How to Effectively Manage Your Inventory (2023)

  • Inventory management involves ordering, stocking and effectively utilizing a business’s materials or products.
  • Prioritizing your inventory helps you understand necessary ordering and manufacturing frequencies to meet your customers’ needs.
  • Inventory management tips include tracking sales, ordering and receiving stock consistently, and using specialized inventory management software.
  • This article is for business owners interested in managing inventory more effectively.

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.

Did You Know?

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.

Key Takeaway

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.

Did You Know?

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

The best inventory management software

The best inventory management software for your business depends on various factors, including your budget, business type and specific features like mobile apps and cloud backup.

Here are a few top inventory management solutions to consider:

  1. QuickBooks Commerce: QuickBooks Commerce, formerly called TradeGecko, is easy to use and has many integration options. You can track inventory across multiple sales channels and locations.
  2. Finale: Finale is designed to help you seamlessly and accurately manage large amounts of inventory data. This program is a cloud-based application with order management, barcoding and analytics features.
  3. Fishbowl: Fishbowl is organized and easy to use, with sales- and order-tracking features. The program has an online mobile version with full access to all product expiration dates, resupply times and shipping dates.
  4. Cin7: Cin7 integrates with multiple programs, including warehouse management tools, POS systems and e-commerce platforms. This service also simplifies inventory reporting and financial decision-making because it can connect with your business’s accounting software.
  5. Lightspeed: Lightspeed is one of the most affordable inventory management systems, offering several options for small businesses. You can track serial numbers across multiple locations and easily reorder items from suppliers. The service also automatically creates purchase orders when stock numbers fall below a certain level.

Putting inventory management best practices in place

Managing the items that enter and leave your business involves crucial steps like tracking, auditing and reordering inventory. With the proper inventory management techniques and tools, you can stay stocked with the products that keep your customers returning. Simultaneously, you can ensure your team is making the most of its time and maximizing your business’s profits.

Shayna Waltower and Dawn Kuczwara contributed to this article.


How to Effectively Manage Your Inventory? ›

The three most popular inventory management techniques are the push technique, the pull technique, and the just-in-time technique. These strategies offer businesses different pathways to meeting customer demand.

What are the best way to manage inventory? ›

Inventory management techniques and best practices for small business
  1. Fine-tune your forecasting. ...
  2. Use the FIFO approach (first in, first out). ...
  3. Identify low-turn stock. ...
  4. Audit your stock. ...
  5. Use cloud-based inventory management software. ...
  6. Track your stock levels at all times. ...
  7. Reduce equipment repair times.

What are the 3 techniques to control inventory? ›

The three most popular inventory management techniques are the push technique, the pull technique, and the just-in-time technique. These strategies offer businesses different pathways to meeting customer demand.

What are the 4 main steps in inventory management? ›

To manage your inventory effectively, you can follow a 4 step process:
  • Assess what you have now.
  • Review what you had.
  • Analyse sales.
  • Identify items to repurchase or retire.
Mar 7, 2023

What is the 80 20 rule in inventory? ›

The 80/20 rule states that 80% of results come from 20% of efforts, customers or another unit of measurement. When applied to inventory, the rule suggests that companies earn roughly 80% of their profits from 20% of their products.

What is the easiest way to do inventory? ›

The best way to count inventory is with inventory management software that helps keep inventory audits short and sweet. Using an inventory app is faster than physically counting items and maintaining spreadsheets, and it's also more accurate.

What are the 4 types of inventory? ›

There are four main types of inventory: raw materials/components, WIP, finished goods and MRO. However, some people recognize only three types of inventory, leaving out MRO. Understanding the different types of inventory is essential for making sound financial and production planning choices.

What is the ABC technique of inventory control? ›

ABC analysis is an inventory classification strategy that categorizes the goods into three categories, A, B, and C, based on their revenue. 'A' in ABC analysis signifies the most important goods, 'B' indicates moderately necessary goods, and 'C' indicates the least essential inventory.

How do you overcome poor inventory management? ›

20 Solutions to Overcome Inventory Management Challenges
  1. Centralized Tracking: Consider upgrading to tracking software that provides automated features for re-ordering and procurement. ...
  2. Transparent Performance: ...
  3. Stock Auditing: ...
  4. Demand Forecasting: ...
  5. Add Imagery: ...
  6. Go Paperless: ...
  7. Preventive Control: ...
  8. Measure Service Levels:
Feb 3, 2022

What is the most widely used method of inventory control? ›

The Economic Order Quantity inventory management method is one of the oldest and most popular. EOQ lets you know the number of inventory units you should order to reduce costs based on your company holding costs, ordering costs, and rate of demand.

