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Effective Inventory Management – All You Need to Know

Updated on January 11, 2022

8 Min Read
Inventory Management

You know how a manual inventory management system works. It is all about continuous monitoring of goods, jotting down their details on a register, and still missing out some of the goods from getting tracked? Right? That’s what an ineffective inventory management system is.

New year, new possibilities. In 2020, management of inventory or stock has become more efficient thanks to the digital revolution. Now, ecommerce store owners can optimize their inventory to gain more profits with minimal loss on the financial front. Every business aims to have zero inventory because, in this state, the business has healthy cash in hand and a minimum or no inventory in stock.

We will discuss dead inventory in detail in the preceding paragraphs. If you want to learn about the new trends in inventory management; how to manage inventory effectively in 2020 by using the right tools, strategies, and processes, this article is for you.

Let’s begin.

What is Inventory Management?

Starting with the basics, here is how TechTarget defines it:

“… supervising the flow of goods from manufacturers to warehouses. Its function is to keep a detailed record of each new or returned product as it enters or leaves a warehouse or point of sale.”

In simple terms, inventory management is a process that requires businesses to keep track of the company’s goods both, at the time of receiving and at checkout.

Effective management of the store inventory helps businesses:

  • Request a small quantity of goods available with the supplier.
  • Figure out what type of goods have their expiry dates approaching.
  • Pinpoint goods that are out of season – also called as ‘dead’ stock.
  • Optimize warehouse space according to the storage capacity for the coming season.
  • Keep more cash in hand while becoming cost-efficient.
  • Use business intelligence functions to improve inventory operations, enhance fulfillment, and optimize prices.

The end goal of inventory management is to minimize inventory, maximize profit, and optimize the growth of the business.

Benefits of Effective Inventory Management

Here is how effective management of it can help your business grow and scale in the long-term.

  • Inventory management techniques save you money

It helps you decrease losses by tracking what products are nearing their expiry dates. These products will be of no use to you if you keep them beyond their expiry dates. It is better to bring them to the front so online shoppers can buy them. If you don’t track your inventory automatically, optimizing the inventory will become a daunting task.

  • Inventory management techniques improve cash flow

You can easily find out which products are fast-selling products and which ones are slow-selling products. You can create a strategy about which products to order and how much cash to keep on hand.

  • Inventory management techniques organize warehouse management

Another reason for effective inventory management is to keep the warehouse order volume organized. The space that was previously occupied by slow-selling products can now be refilled with fast-selling products through effective management of inventories.

  • Inventory management techniques improve customer retention

It means no shortage of products. This makes customers happy and they keep coming back to buy from the same store. It also leads to higher retention and lower churn rate.

Inventory Management Process Explained

For effective Inventory management, you must follow a complete process as explained in the image below.

The stock management usually includes the supervision of storage capacity, production, and sale of products.

  1. Getting raw materials for warehousing and their relevant components
  2. Selling quantities of finished products to the end-users.
Inventory Management Process Template

Source: Edrawsoft


Steps to Create Inventory Management Process [Flowchart]

1. Identify the inventory management workflow

Make sure that you are clear about who will be doing what. Your purchasing department will store the raw materials and components in the warehouse. The production department will send the finished products to the sales department.

Departments Involved:

  • Purchasing/Procurement: This department will purchase all the raw materials and even finished products that you need to either store in your warehouse or for producing relevant goods
  • Production: This department will use the raw materials to develop end products for selling
  • Warehousing: This department will act as a storage unit for all relevant goods

2. Assign duties to professionals

Once you have identified the departments, create job descriptions that each individual will be doing. There will be some people working in the purchasing department, while some people will be working in the production department. It is better to create a job description for hiring new candidates for the respective positions, if necessary.

Fourteen Essential Inventory Management Techniques for Business

Now that you know how it can be done effectively, it is time to learn various inventory management techniques to learn how to manage inventories of your ecommerce business.

1. Setting Base Levels for Estimation

To keep a track of your inventory, you must keep a base level for each of your products. The base level will help you determine how many products you have in stock. It will act as a ‘warning’ sign as to when your stock runs below this level, you can place an order from your wholesaler for more products. You should also note that the base levels will vary from one product to the other. Some of your fast-selling items will have a higher base level, while slow-selling items will have a low base level.

To set a base level for your products, you need data about how fast your products are selling. That’s only possible when you are tracking each item automatically. Do remember that conditions tend to change with time. Therefore, you will have to change the base levels a few times throughout the year.

2. First-In-First-Out (FIFO), Last-In-First-Out (LIFO)

The term ‘first-in-first-out’ is an important principle of administration and management. It applies to every industry including human resources, technology, and even supply chain. In the supply chain, inventory management calls to get your oldest product out first. Why? Because the oldest products are more prone to getting expired than the new stock. Similarly, perishable products also become unsellable after getting spoiled. Moreover, if your old boxes keep sitting on the back shelves, they will be a burden for you financially. They are not assets but liabilities that are degrading in quality over time.

