What Is Inventory Management? How to Manage and Improve Stock Flow

inventory management

Inventory management is the process of organizing and managing stock throughout the supply chain. 

The goal of inventory management is to minimize the cost of holding inventory, while keeping stock levels consistent and getting products into customers’ hands faster. Inventory management is the heart of a successful retail business. 

Not sure where to get started with inventory management? This guide will walk you through the leading inventory management techniques, formulas, and tips for managing stock and keeping your customers happy. 

    What is inventory management?

    Inventory management is the system a business uses to order, store, organize and move inventory through their supply chain. It ensures businesses have the right amount of product in the right place at the right time. 

    It also tracks your company’s stocked goods and monitors their weight, dimensions, amounts, and location. 

    The goal of inventory management is to minimize the cost of holding inventory by helping you know when it’s time to replenish products or buy more materials to manufacture them. This helps you maintain optimal inventory levels and minimize costs. 

    Inventory management vs inventory control

    Inventory control is contained within inventory management, but it is slightly different.

    Inventory control refers to the process of regulating, monitoring, and handling the inventory that you already have at your store, while inventory management also accounts for demand forecasting, ordering, and receiving inventory

    Inventory vs stock

    Stock refers to the finished goods that you have available to sell to your customers, while inventory might include materials used to create the finished goods, as well as the finished goods themselves. Because of this subtle distinction, all stock is included within inventory, but not all inventory is referred to as stock.

    Why is inventory management important?

    Inventory management is a critical part of any successful business, ensuring your store has enough of the right inventory at the right time. However, inventory management grows in complexity as your business scales.

    Effective inventory management requires a delicate balance of not having too much inventory (leading to overstocking) or too little inventory (causing stockouts). Below are some of the benefits of inventory management, as well as the challenges.

    Benefits of inventory management

    1. Avoid spoilage
    2. Avoid dead stock
    3. Save on storage costs
    4. Improve cash flow
    5. Optimize fulfillment

    Effective inventory management is essential for ensuring a business has enough stock on hand to meet customer demand. Poorly-handled inventory management can result in a business either losing money on potential sales that can’t be filled or wasting money by stocking too much inventory. 

    Whether you’re a small business or company using enterprise resource planning (ERP), inventory management helps your business do a number of important things:

    1. Avoid spoilage

    If you’re selling a product that has an expiry date, like coffee or tea, there’s a very real chance it will go bad if you don’t sell it in time. Managing inventory effectively helps you avoid unnecessary spoilage.

    2. Avoid dead stock

    Dead stock is stock that can no longer be sold—not because it's expired, but rather because it may have gone out of season, out of style, or otherwise become irrelevant. By adopting a diligent strategy, you can address this costly inventory mistake.

    3. Save on storage costs

    Warehousing is often a variable cost, meaning it fluctuates based on how much product you’re storing. When you store too much product at once or end up with a product that’s difficult to sell, your storage costs will go up. Avoiding this will save you money.

    4. Improve cash flow

    Not only is good inventory management more cost efficient; it improves cash flow in other ways, too. Remember: inventory is product you’ve likely already paid for with cash (checks and electronic transfers included), and you’re going to sell it for cash. But while it’s sitting in your warehouse, it’s definitely not cash.

    This is why it’s important to factor inventory into your cash flow management. Inventory directly affects sales (by dictating how much you can sell) and expenses (by dictating what you have to buy). Both of these elements factor heavily into how much cash you have on hand. In short, better inventory management leads to better cash flow management.

    When you have a solid inventory system you’ll know exactly how much product you have in real time. Based on sales, you can project when you’ll run out so you can replace it before then. Not only does this help ensure you don’t lose sales (critical for cash flow), but it also lets you plan ahead for buying more by ensuring you have enough cash set aside.

    Money spent on inventory is money that is not spent on growth. Manage it wisely.

    5. Optimize fulfillment

    Good inventory management can help improve order fulfillment in a few beneficial ways. You can use tactics like inventory distribution, which involves having inventory in multiple fulfillment centers to ensure your products are close to your customers. This speeds up delivery time while reducing shipping costs—both of which help keep customers happy.

    Proper inventory management also means offering buyers a seamless return experience, while ensuring that usable inventory is quickly reentered into circulation.

