RESOURCE CENTRE

What Is Inventory Management? Real-Time Visibility and Other Techniques

Avoid empty shelves and unhappy customers with these inventory management best practices.

Oct 12, 2022

9 Minute read

Lauren Wallace
Editorial Lead, Commerce Cloud, Salesforce

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 the business or industry, the objective is identical: Get the right amount of the right goods in the right place at the right time.

43% of retailers rank inventory management as their number one day-to-day challenge.

The goal sounds simple enough. However, the data tell a different story: 43% of retailers rank inventory management as their number one day-to-day challenge. When you consider supply chain problems like delayed lead times, unanticipated demand, and higher storage and delivery costs, a complicated picture emerges. So, what’s the difference between the businesses that can withstand these challenges and the ones that can’t? Embracing tools that deliver insights and real-time visibility into inventory.

Whether you’re a raw materials supplier or a retailer selling finished products to consumers, implementing inventory management best practices will save your organisation time and money. In this guide, we’ll answer your inventory management FAQ and show you how greater visibility facilitates the strategies you need to succeed.

What is inventory visibility?

Two employees reviewing the inventory data on a tablet.

Inventory visibility is the ability to view the quantity and flow of goods in real time. From a single view, companies can quickly track and store massive quantities of data, match supply with demand, and reduce instances of overselling and underselling. The ability to do this enables growth at scale. That’s why creating inventory visibility is considered an inventory management best practice.

Tools like barcode scanners and SKUs can track the physical flow of goods and give companies an easy view of their inventory. However, the most advanced systems also account for real-time reservations across selling channels — for example, a platform that integrates sales data from a retailer’s website, app, and brick-and-mortar stores. At these companies, operations and merchandising teams know at a glance exactly how many units of each item are in stock at each location, how many await shipment, and where they are stored within a fulfillment center or warehouse location. Automated reordering and predictive analytics ensure brands can replenish goods at key moments, such as when demand is rising but the reorder point hasn’t been reached.

Why is inventory management and real-time visibility important?

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 leave to shop elsewhere. Knowing when and how much to order is key to successfully managing inventory. With real-time inventory data, companies can apply automation and predictive analytics to surface key moments earlier. Automating inventory management systems saves money and avoids wasted labor — and it all starts with inventory visibility.

The improved visibility companies gain when they implement a real-time inventory management system is significant. Not only does greater visibility enable bulk purchasing while cutting storage costs, embedded analytics make it possible to more accurately predict demand and make timely purchases. Automated reporting and reordering reduces costly mistakes like out-of-stocks, overstocks, mis-picks, and mis-shipments. This increases the chances you can keep shelves stocked and deliver goods quickly and correctly. That builds customer satisfaction and drives repeat business.

How to improve inventory visibility

A digital dashboard with a column of products and available inventory, including a product lookup search window.

Many businesses use spreadsheets to manage inventory. But even the most well organised and routinely updated spreadsheet can’t, on its own, deliver real-time insights into marketplace conditions or emerging supplier problems, such as a ship with goods that is stuck in port. It also doesn’t support flexible fulfillment options like Buy Online, Pick Up in Store (BOPIS) — which are becoming increasingly popular with consumers.

The bottom line is that manual inventory management is not a sustainable practice as companies grow and scale. But by elevating inventory data from siloed teams to the right digital platform, you can efficiently manage the flow of goods across your entire supply chain. That’s true even for omni-channel companies that sell on brick-and-mortar, social media, and app-based channels. This protects your business from easily avoidable problems like overselling online.

Digitising and automating inventory management:

Facilitates the tracking, storage, and analytics of massive quantities of inventory data.
Ensures accurate inventory counts in real time, lowers holding costs, cuts down on deadstock, and streamlines dock-to-stock journeys.
Enables order tracking and accountability along pick, pack, and ship processes.
Delivers granular visibility to the location and warehouse location level, ensuring you can accurately match demand and delivery, and reduce overselling and underselling.

To facilitate growth and agility, you need to have an inventory service that shares those insights. Claire’s introduced an up-leveled ecommerce experience that gave consumers more flexibility. By connecting its commerce platform with a new order management system, the retailer expanded its digital capabilities, introduced same-day BOPIS, and delivered frictionless engagement at scale.

How can I follow inventory management best practices?