Can Excel be used for inventory management? ›

With integrated tools, features, and formulas to make spreadsheets more dynamic and interactive, Excel is also capable of handling basic inventory management for small businesses. While not ideal for a medium or large sized inventory, Excel is cost-effective or, if you use it in OneDrive, even free.

What are the five principles of inventory management? ›

Sorting, setting order, systemic cleaning, standardizing, and sustaining the discipline ensure that no dollars are lost to poor processes. The principles of inventory management are not any different from other industrial processes.

What is the 5S method for inventory? ›

The 5S system consist of: sort, set in order, shine, standardize and sustain. Repeat it to yourself multiple times and write it down — go ahead, do it now!

What is the golden rule for inventory? ›

Summary: Common SCM inventory golden rules are: (a) avoid situations where inventory and demand are out of balance, those slow-moving low margin products add no value to the firm and (b) production campaigns result in unnecessary inventory.

How much inventory is too much? ›

More quantifiably, you have too much inventory on hand (AKA, excess inventory) when the product's potential value minus storage costs are less than its salvage value. Meaning, you won't make a profit, even if that good sells. Excess inventory is a common issue that every retailer faces at some point.

What is the average inventory rule? ›

The average inventory formula uses your beginning and ending inventory levels to average out your inventory numbers. In a nutshell, you add those two numbers together and divide them by the number of periods or months you're calculating for.

How to do inventory checklist? ›

How to write an inventory report
  1. Create a column for inventory items. Similar to an inventory sheet template, create a list of items in your inventory using a vertical column. ...
  2. Create a column for descriptions. ...
  3. Assign a price to each item. ...
  4. Create a column for remaining stock. ...
  5. Select a time frame.
Jul 15, 2019

What is an inventory checklist? ›

Inventory Checklist is a record of the items stored in a specific area or department of a company. It helps in tracking and controlling the goods in an organized way. This document can be also be used for inspection because all items in the inventory are recorded here.

What is the inventory formula? ›

The basic formula for calculating ending inventory is: Beginning inventory + net purchases – COGS = ending inventory. Your beginning inventory is the last period's ending inventory. The net purchases are the items you've bought and added to your inventory count.

What are the most common inventory methods? ›

There are three methods for inventory valuation: FIFO (First In, First Out), LIFO (Last In, First Out), and WAC (Weighted Average Cost).

What is JIT strategy? ›

Just-in-time, or JIT, is an inventory management method in which goods are received from suppliers only as they are needed. The main objective of this method is to reduce inventory holding costs and increase inventory turnover.

What is JIT technique? ›

JIT techniques work to level production, spreading production evenly over time to foster a smooth flow between processes. Varying the mix of products produced on a single line, sometimes referred to as "shish-kebab production", provides an effective means for producing the desired production mix in a smooth manner.

What is three bin system? ›

The three-bin system includes a dedicated bin for garden organics that can be converted to mulch. This bin is in addition to the standard bins for recycling and general waste.

What is the biggest challenge of inventory management? ›

Inventory Management Challenges and How to Deal with Them
  • Overstocking. Most businesses tend to over-stock on items that take up additional space and increase your storage costs. ...
  • Limited Visibility. ...
  • Tracking Obsolete Stocks. ...
  • Counterproductive Processes. ...
  • Issues with Tracking Materials. ...
  • Defects and Waste.
Oct 11, 2022

What reduces wasted inventory? ›

7 Ways To Minimize Inventory Waste
  • Don't throw it in the dumpster. ...
  • 7 ways to start reducing waste now. ...
  • Get a good inventory count first. ...
  • Put someone in charge. ...
  • Understand the root of the problem. ...
  • Put the FIFO strategy to the test. ...
  • Automate your inventory management system. ...
  • Using more drop shipping.
Nov 18, 2020

Why is inventory management difficult? ›

Inventory is unpredictable

For businesses with fairly fluid order patterns, knowing how much stock to have on hand can be difficult. This stress is understandable – managers face competing pressures to have enough stock on hand for every eventuality while at the same time avoiding costly, inefficient overstocking.

What is the most flexible system for inventory control? ›

A perpetual inventory system, such as Extensiv, is much more flexible than a periodic inventory system. This is because it continually updates your inventory by recording when items are received, sold, moved, picked, and so on.