    Inventory management challenges

    1. Phantom inventory
    2. Changing demand
    3. Supply chain issues
    4. Difficult counting processes
    5. Disorganized stock rooms

    While effective inventory management offers many benefits, you must overcome some challenges to achieve efficiency. Although these challenges arise in different ways, they all lead to one of three costly problems: too much inventory, not enough inventory, or lost inventory. Let’s look at each of these challenges more closely. 

    1. Phantom inventory

    One of the primary challenges of inventory management is dealing with phantom inventory

    Phantom inventory refers to a situation where your point of sale system is reporting available inventory that doesn’t actually exist in your store. This situation can be costly, as it will lead to inaccurate stock levels that can impact your decisions regarding your product offering and reordering. 

    2. Changing demand

    Shifts in demand can also cause challenges with inventory management. For example, the pandemic led to radical changes in demand almost overnight, causing many stores to run out of stock of multiple products very quickly. 

    3. Supply chain issues

    Similar to demand, another external factor that can greatly affect your inventory management is the global supply chain. Supply chain constraints will cause stock outs at your store if you don’t have enough safety stock on hand.

    4. Difficult counting processes

    Counting inventory is a difficult and time-consuming process. Since counting inventory takes so long, you’ll likely need to either close down your store for a day or ask staff to come in outside of operational hours (which costs overtime). On top of this, manual inventory counts are prone to errors which can cause further issues.

    5. Disorganized stockrooms

    Maintaining an organized stockroom is another challenge of inventory management. A messy stockroom will make it difficult for associates to find inventory for customers when they need it—which hurts customer experience—and can even lead to inventory shrinkage.


    Unify your inventory management with Shopify

    Only Shopify POS helps you manage warehouse and retail store inventory from the same back office. Shopify automatically syncs stock quantities as you receive, sell, return, or exchange products online or in store—no manual reconciling necessary.


    Types of inventory

    1. Raw goods
    2. Work-in-progress (WIP)
    3. Finished goods
    4. Maintenance, repair, and operations goods (MRO)

      Raw goods

      Raw goods are materials or substances used in the early production or manufacturing of goods. Raw materials can include wood, metals, plastics, or fabrics used in the creation of finished goods. A business owner or manufacturer acquires these materials from one or more suppliers or producers. 

      You can divide raw materials into two groups: 

      • Direct materials, which are used in the final product. For example, the fabric you use to make clothing. 
      • Indirect materials, which are used throughout production but not included in the final product. For example, the oil you use to maintain a machine.

      Raw materials represent an asset on your company’s balance sheet. You pull raw materials over time and use them to produce finished goods. 

      Work-in-progress

      When you use direct and indirect materials in production, you must recognize the move of materials into works-in-progress (WIP). WIP describes a partially finished product awaiting completion. 

      On a balance sheet, WIP represents all production costs: labor, machinery, raw materials, and other equipment. It reflects only the value of products in this production stage. Costs are then transferred to the finished goods account and attributed to the cost of sales.

      5 Free Templates to Better Understand Your Inventory

      Calculate your businesses cost of goods sold, sell through rate, inventory turnover, saftey stock, economic order quantity, or reorder point with ease using these custom templates. (No math required!)

      Finished goods

      Finished goods inventory refers to the number of products in stock available for customers to buy. Once a WIP is complete, it becomes part of the finished goods inventory. 

      Finished goods undergo a markup, which means the price they’re sold at is higher than the items cost you.

      Markup amounts differ, but the average markup is around 50%, according to data from Freshbooks.

      Maintenance, repair, and operations goods

      Maintenance, repair, and operation supplies (MRO) are materials and equipment used in the production process but not a part of the final product.

      MRO inventory items include personal protective equipment like face masks, gloves, and safety glasses; cleaning supplies such as disinfectants, brooms, and buckets; office supplies like notebooks, pens, and tape; tech equipment like laptops, printers, and scanners; lab equipment for any testing and research to create products; and repair tools. 

      11 inventory management strategies

      1. Implement Six Sigma
      2. Set par levels
      3. Follow the first in, first out (FIFO) principle
      4. Manage relationships
      5. Make contingency plans
      6. Conduct regular auditing
      7. Prioritize with ABC
      8. Practice accurate forecasting
      9. Apply the last in, first out (LIFO) method
      10. Try the just-in-time (JIT) approach
      11. Outsource your inventory storage and fulfillment

      Inventory management is a highly customizable part of doing business. The optimal inventory control method is different for each company.

      However, every business should strive to remove as much human error from inventory management as possible, which means taking advantage of inventory management software. If you run your business with Shopify, inventory management is already built in.

