Inventory Management Guide

What is Inventory Management? Techniques, Tips and More

At its base level, inventory management refers to tracking the goods a company has in stock. It includes such activities as ordering, restocking, storing and inventory forecasting.

Strategically managing inventory gets more challenging in accordance with growth of units sold. Inventory can also grow if new and more types of products are introduced and sold. The right inventory system can help manage inventory, and is a crucial part of supply chain management.

Many small businesses think that outsourcing ecommerce fulfillment and product storage to a 3PL (third-party logistics) provider means completely turning over the inventory management process to them. The truth is a 3PL can provide valuable tools and data that will allow a seller to successfully manage their inventory in the most efficient as well as cost effective manner possible.

The Importance of Inventory Management

In today’s hyper-competitive ecommerce marketplace, good inventory management is an often overlooked but critical aspect for any seller. It is vital that the inventory management process is efficient, cost effective, and accurate. If you do not have all of those components in place you may run considerable risk of failing to meet customer demand and losing money.

There are many benefits for a seller to establish proper inventory management.

1.  Save Money on Storage Fees

If you have too much inventory on hand it will likely cost a lot in storage fees. And that’s money that could be spent on branded shipping materials, or absorbing expedited shipping fees. Storing goods is most often based on how much physical space your products take up. Fees vary depending on how many units you need to keep in stock. By keeping your inventory at the right amount based on your customer demands you will save money on storage fees, and put it toward different aspects of your business.

2.  Ensure you Never Run Out of Product

One of the most critical parts of inventory management is calculating the right amount of product units (SKUs) needed in stock at any given time. If your stock level dips too low, you run the risk of running out of products which can lead to missed sales, backordering, and customer service issues. On the flip side if you have too much inventory, it can result in having products that can no longer be sold due to decreased demand or being outdated. This is also known as “dead stock”. Proper order management, combined with analytics can also help with your warehouse management operations.

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3.  Provide Insights Into Customer Behavior

By monitoring the amount of product inventory that gets shipped  (as opposed to that which is unsold, in storage, or stuck in any part of the supply chain) you will gain valuable insights into what customer’s preferences. Is there a peak month of purchase? Perhaps a specific location that buys your product most frequently. Additionally any spikes or dips in inventory after a product launch will help lend necessary feedback on your promotional efforts and product likability. This can cut down on the lead time as purchase orders come in as well as streamline operations at your point of sale. This can help with both inventory tracking and inventory control, and is crucial for a small business.

4.  Forecast For the Future

Proper inventory management can help with inventory forecasting. By tracking and managing your inventory storage levels and output flow, you will be better able to plan for demand. If you monitor your inventory trends on a monthly, quarterly, or unit-to-unit basis you will likely be more able to keep up with sales.

5.  Plan for the Unexpected

No one can predict the future, but by managing your inventory can help you prepare for unexpected supply chain issues or deficits, such as:

  • Delayed inventory from the manufacturer
  • Unexpectedly sell out of a product
  • Run out of storage space
  • Cash flow problems
  • Large retail orders
  • Growing sales channels

Maximize Cash Flow

While having enough inventory on-hand is crucial to meet customer demand, having too much inventory can hurt your bottom line. Sellers typically save on a per unit basis when buying inventory in bulk and save on shipping cost when importing their goods. However, it’s equally important to the health of their business to have cash on hand to invest in other parts of their business.

By analyzing your inventory over time you can create a contingency plan for problems that might occur. This preparation will help bolster your ecommerce fulfillment when you encounter circumstances that otherwise could have serious adverse effects for your bottom line.

Inventory Management Techniques

Inventory management affects every aspect of a business’s operations. Choosing the right inventory management system and techniques can help your business save money, meet customer demand, and stay efficient and effective in the competitive ecommerce landscape.

Conduct a Regular Inventory Audit

Auditing your physical inventory can be time consuming, but it is an important aspect of inventory management. It involves counting actual warehouse inventory on hand (also called cycle counting) and making sure that it matches up with what you have listed in your inventory management software. If you work with a 3PL provider, they should perform inventory counts on a regular basis (using a barcode scanner to track SKUs) and compare it to the information against their inventory management system. This can help to cut down on human error. There should be clear rules in your 3PL partner agreement (also know as a Service Level Agreement – SLA) that states the frequency the inventory is checked and the allowable discrepancy.

Some use a technique called spot checking. This means choosing a specific product and counting the units on hand and comparing it to what your inventory records show.  Instead of counting the number of all of your products, you can assume if you randomly select a spot to check, and it matches perfectly to your inventory records, that the rest of the inventory follows. However if you spot check and find non matching information, it might be best to do a full inventory audit.

Set Reorder Points

Reorder points are the minimum quantity, established by you, of each of your products that need to be on hand to prevent having a stockout. If your inventory dips below that quantity, it means that you need to order more products.

