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The Complete Guide to Inventory Management

Inventory Management
Woman checking inventory in a warehouse

Product-based business models are popular with both B2B and B2C applications. But managing all of these physical products is a big challenge. Regardless of a company’s size, niche, or product, managing inventory can become unwieldy without the right tools and processes in place. In fact, inventory problems cost businesses $1.1 trillion globally every year.

Changing consumer habits and the switch to eCommerce-first shopping have made it even harder for brands to compete. It’s more important to carefully watch margins today—because any inefficiencies can cost brands millions.

Don’t rely on manual data entry or spreadsheets to track your inventory. Inventory management practices and inventory management software systems will help your team run a more balanced, data-driven operation. Learn how inventory management works and the inventory management techniques and tracking tools that can revamp your operations.

What Is Inventory Management?

Man checking inventory in a warehouse on a clipboard

Inventory management is the process that businesses follow to manage all of their inventory. This can include the raw materials you use to make your products (like ingredients for food businesses), the assets your business relies on to conduct business, as well as the finished products themselves. It can also include the replacement parts and other inventory needed for maintenance, repair, and operations (MRO).

It’s critical to manage inventory because, until it’s sold, inventory ties up capital and warehouse storage space. If businesses hold too much inventory in their warehouse, they risk not having the capital necessary to operate.

Fortunately, inventory management gives brands more visibility into their products. It ensures that brands stock:

  • The right products
  • At the right level
  • At the right time
  • In the right locations

Proper inventory management tracks products from the moment they leave the manufacturer to when a customer buys them. Inventory management monitors every step in the process, including:

  • When brands buy inventory from the manufacturer
  • When products arrive at the warehouse and the brand stores them
  • When inventory is shipped from the warehouse to the end customer

There are so many behind-the-scenes moving parts with managing inventory, especially as an operation scales. Trends change and supply chains evolve, too, so it’s important to use an inventory management tool to keep your customers happy.

The Purpose of Inventory Management

The main purpose of inventory management is twofold:

  1. It helps brands keep enough inventory in stock so they can fulfill all orders. This gives customers a good experience, ensuring you don’t run out of inventory.
  2. It helps brands stock as little stock as possible. It costs a lot of money to store unsold inventory, so this helps brands minimize how much money they tie up in unsold products.

Ultimately, the goal of inventory management is to maximize profits by removing any imbalances in your business.

Aside from helping businesses master this balancing act, inventory management also comes with benefits such as:

  • Increased inventory visibility: 72% of brands want real-time visibility into their inventory. Since brands are sitting on $1.36 in inventory for every $1 in sales, this is a critical issue. Inventory management tells brands what inventory they have and where. It’s the best way to get critical insights into otherwise complex operations.
  • Reduced costs: Brands can’t infinitely produce and store products forever. Inventory management reduces the liability that comes with transporting, storing, and timing orders. In fact, by reducing stock-outs and overstocks with inventory management, brands can decrease their inventory costs by as much as 10%.
  • Data-driven decisions: What’s going on in your business? Inventory management software gives brands deeper insights into their operations. For example, AI analytics can pinpoint anomalies that your team might otherwise overlook. Since warehouse space is so expensive, these insights can help you minimize the amount of space required to store your inventory.
  • Improved speed and accuracy: 46% of warehouses say that human error is their number-one problem. Manual entry not only takes significantly more time, but it’s a task that opens you up for error—one wrong number can spell disaster for your inventory. But with inventory management software and tags, brands can speed up their processing times while boosting accuracy. In fact, item tagging increases average accuracy from 63% to an impressive 95%.
  • Theft prevention: It’s a difficult situation, but theft does happen at the warehouse level. Inventory management ensures accountability at every turn, identifying the parties responsible while (hopefully) preventing future theft.
  • Compliance: Do you operate a public company? If so, the SEC requires you to track inventory to stay compliant. If your inventory levels are inaccurate, you’re at risk of fines and regulatory action, so proper inventory management is critical.
  • Trend awareness: Product demand will change based on current events. The pandemic showed that demand for certain products, like toilet paper, can suddenly spike out of nowhere. It’s hard to predict issues like this, but inventory management tools can help you spot trends to meet customer demand. It can also help you use the inventory you have on hand instead of ordering more, further managing costs.
  • Customer satisfaction: One-third of businesses have shipped items late because they promised customers products that weren’t actually in stock, which can damage customer relationships. But with inventory management, companies can ensure they keep the products on hand their customers need to avoid business disruptions.