An employee scans boxes and checks the on a tablet dashboard with Astro driving off a forklift with boxes.

To follow inventory management best practices, you’ll need to know how much to order, how long it takes to exhaust your supply, when to reorder goods, and how much to keep in reserve. You’ll also need to consider storage and delivery costs.

These basic principles are the same from industry to industry. But a deeper dive into the specific needs of companies in certain sectors reveals important differences in inventory management best practices:

Inventory management for manufacturing

Ask manufacturers how they feel about raw materials getting stuck in port and it’s easy to understand why problems like shortages and delivery delays are big industry pain points. Following inventory management best practices is critical because these companies are the linchpin in every supply chain — regardless of industry. Assuring on-time production and delivery is, of course, essential for manufacturers. But they also have to partner closely with raw materials suppliers and reduce carrying costs at the same time they avoid out-of-stocks materials and overproduction. Automating inventory management avoids these problems while also matching supply with demand.

Inventory management for retail

Nothing spells trouble for retailers like high demand on an out-of-stock product (or low demand on a weak seller with plenty of inventory on hand). But by following inventory management best practices, retailers can earn a higher return on investment from purchased stock. A visible inventory management system surfaces in real time what they have on hand to move, but it also helps retailers see at a glance which finished goods are their best and worst sellers (and which are the most profitable). With greater visibility, retailers can instantly connect and view warehouse, sales, location, and distribution data, which streamlines customer touchpoints (and ensures they can deliver the correct goods on time).

Inventory management for healthcare

Visibility takes on critical importance in healthcare when necessary supplies go missing or are expired, backordered, or out of stock. At the same time, providers are under pressure to manage waste and prevent theft or abuse. With a digitised, connected inventory management system, everyone along the supply chain gains full visibility into location, distribution, and usage. That protects patients, keeps spending under control, and ensures employees can stay focused on care.

Inventory management FAQ

Astro with construction vest and an image of woman holding a tablet device looking into the inventory list

What are the five types of inventory?

There are five types of inventory:

Raw materials: Manufacturing materials used to produce finished goods
Work in progress: Semi-finished goods still on the production floor
Finished goods: The final saleable product
Packing material: Inventory necessary for usage or for transport
Maintenance, repair, and operations (MRO) goods: Supplies and consumables used to maintain machinery during production

Are there other types of inventory?

Other types of inventory include:

Anticipatory stock: Inventory investment in raw materials or finished goods based on expected rising demand.
Buffer inventory: Inventory held to ensure smooth production and delivery during periods of unanticipated rising demand — also called safety stock.
Cycle inventory: Inventory held to balance carrying and holding costs.
Decoupling inventory: Work-in-progress inventory that ensures machinery throughout the plant is kept running.
Goods in transit: Any raw materials or finished, work-in-progress, packing, or MRO goods being transported to another location.

What are the three primary inventory management techniques?

The three main inventory management techniques are:

Manual: Spreadsheet- or paper-ledger-based systems that businesses use to track goods.
Periodic: Manual counting of goods at predetermined intervals. Quantities are recorded in a spreadsheet.
Perpetual: The most accurate inventory system because quantities are updated in real time. Barcode and radio frequency inventory systems are perpetual inventory systems.

What are common demand planning methods?

Four common demand planning methods include:

Qualitative inventory forecasting: Predicting demand based on macroeconomic factors like the state of the economy or a government shutdown. It can also include focus group data and market research.
Quantitative inventory forecasting: Predicting demand using historical sales data. Quantitative forecasting does not, on its own, take into account important factors such as unanticipated demand or current market conditions.
Trend forecasting: Predicting demand based on changes in demand over time. It may or may not include seasonal or irregular trends.
Graphical forecasting: Trend forecasting data presented in a visual format to more easily surface changes in demand.

What are the risks of bad inventory management processes?

Bad inventory management processes can lead to unhappy customers, deadstock liability, and lost sales due to empty shelves. But other problems, like a messy warehouse with incorrect shelf labels, can also end in costly mis-picks and mis-shipments. That’s why it’s essential to run a data-driven inventory management strategy (along with a well-organised warehouse).

How will my business benefit from better inventory management processes?

The right inventory management system makes a direct impact on profitability.

