BREAKING DOWN ‘Inventory Management’

A company’s inventory is one of its most valuable assets. In retail, manufacturing, food service and other inventory-intensive sectors, a company’s inputs and finished products are the core of its business, and a shortage of inventory when and where it’s needed can be extremely detrimental. At the same time, inventory can be thought of as a liability (if not in an accounting sense). A large inventory carries the risk of spoilage, theft, damage, or shifts in demand. Inventory must be insured, and if it is not sold in time it may have to be disposed of at clearance prices – or simply destroyed.

For these reasons, inventory management is important for businesses of any size. Knowing when to restock certain items, what amounts to purchase or produce, what price to pay – as well as when to sell and at what price – can easily become complex decisions. Small businesses will often keep track of stock manually and determine reorder points and quantities using Excel formulas. Larger businesses will use specialized enterprise resource planning (ERP) software. The largest corporations use highly customized software as a service (SaaS) applications.

Appropriate inventory management strategies vary depending on the industry. An oil depot is able to store large amounts of inventory for extended periods of time, allowing it to wait for demand to pick up. While storing oil is expensive and risky – a fire in the UK in 2005 led to millions of pounds in damage and fines – there is no risk that the inventory will spoil or go out of style. For businesses dealing in perishable goods or products for which demand is extremely time-sensitive – 2017 calendars or fast-fashion items, for example – sitting on inventory is not an option, and misjudging the timing or quantities of orders can be costly.

For companies with complex supply chains and manufacturing processes, balancing the risks of inventory gluts and shortages is especially difficult. To achieve these balances, firms have developed two major methods for inventory management: just-in-time and materials requirement planning.

The inventory management process

Inventory management is a complex process, particularly for larger organizations, but the basics are essentially the same regardless of the organization’s size or type. In inventory management, goods are delivered into the receiving area of a warehouse in the form of raw materials or components and are put into stock areas or shelves.

Compared to larger organizations with more physical space, in smaller companies, the goods may go directly to the stock area instead of a receiving location, and if the business is a wholesale distributor, the goods may be finished products rather than raw materials or components. The goods are then pulled from the stock areas and moved to production facilities where they are made into finished goods. The finished goods may be returned to stock areas where they are held prior to shipment, or they may be shipped directly to customers.

Inventory management uses a variety of data to keep track of the goods as they move through the process, including lot numbers, serial numbers, cost of goods, quantity of goods and the dates when they move through the process.

Set Re-order levels

Inventory management becomes much easier if we set ‘re-order levels’ for each of the items. In simple words, re-order levels are the minimum amount of items that must be in stock at all times. When your inventory stock dips below the predetermined levels, you know it’s time to order more.

Setting re-order levels will systemize the process of procuring the products. However, it requires some research. This decision will be based on how quickly the item sells, and how long it takes to get back in stock, etc. You may not be able to set it during initial days of the business but eventually it will become clear to you. Best part is, your staff can make decisions about ordering on your behalf when you are not around.

Given the dynamic nature of some business like e-Commerce, conditions can change very often. Check on re-order levels regularly throughout the year to confirm they are still relevant. It will be a good idea to adjust your re-order levels up or down depending on the past sales data.


Categorise your operating inventory

Its obvious that we are always focused on the high selling items. But while managing inventory efficiently, we need give more attention to others items as well. For this, experts suggest to use an ABC analysis to efficiently manage your inventory. This is basically categorising products that require a lot of attention from those that don’t.

Simple way to do this is to go through the entire stock list and add each items to one of three categories:

A – high-value items with a low frequency of sales
Items in this category require regular attention because their financial impact in terms of storage cost is significant but sales are unpredictable.

B – low-value items with a high frequency of sales
Items in this category require relatively less attention as they have a smaller financial impact and they’re constantly moving.

C – moderate value items with a moderate frequency of sales
Items in this category fall somewhere in-between and still require some attention and financial assessment.


Prioritise your valuable products

Use 80-20 principle and focus on the items that matter most. Generally, 80% of demand will be generated by 20% of your items.

Spend most of your effort on those top items, forecasting, reviewing stock position and reordering more frequently. The next highest-selling 30% of items will typically generate about 10% of sales. The slowest items account for half the items you stock, but only generate 10% of your sales.

Above percentage may vary but the uneven pattern will be the same. You need identify this pattern and channelize your resources towards the products that fetch most sales.



FIFO stands for ‘First-in, first-out’. Its an important concept of inventory management. It simply means that your oldest stock (that was first entered in the system) gets sold first (first-out), not your newest stock. This is particularly important for perishable products so you don’t end up with unsellable expired items.

Now the question is, can we apply FIFO principle for non-perishable products as well? Ofcourse yes! If the same stock is always sitting at the back, its more likely to get worn out. Apart from this, things like packaging, features, price often change over time. There is no point in stocking something obsolete that you can’t sell.

So, how to implement a FIFO system in your business? For this, you’ll need to setup an organized warehouse. Then you’ll need to ensure that the new products are added from the back and old items always stays at the front. There are warehousing and fulfillment companies that can help you do this easily.