Next, we have LIFO. In LIFO, you sell the latest products first and your old products last. You must be wondering why one should opt for LIFO when FIFO is a more convenient method? This is because, in some countries, products that have a higher production cost have a lower sales tax. LIFO method helps reduce the sales tax that you will have to pay against the number of products sold.

3. Dropshipping

Dropshipping is a business model in which you don’t need any inventory to keep in the warehouse. With this model, you can sell products directly from the supplier’s warehouse. Dropshipping is one of the fastest-growing business models in the world. The barrier to entry is low and anyone can become a dropshipper by setting up their website and promoting products through paid channels.

4. Just-in-Time Delivery

Just-in-time (JIT) inventory management is another great technique to manage orders from suppliers. In the JIT model, you only get orders when your stored products are about to run out. It reduces inventory costs and helps the companies get inventory on an ‘as-needed’ basis. Companies don’t have to order too much to store in their warehouses. By moving to the JIT model, they can also deal with dead stock that was never sold or used by customers previously.

5. Prioritize with ABC

If you are selling products that fall in different categories, then you can use the ABC Prioritization inventory management technique. With this technique, you can use ABC analysis to prioritize inventory by separating products that require a lot of attention. To get started, it is better to categorize your products as follows:

  • High-value products that are a slow sell
  • Moderate value products that sell at a moderate frequency
  • Low-value products that sell the fastest

6. Regular Audit

Nothing beats regular audit of your products. Meanwhile, software auditing is a great way to check how many products you have sold, it only presents one side of the picture. There are several methods you can use to conduct a thorough audit of your inventory.

a) Physical Audit

The first practice is the obvious one: Physically checking out the inventory. Physical auditing is done only once a year, but it is a tedious job. It is a great way to find anomalies in inventory and avoid any short-term losses.

b) Cycle counting

In cycle counting, you can check a product every week to manage the burden effectively, without dragging yourself too much. In cycle counting, you are only counting products that have a higher priority. Generally, higher selling items are counted more frequently.

7. Safety Stock Inventory Formula

The safety stock inventory management formula works on a percentage basis. Let’s say, you are sure that your whole inventory will get sold before the season ends. In such a case, you will order excess inventory. This will help you prevent ‘out of stock’ problems due to incorrect forecasting or a change in customer demand.

8. Reorder Point Formula

In the reorder point formula, you calculate the stock percentage based on the number of products you sell during a season. This formula slightly differs from the safety stock inventory formula because, in safety stock, you consider the change in customer demand, but in reorder point formula, you consider previous data.

9. Batch Tracking

In batch inventory tracking, companies combine similar stocked items. This helps companies track the expiry date, defective pieces, order volume, etc. Batch tracking is a mainstream practice and companies across many industries follow it in their inventory tracking processes.

10. Six Sigma

Six Sigma practice is usually used for optimizing the performance of the supply chain. The concept of Six Sigma was first introduced by Bob Galvin, CEO of Motorola. It is now a standard certification for improving supply chain management. Six Sigma is also a great way to improve business profits and decrease the volume of unused inventory.

Six Sigma Inventory Management

Source: SixSigma Institute

11. Lean Manufacturing Strategy

The lean manufacturing approach requires businesses to have a simple inventory control system. It is a fact that excess inventory can hide many issues which are only visible when inventory is minimum. Therefore, the best way to overcome this issue is to follow the lean manufacturing approach. It also reduces the company’s financial losses and inventory storage problems.

Lean Inventory Management Strategy

12. Demand Forecasting

In a demand forecasting inventory control technique, you will use historical data to set future demand and supply requirements. Demand forecasting is all about estimating the future projections of goods and services of a company, based on the current and previous customer purchase value. You may need help from business intelligence experts for implementing the demand forecasting model for your ecommerce business.

13. Cross-docking

It is an extension of a Just-In-Time (JIT) inventory tracking model. In cross-docking technique, you will directly unload material from the inbound truck and upload it on the outbound truck – taking the JIT model one-step further. The cross-docking model works fittingly well for ecommerce businesses. There is little or no storage mechanism in between deliveries.

14. Bulk Shipment

Bulk shipment is not an inventory control technique but a shipping method in which you save the cost by creating bulk packages that you can palletize and ship. It is a cost-efficient method because you can use it with almost all products en-route to the same destination.

Time to Make Inventory Management Effective

An ineffective inventory management system will incur more costs, less profit, faster churn, and slow business growth. With the above-mentioned effective inventory management techniques, you can easily optimize business growth by analyzing sales patterns and predicting future sales. In 2020, businesses have a better chance of survival in a competitive world where they can optimally manage their inventory. It is the only formula that Amazon, Jet, Walmart, and other top ecommerce stores use to win big.

Now that you are aware of all there is to know about dealing with inventory management problems, it is time to manage your store’s inventory effectively.

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Sajjad Shahid

Sajjad is an Ecommerce Community Manager at Cloudways. He loves helping out Ecommerce store owners, merchants and marketers in establishing their businesses and startups. Sajjad enjoys playing table tennis and cricket over the weekend.


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