It can require some work on the front end to calculate the reorder point formula, but having it will help you avoid running out of inventory which can cause numerous after-effect problems for your business.

Maintain Good Relationships With Suppliers

The first step in setting up your business is finding the right manufacturer that can help build your products  in the most cost-effective and efficient manner in order to grow your business. After you have chosen your manufacturer it is important to establish a positive relationship with them so that they can help with your inventory management, as opposed to getting in the way of it.

Communicate with them frequently to let them know of potential increases in sales, promotions, or other factors that could cause a spike in your need for additional inventory. This will help ensure that they can keep up with your customer demand, and that you have all of the products in your inventory that you’ll need. With well-established communication, should you run low on products, they are more likely to go out of their way to help you restock.

Inventory Management Software

Finding the right software system to help handle inventory management is invaluable. The right software will provide the real-time metrics, reporting, and updates that match your needs—whether that is needing to move unsold products, meeting a sudden and unexpected demand in sales, or re-calculating your inventory after making a mistake. Accurate reporting of inventory levels is crucial, and your inventory software should keep you on top of this when you need it. The ability to track trends over time will be imperative to successful inventory management. The right software can even help you optimize where to warehouse your inventory which can cut down on shipping costs.

A great example of inventory management software is ERP. ERP (short for enterprise resource planning) refers to an integrated approach to business planning and operations. With ERP systems, businesses can manage all their finances, logistics, operations, and inventory in one place.

“In the past, we’ve had to use a number of different systems and spreadsheets to gain insights of our orders and inventory which was time consuming and at times, inaccurate. eFactory’s analytics allows us to view reports in a variety of different ways to help us plan and ensure we have the most up to date information for forecasting.” 

Bryson Smith Nomad

Utilize the FIFO Method

FIFO means “first in, first out.” In other words, the oldest inventory, being the first in, should be sold out first before the newer stock is offered to customers. This ecommerce stock control strategy is especially important to retailers who sell perishable goods. This way, you don’t end up stuck with expired products that you can’t sell.

Even when you sell products that aren’t perishable, having them sit for a long time on the shelves potentially leaves them out of date if newer options become available. Another factor could be if your supplier changes the packaging of their products, the old stock begins to look obsolete – meaning it’s especially important to sell the older stock first.

Safety Stock

Safety stock in inventory management is extra inventory being ordered beyond expected demand. This technique is used to prevent stockouts typically caused by incorrect forecasting or unforeseen changes in customer demand.


Automated systems offer real-time, accurate information about stock levels and composition. The technology employed in managing inventory in a warehouse is critical to success because the value of the automated system is just as good as the quality of the system itself. A low-quality system retains some of the risks associated with inaccurate inventory. A careful and informed selection process reduces the risk of procuring an automation system that does not meet the needs of the warehouse

ABC Analysis

ABC analysis classifies inventory into three categories that represent the inventory values and cost significance of the goods.

  • Category A: represents high-value and low-quantity goods

  • Category B: represents moderate-value and moderate-quantity goods

  • Category C: represents low-value and high-quantity goods

Each category can be managed separately utilizing an inventory management system. It’s important to know which items are the best sellers to keep quantities of buffer stock on hand.

For example, more expensive category A items may take longer to sell, but they may not need to be kept in large quantities. One of the advantages of ABC analysis is that it provides better control over high-value goods, but a disadvantage is that it can require a considerable amount of resources to continually analyze the inventory levels of all the categories.

Economic Order Quantity

Economic order quantity (EOQ) is a term for the ideal quantity a company should purchase to minimize its inventory costs, like shortage or carrying costs. The overall goal of economic order quantity is to decrease spending; its formula is used to identify the greatest number of units needed (per order) to reduce buying.
One of the primary gains of the EOQ model is customized recommendations for your particular company. At times, EOQ may suggest investing in a larger order to take advantage of discount bulk buying and to cut down on total costs associated with multiple shipments.


In dropshipping you can sell products without actually holding the inventory yourself. Instead, a wholesaler or manufacturer is responsible for carrying the inventory and shipping the products when a consumer buys from your store. That way, you don’t worry about inventory holding, storage, or fulfillment. Many owners who start an online store adopt drop shipping methods, but this supply chain fulfillment strategy can be adopted by many types of businesses across all industries.

Bottom Line

If you establish the best practices for inventory management it can be an incredible help in efficiently running your business. It is important to make the right choices that can scale and grow with your business. Great inventory management will save money, time, and improve customer service. Remember that with an effective inventory management system in place you can keep your business profitable, analyze sales patterns and predict future sales, and prepare for the unexpected. With a proper inventory management, a business has a better chance to survive and thrive.

Help with inventory management is one of the many benefits to working with a 3PL. If you are seeking logistics support we’d love to hear from you. You can read DCL’s list of services to learn more, or check out the many companies we work with to ensure great logistics support. Send us a note to connect about how we can help your company grow.