Improve sales and service at a glance: Find out what products are selling quickly and place reorders before you run out.
Strengthen expense controls: Buy the right number of products to ensure they don’t sit on shelves. Find mistakes in calculations like reorder point faster. Reduce theft, loss, and warehouse costs. Mark down slow movers and free up cash for investment elsewhere.
Speed time to market and improve productivity: With a digital inventory management system, you can automate reorders, monitor lead times and delivery schedules, and use real-time data to make informed decisions.
Build more accurate demand forecasts: Use embedded analytics to anticipate periods of high and low demand. Keep goods moving efficiently by reordering at the right times.

What’s the difference between an inventory management system and an enterprise resource planning (ERP) system?

Inventory management systems can be as simple as a manual ledger or as advanced as a perpetual system. But an ERP system goes beyond these inventory systems because it integrates functions like inventory, logistics, finance, and operations on one platform. Unlike perpetual systems, ERP systems also support automation and predictive analytics.

Inventory management glossary

Important inventory management terms you need to know include:

ABC analysis: This helps companies figure out which goods have the most impact on inventory cost. “A” is your most profitable and valuable product. “C” goods are small-dollar transactions that aren’t significant individual contributors to the bottom line. “B” goods fall somewhere in the middle.
Average inventory: Calculated by adding beginning inventory to ending inventory over an accounting period and dividing by two.
Beginning inventory: The monetary value of unsold goods at the beginning of an accounting period.
Bundles: Multiple products sold together under one unique alphanumeric code (SKU).
Carrying costs: The amount of money spent holding and storing unsold goods.
Cost of goods sold: Also known as COGS. The amount of money spent purchasing or producing goods, including raw materials, machinery, and labor. It does not include indirect costs such as advertising, sales, or distribution.
Days inventory outstanding: The amount of days it takes for inventory to sell. Fewer days are generally better. This varies between companies, even for the same product.
Deadstock: Outdated (and probably unsellable) goods.
Economic order quantity: Also known as EOQ, this formula calculates the ideal amount of goods a company should purchase to minimise storage and other buying costs.
Ending inventory: The monetary value of unsold goods at the end of an accounting period.
First-in-first-out valuation: An asset-management and valuation method in which assumes goods that are bought first are sold first.
Inventory count: Taking a manual count of inventory to verify the accuracy of records. Also called a stock take.
Inventory variant: Variations on a single product (for example, different sizes of the same shoe).
Just-in-time: Specific to raw materials orders, companies buy goods on an as-needed basis and they arrive “just in time” to begin production. Cross-docking, where companies bypass warehousing and transfer goods from inbound trucks directly to outbound trucks, is typically a piece of the JIT puzzle. This is because cross-docking limits the amount of money companies have to spend on storage.
Last-in-first-out: Assumes goods that are bought last are sold first.
Lead time: How long it takes to deliver purchased goods to the buyer’s location.
Materials requirements planning (MRP): With MRP, companies start by estimating demand for specific raw materials. Then, they order the materials or components to manufacture the product, distributing the goods by need based on what’s already in stock. Once the resources are allocated, production is scheduled.
Mis-pick: When the wrong item is pulled from inventory and delivered to the customer. This includes cases where the item is omitted or is correct but is damaged or mis-labeled.
Mis-shipments: Goods delivered to the wrong destination.
Overselling: Taking orders for out-of-stock products. This leads to a poor customer experience.
Pipeline inventory: Goods that are in production or in transit somewhere along the supply chain.
Reorder point: The reorder point factors in lead time and tries to ensure the company doesn’t run out of stock. The reorder point can change based on the product or the company’s own sales cycle.
Safety stock: The extra product a company should have on hand just in case there is an unforeseen change, like a sudden increase in customer demand or a forecasting error. Also called buffer inventory.
Shrinkage: Damaged or stolen goods that cannot be sold.
Stock-keeping unit (SKU): An alphanumeric code assigned to goods that help keep track of inventory. SKUs are unique by inventory variant.
Supply chain: The flow of goods from their raw materials origins to finished products. Companies are often only directly responsible for one aspect of the supply chain (for example, retailers).
Third-party logistics (3PL): A partner company that manages customer service, fulfillment, or warehousing for retailers.

How can I improve my current inventory management system?

Inventory management systems that rely too heavily on legacy technology can be inflexible and expensive to run. But with the right strategy and tools, you can streamline complex supply chain operations, mitigate the impact of disruptions, and make customers happy.

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