      Regardless of the system you use, the following will improve your inventory management—and cash flow.

      1. Implement Six Sigma

      Six Sigma is a method and tool set for business process improvement. It’s used in inventory and supply chain management to reduce excess and obsolete inventory write-offs. This inventory is often sold below cost or donated, which costs small business owners cash. 

      Edwin Garro, founder of PXS School of Excellence, a Six Sigma certification and training company, says, “In the Six Sigma world, we hate two things: waste and variation.”

      He explains that waste is anything that adds cost but does not add value to the product or service, and variation is the lack of uniformity in a product or service that is perceived by the customer.

      “Inventory is a major source of waste and variance,” Edwin says.

      If you have more inventory than you need, you are wasting money, space, and personnel dedicated to caring for that inventory. If you have variation, inventory can end up lost, damaged, or hidden, which can result in less stock and unsatisfied customers. — Edwin Garro

      Having the correct inventory to meet demand reduces waste and variance problems.

      Six Sigma is a great methodology for solving inventory problems. It has order and reliability. Edwin describes a five-step process he calls DMAIC to solve these issues using the Six Sigma model:

      • Define the problem you’re going to solve. It needs to have a clear metric. For example, if your problem is inconsistent tracking, the metric could be productivity. 
      • Measure the current state using simple stats. How much input is turning into useful outputs? This will give you an idea of the problem’s root cause.
      • Analyze the root causes and create an action plan to eliminate them. From the example above, the root cause could be that tracking procedures are spread across different software and spreadsheets. The action plan could be to create a centralized inventory tracking system.
      • Implement your action plan by running pilot tests to see if it eliminates the problem. Maybe you can try a new inventory management tool or test a hub-and-spoke model to move products faster.
      • Control the new process. Track a metric to verify that the process works and you’re seeing consistent results. Then celebrate!

      Further Reading: Learn how to set up your model by reading Lean Six Sigma to Reduce Excess and Obsolete Inventory.

      2. Set par levels

      Ease your inventory management by setting par levels for each of your products. Par levels are the minimum amount of product that must be on hand at all times. When your inventory dips below these predetermined levels, you know it’s time to order more.

      Ideally, you’ll order the minimum quantity that will get you back above par. Par levels vary by product and are based on how quickly the item sells and how long it takes to get back in stock. (Discover this data in your Shopify Retail sales reports.)

      Although setting par levels requires some upfront research and decision making, the process will eventually systemize your ordering process. Not only will it be easier for you to make decisions quickly, it will also allow your staff to make decisions on your behalf.

      Remember that conditions change over time. Check your par levels a few times throughout the year to confirm they still make sense. If something changes in the meantime, don’t be afraid to adjust your par levels up or down.

      By using a smart third-party fulfillment provider, you can set these tripwires early and use them to build better demand forecasting and understand your seasonal inventory needs.

      3. First in, first out

      First-in, first-out (FIFO) is an important principle of inventory management. It means your oldest stock (first in) gets sold first (first out), not your newest stock. This is especially important for perishable products so you don’t end up with unsellable spoilage.

      It’s also a good idea to practice FIFO for non-perishable products. If the same boxes are always sitting at the back, they’re more likely to get worn out. Plus, packaging design and features often change over time. You don’t want to end up with something obsolete that you can’t sell.

      In order to manage a FIFO system, you’ll need an organized warehouse. This typically means adding new product from the back or otherwise making sure old product stays at the front. If you’re working with a warehousing and fulfillment company, they probably do this already, but it’s a good idea to confirm. 

      4. Manage relationships

      Part of successful inventory management is being able to adapt quickly. Whether you need to return a slow-selling item to make room for a new product, restock a fast seller very quickly, troubleshoot manufacturing issues, or temporarily expand your storage space, it’s important to have a strong relationship with your suppliers. That way, they’ll be more willing to work with you to solve problems.

      With solid supplier relationships, minimum order quantities are often negotiable. Don’t be afraid to ask for a lower minimum so you don’t have to carry as much inventory.

      A good relationship isn’t just about being friendly—it’s about clear, proactive communication. Let your supplier know when you’re expecting an increase in sales or generating a lot of purchase orders so they can adjust production. Ask them to notify you when a product is running behind schedule so you can pause promotions or look for a temporary substitute.