What are the 2 methods of inventory control? ›

There are two key types of inventory control systems.
  • Perpetual inventory system. A perpetual inventory control system tracks inventory in real-time. ...
  • Periodic inventory system. A periodic inventory system is kept up to date by a physical count of goods on hand at specific intervals.

Is QuickBooks used for inventory management? ›

QuickBooks Online has everything you need to manage your inventory. Track what's on hand, get alerts when it's time to restock, and see insights on what you buy and sell. You can also enter non-inventory products and services so you can quickly add them to your sales forms.

How do you organize an inventory spreadsheet? ›

Use a row for each item in each section and create column headers above the rows. Suggested column headers include the item name, the number of items in stock, the unit price, an expiration date of the item, if applicable, and the total value of the group of items.

What is simple inventory management? ›

The simple inventory management solution is designed to cater to inventory control and management needs of small to medium businesses. It enables user to perform stock receiving and dispatch through on-demand mobile printing and item scanning as well as visibility of inventory stocks at one glance.

What is Kaizen in warehouse? ›

In warehousing, Kaizen generally involves thinking with your team and fishing out creative ideas to solve problems. You can use this strategy with everyone, from managers to plant workers to make the most out of it. All ideas will have equal value, followed by testing to measure how effective an idea is.

What is ABC inventory analysis? ›

ABC analysis is a method of inventory management that involves grouping inventory items into three categories, "A" items being the most important and "C" items being the least important.

What is Kaizen with example? ›

The word Kaizen comes from the Japanese words for “Good” and “Change.” In businesses and other organizations, Kaizen refers to activities that continually improve all processes and involve every employee from the executive team to front line workers.

What are the three typical rules of inventory allocation? ›

Four Inventory Allocation Rules and Best Practices
  • Conduct market research and consider regional demand. ...
  • Consider items with shorter shelf lives to have higher priority. ...
  • Use real-time data. ...
  • Automate what you can.
Sep 21, 2022

What is a good inventory percentage? ›

Most sectors maintain inventory levels at between 10-20% of sales.

What is the basic inventory principle? ›

Basic Principle of Inventory Valuation

So the principle basically states that we must value the inventory either at the cost of the inventory or at its net realizable value. We will record it at the lower amount amongst the two in accordance with the conservative cost approach.

When should you avoid holding inventory? ›

If the production is not consistent with quality, the goods produced will get rejected leading to an increase in rejected inventory. Secondly, to make up for the loss due to quality rejection, one would have to increase production and hold finished goods inventory.

Is it better to have more inventory or less? ›

Running low on inventory is obviously bad. If you can't meet customer demand, you'll quickly lose customers. But many entrepreneurs don't realize that keeping too much inventory can be just as detrimental to a business. Some might make the mistake of holding onto excess inventory, thinking that more is always better.

Is it better to have high or low inventory? ›

A low inventory turnover ratio might be a sign of weak sales or excessive inventory, also known as overstocking. It could indicate a problem with a retail chain's merchandising strategy, or inadequate marketing. A high inventory turnover ratio, on the other hand, suggests strong sales.

What is a reasonable inventory level? ›

What Is a Good Inventory Turnover Ratio? A good inventory turnover ratio is between 5 and 10 for most industries, which indicates that you sell and restock your inventory every 1-2 months. This ratio strikes a good balance between having enough inventory on hand and not having to reorder too frequently.

What is a good average days in inventory? ›

What Is a Good Days Sale of Inventory Number? In order to efficiently manage inventories and balance idle stock with being understocked, many experts agree that a good DSI is somewhere between 30 and 60 days.

What is the formula for inventory cost? ›

The inventory cost formula consists of beginning inventory value, ending inventory value, and purchase costs over a set period of time. More succinctly, it looks like: inventory cost = [beginning inventory + inventory purchases] - ending inventory.

What are the 6 types of inventory? ›

The 6 Main classifications of inventory
  • transit inventory.
  • buffer inventory.
  • anticipation inventory.
  • decoupling inventory.
  • cycle inventory.
  • MRO goods inventory.
Sep 29, 2020

What are the 3 important types of inventories? ›

Raw materials, semi-finished goods, and finished goods are the three main categories of inventory that are accounted for in a company's financial accounts.

What are the 3 types of inventory and examples? ›

There are three general categories of inventory, including raw materials (any supplies that are used to produce finished goods), work-in-progress (WIP), and finished goods or those that are ready for sale.

What are the three major types of inventory? ›

Manufacturers deal with three types of inventory. They are raw materials (which are waiting to be worked on), work-in-progress (which are being worked on), and finished goods (which are ready for shipping).

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