What is Inventory Management? Stock & Order Systems

What is Inventory Management?

Inventory or inventory management is one of the most critical aspects of most modern companies. In a nutshell, it is a system for monitoring, purchasing, producing, and selling of any bodily inventory on your operation. It may be either for raw materials, finished goods, or both.

The inventory management definition might be simple, but the process gets more complex with larger companies. There are several components involved which are both inside and beyond your control. That is why one of the most critical regions of good inventory management is proper tracking.








Effectively managing your inventory is something that will make or break your company. Do it right, and you can save your performance a lot of money and time. But if you do it badly, it can cripple even the most prosperous businesses.

To manage inventory, you’ll need an efficient stock management system. In this post, we will go over why you need a stock management system, the features you should look out for, and other stock tips and techniques to help you out.

Closer Look: Inventory Management Systems

A robust inventory system is vital for any company’s bottom line. Inventory is exactly like any asset in your balance sheet; you want to correctly account for it. If you fail to do this, then you risk losing money on losses or theft. You also need to be sure that you’re not spending too much money on your stock, as this ties up funds that may be better used elsewhere in your company.

Good inventory management also helps your company perform better for your clients. Maintaining proper inventory levels of your products ensures that people can always rely on you for the purchases that they require. If you’re always out of stock, your clients will see you as unreliable and might go to your competitors instead.

Every business needs inventory management in the event the business is selling or working with a physical item. Even service businesses need to maintain an inventory of the consumables they should deliver that service to clients. For example, a hair salon will require an accurate inventory of the shampoo, conditioner, hair dye, and other products they use daily.

Where things differ is the inventory management methods employed by individual businesses. Smaller companies tend to keep it simple with nothing more than a manual count on an Excel spreadsheet. More complex operations will often utilize technology like barcode scanners or tagging to help monitor large volumes of stocks.

There are no hard and fast rules for many businesses, as each has its own quirks and circumstances. A manufacturing company, for instance, will need to account for production lead times in calling their inventory.

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Common inventory management systems

There are many approaches to successful inventory management:

Manual Counting

This is the most simple, but also the most cumbersome method. Manual counting involves nothing more than a spreadsheet and plenty of time and patience. Aside from the effort involved, manual counting also has the risk of human errors. Small errors, like miscounting even 1 item, can snowball into more significant problems down the line.

The only time you would like to do manual counting is if your performance is small enough that getting a more complex inventory management system does not make sense financially. Manual counting is also a feasible strategy to be done annually to double-check inventory amounts.

Cycle Counting

Cycle counting is an inventory management system that frequently counts just part of your inventory. The stocks or area counted changes or cycles every time, thus the name. Normally, the fastest-moving stocks are prioritized.

Cycle counting can give a good picture of your inventory levels, but only if the right sample is taken. Needless to say, errors and inaccuracies are still problems that can affect the result.


The easiest and fastest inventory management system utilizes scanning methods. One means to do this is with barcode scanning. It not only speeds up the stock counting process, but in addition, it reduces any errors. The data can also be upgraded in real-time.

An upgrade to barcode scanning is the use of radio-frequency identification (RFID) tags attached to each item. Rather than needing to aim the scanner into the label like with a barcode, RFID scanners permit identification of the tag from a distance. This speeds up the process dramatically.

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Features of good inventory management system software

Because inventory management software is a crucial part of your operation, you want to be cautious when picking one. Unfortunately, not all inventory software is created equal. Here are some of the basic features to look out for:

  • Location Management

Understanding how much inventory you have is not enough when you’re dealing with large warehouses. In addition, you need to understand where it’s located. This can get especially tedious if you’ve got multiple warehouse locations.

That’s why location management features are essential. They go beyond tracking stock location and also include suggestions on where to put items on the sales floor or in the warehouse for the most efficient use of space.

  • Stock forecasting

An essential feature every inventory management system should have is powerful forecasting. The software should let you set critical levels to your inventory and alert you if this happens. A sound system will also prevent the opposite problem — surplus stock.

For larger operations, cross-platform performance is crucial. This permits you and your employees to get real-time stock information, whether you are out of the office or down to the warehouse floor. Support for mobile devices is also crucial, so you may rely on information getting updated much faster.

You also want your inventory data to be accessible right from the point of sale (POS) system. In retail stores, this is essential for upgrading your stocks as they get updated in real time.

  • Barcode scanning

Barcode scanning is a common technique used to speed up the process of adding items to your inventory management system. It semi-automates the process and removes potential human error from manually entering values into the system.

  • Shipping features

Good inventory management systems have shipping features built-in. With these, you can handle the whole shipping process, including creating waybills, invoices, and packing sheets.

  • Inventory counting features

Needless to say, any stock management system worth its salt should have robust counting functions. Apart from manual audits, look for innovative strategies like cycle counting, which permits you to sample a small part of your inventory to infer the count of the whole inventory.

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Stock inventory management Methods and best practices

Inventory management is a vast and complex subject, and there is no one-size-fits-all solution for each business or industry. However, there are some best practices which you can implement (or at least tailor-fit) to your organization.


FIFO refers to First In, First Out, and is one of the most common and effective strategies in stock management. As the name implies, you take out the shares that first entered your stock. In effect, you are selling off the older goods first rather than newer ones.

FIFO is an acceptable approach when dealing with perishable goods like food. This ensures that products don’t stay longer than they want to on your inventory, reducing spoilage costs. In a physical inventory system, the simplest way to implement FIFO is to always add new inventory at the trunk and receive stock from the front.

The ABC Method

The ABC Method is a system for classifying your shares based on how quickly they get disposed of or sold. You may set the fastest-moving products in Category A, for instance, while slow-moving inventory is moved to Categories B and C (hence the name).

The logic is that Category A products should be prioritized in terms of both warehouse layout (they should be closer to the satisfaction area) and inventory forecasts. By doing this, you effectively maintain appropriate stock count without overspending and interrupting your supply chain.

Do a regular audit

Even if you rely on a stock management system that tracks stocks for you, it’s still worthwhile to manually count the stock yourself. There could be some discrepancies which you need to look further, be it because of computer or human error. Small issues like these can grow to uncontrollable proportions if not kept in check.

There are many ways to approach an inventory audit, based on the size of your operation. The most common is to do a comprehensive manual count in the end of a financial year, and spot checking at regular intervals.

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Look into dropshipping

Sometimes, the perfect inventory management approach is to not do it at all! This is known as dropshipping, where a store sells products directly from a third party. They don’t take care of the product itself and, thus, don’t have to track inventory. This simplified approach is a popular method used in e-commerce stores.

Hire a stock controller

For those who have a bigger operation, it might be best to hire a stock controller. This is a point person devoted to keeping an accurate inventory at all times. They will get inventory orders, sign off on deliveries, and track your inventory traffic.