of the inventory management process. With AI, you can automate tasks, gain valuable insights and make your operations more efficient.