Types of Inventory Management

While inventory management might sound straightforward, there are actually several different types of inventory management. Every business is different, so the way you approach inventory management and inventory tracking depends greatly on your model and products.

Brands commonly fall into these types of inventory management:

  • Multi-location: This type of inventory management is for managing stock at multiple locations. This includes managing eCommerce, retail, and warehouse locations all in one platform. With the proper tools, brands can see their stock levels across every location.
  • Manual: Manual inventory management is incredibly inefficient and outdated, but it’s still popular with small businesses. With this type of inventory management, your team records inventory on paper and counts everything manually. There’s a high chance of error and it’s very time-consuming, so manual inventory management isn’t feasible once brands start scaling.
  • Periodic: With periodic inventory management, your team only counts inventory at certain times of the year, like every quarter. It can also apply when your system records item information as it moves throughout the warehouse. Brands will use asset tags and barcode labels for this, which link to their enterprise resource management (ERP) system so they can track stock, no matter where it is. Periodic inventory management may involve human intervention to count inventory manually, but companies that rely on barcode inventory management benefit from reduced human error.  
  • Perpetual: The most efficient type of inventory management is perpetual. There’s rarely a need to count inventory manually because all inventory management happens in real-time. With RFID tags on every product, brands can see all inventory data in real-time, with no manual counting or scanning required.

9 Inventory Management Techniques

Managing inventory and packing shipments at a desk

Inventory management makes it possible to run a data-driven company with as little ambiguity as possible. But physical inventory requires a lot of hands-on management to keep costs manageable and reduce errors. While the proper processes are important, companies should adopt one or more of these inventory management techniques to optimize their inventory.

1. ABC Analysis

It isn’t possible to stock all of your products at the same level. Some inventory is going to be in higher demand than others. That’s why brands conduct ABC analyses: this looks at your most and least popular stock, making it possible to prioritize which products you reorder first. If you need to manage cash flow, this technique is a great way to route resources to the products that customers are more likely to buy.

2. Demand Forecasting

61% of brands say forecasting is the biggest benefit of inventory management. With demand forecasting, brands can use artificial intelligence (AI) to predict customer demand for certain products.

For example, if you sell school lunch boxes, you can use AI to determine when parents start shopping for school supplies. From there, it’s as simple as working backward to have the proper items in stock in time for back-to-school shopping.

3. Reorder Point

What’s the right time to reorder from your suppliers? The reorder point formula tells brands the bare minimum level of stock they need before it’s time to reorder. This helps brands avoid ordering too early or too late—both of which come with expensive consequences.

4. EOQ

Economic order quantity (EOQ) is a formula for calculating how much inventory you should order from your supplier. The goal is to keep inventory moving as quickly as possible, so you aren’t holding onto unsold inventory. For example, if your EOQ tells you that you will sell 200 units in one week, you can maintain that inventory level every week to keep up with demand. No more, no less.

5. FIFO, FEFO, and LIFO

There are three formulas brands use to determine the order in which they ship out inventory. The right option depends on the nature of your business and products.

  • FIFO: First in, first out means that brands move the oldest stock out first.
  • LIFO: Last in, first out is when you sell recently-purchased inventory out first. This is common for brands that update their products frequently and don’t want to sell obsolete inventory.
  • FEFO: First expired, first out is similar to FIFO, but it’s based solely on expiration dates.