      5. Contingency planning

      A lot of issues can pop up related to inventory management that can cripple unprepared businesses:

      • Your sales spike unexpectedly, and you oversell your stock.
      • You run into a cash flow shortfall and can’t pay for product you desperately need.
      • Your warehouse doesn’t have enough room to accommodate your seasonal spike in sales.
      • A miscalculation in inventory means you have less product than you thought.
      • A slow-moving product takes up all your storage space.
      • Your manufacturer runs out of your product, and you have sales orders to fill.
      • Your manufacturer discontinues your product without warning.

      It’s not a matter of if problems arise, but when. Figure out where your risks are and prepare a contingency plan. How will you react? What steps will you take to solve the problem? How will this impact other parts of your business? Remember that solid relationships go a long way here.

      6. Regular auditing

      Regular inventory reconciliation is vital. In most cases, you’ll be relying on software and reports from your warehouse management system to know how much product you have in stock. However, it’s important to make sure the facts match up. There are several methods for doing this.

      Physical inventory

      A physical inventory count, or stock take, is the practice of counting all your inventory at once. Many businesses do this at their year end because it ties in with accounting and filing income tax.

      Although physical inventories are typically only done once a year, it can be incredibly disruptive to the business and tedious. If you do find a discrepancy, it can be difficult to pinpoint the issue when you’re looking back at an entire year.

      Spot checking

      If you do a full physical inventory at the end of the year and often run into problems or have a lot of products, you may want to start spot checking throughout the year. This simply means choosing a product, counting it, and comparing the number to what it's supposed to be. This isn’t done on a schedule and is supplemental to physical inventory. In particular, you may want to spot check problematic or fast-moving products.

      Cycle counting

      Instead of doing a full physical inventory, some businesses use cycle counting to audit their inventory. Rather than a full count at year end, cycle counting spreads reconciliation throughout the year. Each day, week, or month a different product is checked on a rotating schedule. There are different methods of determining which items to count when but, generally speaking, higher-value items will be counted more frequently.

      7. Prioritize with ABC

      Some products drive more revenue than others. You can use an ABC analysis report to grade the value of your stock based on a percentage of your revenue:

      • A = % of stock that represents 80% of your revenue
      • B = % of stock that represents 15% of your revenue
      • C = % of stock that represents 5% of your revenue

      Your A stock represents your most profitable and valuable products. You’ll want to make sure you always have these products on hand so you don't miss out on future sales.

      On the other hand, your C stock is your slow-moving or dead stock. This is stock you might want to sell at a discount, so you can get it off your shelves and free up cash from your inventory.

      8. Accurate forecasting

      A huge part of good inventory management comes down to accurately predicting demand. Make no mistake, this is incredibly hard to do. There are countless variables involved and you’ll never know for sure exactly what’s coming—but you can try to get close.

      Here are a few things to look at when projecting your future sales:

      • Trends in the market
      • Last year’s sales during the same week
      • This year’s growth rate
      • Guaranteed sales from contracts and subscriptions
      • Seasonality and the overall economy
      • Upcoming promotions
      • Planned ad spend

      If there’s something else that will help you create a more accurate forecast, be sure to include it.

      9. Last in, first out

      The last in, first out, or LIFO, inventory management method assumes that the merchandise you acquired most recently was also sold first. The last to be bought is assumed to be the first to be sold. It’s essentially the opposite of FIFO.

      This works under the assumption that prices are steadily rising, so the most recently purchased inventory will also be the highest cost. That means that higher costs will yield lower profits, and, therefore, lower taxable income—this is pretty much the only reason it makes sense to use LIFO.

      In general, LIFO is a really difficult method in practice. If you keep your oldest merchandise on the back of the shelf, it’s more likely to become obsolete and unsellable at a certain point. This rings true for both perishables and non-perishables as items can get damaged, worn, and outdated. Use this approach with caution.

      10. Just-in-time

      Just-in-time, or JIT, inventory management is for the risk takers out there, though effective inventory management mitigates a lot of that risk. With JIT, you keep the lowest inventory levels possible to still meet demand and replenish before a product goes out of stock.

      This requires careful and accurate planning and forecasting, but works well for rapidly growing brands with calculated launches and product line extensions.

      💡 TIP: If you need to receive direct notifications of low stock levels, then install an inventory alert app from the Shopify App Store.

