What Is Inventory Management?
Inventory management is the process of tracking and controlling the flow of goods—raw materials, works-in-progress, and finished products—through every stage, from initial purchase through final sale. It helps businesses keep the right amount of stock on hand, across multiple locations, to consistently meet customer demand.
Done well, inventory management reduces the risk of stockouts that disappoint customers, or overstocking, which ties up capital, increases carrying costs, and can cut into profits. It also helps companies stay agile amid fluctuations in demand, supply chain disruptions, and other unexpected challenges that can impede operations.
Inventory Management Step-by-Step Process
Inventory management requires clear guidelines for every stage involved in procuring, receiving, storing, and fulfilling orders. The following steps serve as a general framework:
- Demand planning: Demand planning analyzes historical sales data, market conditions, seasonal fluctuations, and a host of other factors to estimate future sales. Accurate forecasting helps businesses avoid overstocks and stockouts by setting a reasonable baseline for inventory needs.
- Ordering: Based on the prior demand analysis and current stock levels, orders are placed, either manually by procurement teams or automatically with software. Timing considerations also include supplier lead times, minimum order quantities, storage constraints, and holding costs.
- Delivery: When goods arrive, receiving teams verify that shipments match their invoices and are in expected condition. Some businesses use automated weighing systems or robotic equipment to speed up the process and to allocate goods to their designated locations.
- Inventory tracking and storage: Inventory is recorded and moved to storage. Some companies rely on centralized storage to keep costs down, while others have multiple facilities to position inventory closer to customers, reducing delivery times. Tracking systems, such as barcodes and inventory management software, monitor stock levels and product whereabouts.
- Sale: Those same tracking systems aid fulfillment teams in quickly finding, selecting packaging for, and shipping orders. They also automatically update inventory counts after orders are processed and notify customers and businesses as their items pass specific checkpoints.
- Reviewing, reporting, and optimization: Ongoing inventory audits, quality-control checks, and key performance indicator (KPI) reports can uncover inefficiencies that may be impeding the inventory management process. Common areas for review include lead times for different locations, perfect order/return rates, shipping costs (both incoming and outgoing), and inventory turnover.
- Replenishment: Automated inventory systems alert staff or trigger reordering when stock levels dip below predetermined thresholds. Many businesses periodically assess their suppliers’ prices and overall performance, as well as staying on top of competitive offerings, to verify they’re getting the best value and maintaining a reliable supply chain.
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