6. Just-In-Time

Just-in-time (JIT) inventory (also known as “lean manufacturing”) is a practice where you keep the lowest stock levels possible before you reorder. It’s very tricky to do, but with inventory management software, JIT significantly reduces the need to store inventory. JIT is most common for eCommerce brands that offer customization, where they only produce items when a customer places an order.

7. PAR Levels

Periodic automatic replenishment (PAR) levels are the minimum amount of inventory brands keep around at all times, no matter what. If you hit your PAR level, it means it’s time to reorder. Brands usually determine their PAR level by looking at their sales volume, as well as how long it takes for products to arrive on shelves.

8. DIO

Days inventory outstanding (DIO) is a formula that calculates the number of days it takes to sell one unit. In other words, it calculates how long you hold onto an item before it sells.

Ideal DIO levels depend on your industry. Big-ticket items like furniture might have a higher DIO rate on average because they take longer to sell, while cheap consumer goods, like soda, might have a lower average DIO. For this inventory management technique, you’ll need to know the average DIO levels for your industry and competitors to understand if you’re selling products quickly enough.

9. Safety Stock

Every brand needs some kind of buffer to address uncertainty. Safety stock is stock that brands keep around to meet unexpected spikes in demand, supplier delays, or any of the other uncertainties that come with running a product-based business. If you sell out of your current stock, you can rely on safety stock to fulfill orders while waiting for replenishment.

Types of Inventory Tracking Tags

There are a variety of types of barcode labels and asset tags that can be used for inventory management applications such as warehouse inventory management. Here’s a look at a few of the most commonly used types of inventory tags.

Inventory Control Tags & Labels

Inventory control tags & labels include a variety of barcode labels and asset tags designed to meet the needs of different applications. Foil Metalphoto® labels, for example, are designed to last more than 20 years, even in harsh outdoor environments, while premium polyester labels are well-suited for use in indoor applications. Industrial metal barcode labels, stickers, and tags are made of Metalphoto photosensitive anodized aluminum or other durable metals such as alloy stainless steel and brass and are designed to withstand the harsh operating conditions in industrial applications.

RFID Tags

50% of brands rely on tags to track their inventory in the warehouse. Radio frequency identification (RFID) tags wirelessly send data without scanning. However, they can pose some security risks as they’re vulnerable to hacking, and they’re also cost-prohibitive to scale compared to barcode labels.

Durable UID Tags

Durable UID tags are designed to meet the requirements of MIL-STD-130 for the defense industry, enabling defense operations to maintain accurate and comprehensive inventory control. Camcode’s durable UID tags can withstand harsh outdoor conditions to remain readable for the lifespan of your assets.

Regardless of which types of tags you use, they’re an essential inventory management tool to automate your inventory with real-time insights.

Inventory Management Software

There are so many moving parts to inventory management that it requires sophisticated technology to keep everything moving. In fact, there’s been a 25% increase in the number of brands using inventory management technology.

With demand for inventory tracking solutions jumping by 2X, it’s clear that product-based businesses need to consolidate inventory management into one platform.

Brands have so many options available, but the right inventory management software depends on your needs, setup, size, and budget. To jumpstart your search, consider these inventory management platforms to streamline your operations:

Want more options? Check out our ultimate guide to inventory tracking software, our roundup of the best inventory management software,  and our list of top inventory management apps to find the best fit for your business.

Master Inventory Management with Proper Asset Tracking

There’s no need to rely on manual inventory counts or spreadsheets. Today’s product-based businesses are operating with more uncertainty and competition than ever before—that’s why proper inventory management is so critical.

Inventory management is essential for success: ensure that you’re following inventory management best practices to keep operations moving smoothly. Asset tagging solutions from Camcode power brands with durable inventory tags that make inventory management a breeze.

Questions about the article? Let us help!

Our sales engineers are experts in automatic asset tracking, tagging and identification,a nd can answer all your questions. Get in touch now.

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