      11. Outsource your inventory storage and fulfillment

      One of the most common reasons for poor inventory management is simply a lack of resources for inventory storage and fulfillment. You might not have the time or manpower to ensure your inventory is properly distributed or to deal with an influx of returns.

      That’s why outsourcing fulfillment is an inventory management strategy all its own. Though it might come at a cost, using a fulfillment partner can help you generate business and keep customers happy.

      Shopify Fulfillment Network, a Shopify-built and -managed fulfillment service, will distribute your inventory across a network of US warehouses on your behalf. This ensures that you can offer two-day delivery to the majority of your customers at an affordable rate. Shopify Fulfillment Network will also receive your customer returns and re-enter usable inventory into circulation. And, in doing so, provide you with more free time to manage other important aspects of your business.

      Inventory management formulas

      Use the following inventory management formulas to understand your stock flow and maximize your inventory dollars:

      • Inventory turnover
      • Sell-through rate
      • Days inventory outstanding (DIO)
      • Economic order quantity (EOQ)
      • Safety stock
      • Reorder point

      Inventory turnover

      Inventory turnover is a ratio showing how many times a business sold and replaced inventory over a given time period. Also known as stock turn, inventory turns, and stock turnover, this formula is calculated by dividing the cost of goods sold (COGS) by average inventory. 

      Use the following formula to calculate stock turnover:

      cost of goods sold (COGS) / [(beginning inventory) + (ending inventory) / 2]

      Using the formula above, track your inventory each month. Your beginning inventory is how much you have in stock on the first of the month, and your ending inventory is how much stock is left on the last day of the month.

      Calculating inventory turnover can help you make better decisions on pricing, manufacturing, and buying new inventory. A slow turnover rate suggests low sales and excess inventory, while a high ratio suggests strong sales or insufficient inventory. 

      Sell-through rate

      Sell-through rate is a percentage that shows how much received inventory you sold over a period of time. You can use this formula to determine how quickly finished goods inventory is sold and how quickly you turn inventory into revenue. 

      You can determine sell-through for your inventory as a whole or you can use it for inventory from specific manufacturers or product lines. This helps you figure out which suppliers and product lines are your best investment. 

      The formula for sell-through is:

      sell-through rate = number of units sold / number of units received) x 100

      It varies by industry, but the general sell-through rate is between 40% and 80%, according to data from Accelerated Analytics

      A high sell through means you have the right amount of inventory for demand. It also indicates you’re efficiently moving inventory through the pipeline. A low sell through could mean you’re ordering too much inventory or people aren’t buying inventory at the set price. 

      Days inventory outstanding (DIO)

      Days inventory outstanding is the average number of days you hold inventory before selling it. This formula shows how fast you can turn inventory into cash. Also known as “days-in inventory,” “inventory day of supply,” or “the inventory period,” the DIO formula is calculated as:

      inventory days = (average inventory / COGS) x number of days

      Managing your inventory levels is crucial, especially when selling physical products. While this formula is similar to inventory turnover, which indicates your ability to turn inventory and make sales, the DIO ratio puts that figure into a daily context and can give you a more accurate picture of your inventory management efficiency. 

      Economic order quantity (EOQ)

      Economic order quantity refers to the ideal quantity you should purchase to minimize inventory costs. This includes holding costs, shortage costs, and order costs.

      The formula is calculated as:

      EOQ = square root of [2SD] / H
      • S = setup costs per order, including shipping and handling
      • D = demand rate, or quantity sold per year
      • H = Holding costs per year, per unit

      By calculating EOQ, you can make smarter decisions on how much product to order in a given time. 

      Safety stock

      Safety stock is like an emergency fund—it’s basically inventory you “set aside” for use in case of emergency. It acts as more of a threshold for when you need to reorder merchandise before dipping into your emergency stock allocation.

      Safety stock has a formula:

      safety stock = (maximum daily usage x maximum lead time) - (average daily usage x average lead time)

      It’s a good idea to work safety stock into your inventory management strategy in case your supply chain is disrupted, your merchandise is damaged, or some other unforeseen circumstance prevents your ability to receive or manage merchandise.

      Reorder point

      The reorder point tells you the level at which it’s time to replenish your stock. Once you know your safety stock level, you can consider lead time with your supply chain to determine the ideal point at which it’s time to place your order.

      You can use the following formula to calculate the reorder point in your business: 

      reorder point = lead time demand + safety stock

      Calculating reorder points is vital for effective stock management, but it can be incredibly time consuming when dealing with a large number of products. A powerful inventory management system makes it a lot easier.

