Show Entrepreneurs, founders, and independent brands now live in a native commerce world where small-to-medium businesses compete against global conglomerates. We’ve put together this definitive guide to inventory management to level the playing field and help you grow your brand with speed, scalability, and smart insights. You’ll find everything you need from inventory control basics to best practices and formulas to advanced automation processes. Inventory management definitionAs a part of your supply chain, inventory management includes aspects such as controlling and overseeing purchases — from suppliers as well as customers — maintaining the storage of stock, controlling the amount of product for sale, and order fulfillment. Naturally, your company’s precise inventory management meaning will vary based on the types of products you sell and the channels you sell them through. But as long as those basic ingredients are present, you’ll have a solid foundation to build upon. Small-to-medium businesses (SMBs) often use Excel, Google Sheets, or other manual tools to keep track of inventory databases and make decisions about ordering. However, knowing when to reorder, how much to order, where to store stock, and so on can quickly become a complicated process. As a result, many growing businesses graduate to an inventory management app, software, or system with capabilities beyond manual databases and formulas. With these systems, the procedures of inventory management extend beyond basic reordering and stock monitoring to encompass everything from end-to-end production and business management to lead time and demand forecasting to metrics, reports, and even accounting. Retail inventory managementRetail is the broadest catch-all term to describe business-to-consumer (B2C) selling. There are essentially two types of retail separated by how and where a sale takes place.
Wholesale, on the other hand, refers to business-to-business (B2B) selling. Knowing the differences and best practices of retail and wholesale is critical to success. Most businesses maintain stock across multiple channels as well as in multiple locations. The diversity of retail inventory management adds to its complexity and drives home its importance to your brand. Importance of inventory managementFor any goods-based businesses, the value of inventory cannot be overstated, which is why inventory management benefits your operational efficiency and longevity. From SMBs to companies already using enterprise resource planning (ERP), without a smart approach, you’ll face an army of challenges, including blown-out costs, loss of profits, poor customer service, and even outright failure. From a product perspective, the importance of inventory management lies in understanding what stock you have on hand, where it is in your warehouse(s), and how it’s coming in and out. Clear visibility helps you:
In a broader context, inventory management also provides insights into your financial standing, customer behaviors and preferences, product and business opportunities, future trends, and more. Inventory management programBefore digging into strategies, techniques, and processes, let’s take a look at some of the inventory management basics for beginners: namely, the terminology and formulas you’ll need. Inventory management termsBarcode scannerPhysical devices used to check-in and check-out stock items at in-house fulfillment centers and third-party warehouses.BundlesGroups of products that are sold as a single product: selling a camera, lens, and bag as one SKU.Cost of goods sold (COGS)Direct costs associated with production along with the costs of storing those goods.DeadstockItems that have never been sold to or used by a customer (typically because it’s outdated in some way).Decoupling inventoryAlso known as safety stock or decoupling stock; refers to inventory that’s set aside as a safety net to mitigate the risk of a complete halt in production if one or more components are unavailable.Economic order quantity (EOQ)EOQ refers to how much you should reorder, taking into account demand and your inventory holding costs.Holding costsAlso known as carrying costs; the costs your business incurs to store and hold stock in a warehouse until it’s sold to the customer.Landed costsThese are the costs of shipping, storing, import fees, duties, taxes and other expenses associated with transporting and buying inventory.Lead timeThe time it takes a supplier to deliver goods after an order is placed along with the timeframe for a business’ reordering needs.Order fulfillmentThe complete lifecycle of an order from the point of sale to pick-and-pack to shipping to customer delivery.Order managementBackend or “back office” mechanisms that govern receiving orders, processing payments, as well as fulfillment, tracking and communicating with customers.Purchase order (PO)Commercial document (B2B) between a supplier and a buyer that outlines types, quantities, and agreed prices for products or services.Pipeline inventoryAny inventory that is in the “pipeline” of a business’ supply chain — e.g., in production or shipping — but hasn’t yet reached its final destination.Reorder pointSet inventory quotas that determine when reordering should occur, taking into account current and future demand as well as lead time(s).Safety stockAlso known as buffer stock; inventory held in a reserve to guard against shortages. Sales orderThe transactional document sent to customers after a purchase is made but before an order is fulfilled.Stock keeping unit (SKU)Unique tracking code (alphanumeric) assigned to each of your products, indicating style, size, color, and other attributes.Third-party logistics (3PL)Third-party logistics refers to the use of an external provider to handle part or all of your warehousing, fulfillment, shipping, or any other inventory-related operation. Fourth-party logistics (4PL) takes this a step further by managing resources, technology, infrastructure, and full-scale supply chain solutions for businesses.VariantUnique version of a product, such as a specific color or size.Inventory management formulasIf you’re new to inventory, you’ll probably come across a lot of formulas that might seem confusing at first. However, with a little bit of homework, these formulas can be very useful for keeping stock levels optimized. Here’s an overview of some of the most common inventory formulas…
1. Economic order quantity (EOQ) formulaYour EOQ is the optimum number of products you should purchase to minimize the total cost of ordering or holding stock. Figuring out your EOQ can potentially save you a significant amount of money. EOQ = √(2DK / H), or the square root of (2 x D x K / H) Where: D = Setup or order costs (per order, generally includes shipping and handling)  Compute the economic order quantity for a product using the calculator below: |
Which of the following is not a role of the inventory management function not the inventory management process as a whole?
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