      📦 INVENTORY TIP: Set reorder points in Shopify Admin to get low stock notifications and ensure you have enough lead time to replenish inventory of a product before quantities reach zero.

      Types of inventory management

      Inventory management looks different for every business and there are even different types of inventory management. Here are a few different types of inventory management to consider.

      Retail inventory management

      Inventory management for retailers refers to managing the stock you intend to sell to your customers. As a retailer, your main goal is to ensure you have enough stock to fulfill orders and customer demand. However, storing inventory is costly so you also want to avoid overstocking your warehouse.

      Multi-location inventory management

      Multi-location inventory management adds further complexity as you’ll need to manage inventory across multiple stores, warehouses, or sales channels. This type of inventory management goes beyond the holistic view of all your inventory, and requires management at the location level as well, to ensure you have enough stock everywhere that you sell. 

      Maintaining an accurate, centralized view of inventory is essential within this system.

      What is an inventory management system?

      An inventory management system (IMS) is the program (typically software) that monitors and organizes all the elements involved in inventory management. This includes tracking orders all the way from suppliers through to customers.

      Perpetual inventory system

      A perpetual inventory system is viewed as the most accurate option for inventory management. Perpetual inventory systems are the most accurate because they continuously track inventory in real-time, and are usually supported by powerful software.

      Periodic inventory system

      Within a periodic inventory system, you take physical counts of inventory at the beginning and end of a specific period. While this system is not as accurate as a perpetual system, it can be done without having to purchase software.

      Manual inventory system

      A manual inventory system is the old school pen and paper approach. While this might be a viable option if your monthly sales are in the single digits, most businesses require something more robust.

      Inventory management software for retailers

      While many small businesses start out with the old-school pen-and-paper method, this gets unwieldy quick—especially if you have growth goals. Not to mention it makes you more vulnerable to human error, which can lead to costly business mistakes.

      When you use a powerful inventory software to help you track stock, you get access to benefits like stock alerts, automated purchase orders, year-end inventory reporting, and user permissions and accounts.

      Inventory tracking software's features give you complete control and insight into how inventory moves from suppliers to customers and everywhere in between.

      The best inventory management software sync stock data in real-time as products are received, sold, returned, or exchanged online or in store. This ensures you have a single, reliable view of your stock.

      Shopify merchants can choose from a variety of trusted inventory management apps in the Shopify App Store. A few examples, in no particular order, are:   

      1. Shopventory
      2. Stocky 

      Inventory management tips

      1. Categorize your inventory
      2. Update inventory records in real-time
      3. Audit inventory regularly
      4. Go over supplier performance
      5. Put one person in charge of inventory management
      6. Always keep customer satisfaction in mind
      7. Invest in inventory management technology

      Whether you’re a new business or opening yet another retail store location, keep these inventory management tips in mind:

      1. Categorize your inventory

      Prioritizing your products into groups helps you understand which need to be ordered frequently and how slow they move out of your inventory. This allows you to spend more time and resources on profitable products.

      To maximize your inventory dollars and improve efficiency, divide your inventory into several groups based on turnover and profitability. Start with three:

      • Group A: Low-priced items that sell fast
      • Group B: Mid-priced items that move slower
      • Group C: High-priced items that sell the slowest

      All products aren’t created equal. If you lend equal inventory time on all products, you’ll likely shortchange the ones that deserve your attention. By categorizing items in priority groups, you’ll get more efficient inventory counts and assure that levels of your highest value items are maintained. 

      2. Update inventory records in real-time

      Keep records of product information for all items in your inventory. Access to fresh, correct inventory data is key to move products quickly and efficiently. You’ll want to record information such as SKUs, barcodes, suppliers, and lot numbers. Plus, know when the last transactions took place. 

      Holding dead inventory can cost you in warehousing fees. Factors like seasonality or trends can impact how fast products move. If it’s been months since a product sold, or if turnover has decreased, you may want to sell the item at a loss and use the revenue to invest in a more profitable product. 

      3. Audit inventory regularly

      Real-time tracking also makes it easier to audit your inventory regularly. Some retailers audit inventory once per year, while others can do monthly or weekly spot checks on their items. Regardless, run audits to ensure accuracy between your stock quantity and financial records. This will help you understand your stock flow and profits and losses, and keep inventory flowing smoothly. 

      4. Go over supplier performance

      A bad supplier can cause chaos for your business. If they are constantly late with deliveries or send the wrong amount of items, it can throw off your operation. A supplier audit is a chance to identify where suppliers can improve or when to cut them off. 

      Discuss any issues with suppliers. Don’t be afraid to switch suppliers if you don’t feel the problem can be solved. You don’t want to deal with pending stock levels and running out of inventory. Your goal is to create supply chain resilience so you can run your business with confidence. 

      5. Put one person in charge of inventory management

      It’s true that many retailers are small enough to be a two- or three-person operation. But if your business continues to grow, you may want to assign the role of inventory manager to one person. 

      Your inventory manager can keep track of all items and be first-in-charge when it comes to ordering restocks, negotiating with suppliers, and paying invoices. You’ll also want to work with them on creating a process for receiving stock. 

      6. Always keep customer satisfaction in mind

      Your goal is to avoid excess stock in your inventory. But obsessing over minimizing stock level steals your attention from the most crucial element of your business: customer satisfaction. If your inventory runs too low and customers can’t buy, it’ll lead to lost sales. Even worse, it’ll lead to lost customers. 

      7. Invest in inventory management technology

      Small businesses often run with minimal technology. If you’re still working off spreadsheets and notebooks, that’s only doable while you’re still small. Say you open an online store or a second location—you’ll spend more time on inventory than your actual business. Keeping inventory synced across all your channels can become exhausting. 

      Stocky made it simple to move a lot of our inventory from the retail store to our warehouse and then distribute it through our online channel. Our online business increased by 500% for several months. — Adam Besheer, Greenery Unlimited

      A good inventory management software makes the process of managing your stock easier. Besides saving you time and sanity, it can also help:

      • Lower risk of overselling
      • Improve cost savings
      • Avoid excess stock and stockouts
      • Improve inventory accuracy 
      • Provide greater insights into your business

      Look for a software that can integrate with your business tools and handle your future multi-channel sales. You’ll want a point of sale (POS) system that connects with your stock management system to keep data synchronized and maintain consistency across your sales channels.

      Future of inventory management

      Technology continues to grow and develop at an incredible pace, and many of these new and emerging technologies have applications for inventory management.

      RFID

      Radio frequency identification or RFID technology certainly has a place in the future of inventory management. In fact. RFID tags are already being used by many companies to search for and find inventory, and they can be used to combat phantom inventory.

      AI

      Artificial intelligence continues to develop and gain new applications within inventory management. Self-correcting AI solutions can empower businesses to automate inventory decisions and react to customer demands in real-time.

      IoT

      Internet of Things or IoT devices can reduce the time it takes associates to find inventory by providing real-time location data. This data can also help you make more informed inventory decisions by knowing exactly how much stock you have and where.

      Taking control of your inventory

      Remember that with an effective inventory management system in place you can help reduce costs, keep your business profitable, analyze sales patterns and predict future sales, and prepare for the unexpected. With proper inventory management, a business has a better chance for profitability and survival.

      It’s time to take control of your inventory management and stop losing money. Choose the right inventory management techniques for your business and start implementing them today.

      Manage inventory from one back office

      Shopify POS comes with tools to help you manage warehouse and store inventory in one place. Forecast demand, set low stock alerts, create purchase orders, know which items are selling or sitting on shelves, count inventory, and more.

      Inventory management FAQs

      What are the 4 types of inventory?

      The four types of inventory are raw goods, work-in-progress (WIP), finished goods, and maintenance, repair, and operations goods (MRO). Understanding these various types of inventory is critical to production planning and inventory control.

      What are the 3 major inventory management techniques?

      Three common inventory management techniques are first in, first out (FIFO), last in, first out (LIFO), and just-in-time (JIT) inventory. Each of these methods have unique pros and cons, so you'll need to find the inventory management technique that is best suited to your business needs.

      What are the five elements of inventory management?

      Five key elements of inventory management are categorizing and organizing your inventory, maintaining updated inventory records, auditing inventory regularly, reviewing supplier performance periodically, and always keeping customer satisfaction top of mind. Mastering these five important areas of inventory management will set your business up for success.

      What are the main inventory formulas?

      The main inventory fomulas used by retail businesses are inventory turnover, sell-through rate, days inventory outstanding (DIO), economic order quantity (EOQ), safety stock, and reorder point. Each of these formulas will provide a different data point that is essential to managing stock flow and minimizing inventory costs.