William K. Turner
William K. Turner

Inventory Management - Process, Benefits, & Techniques

14 min read

Published on: Jan 9, 2024

Last updated on: Jan 22, 2024

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In the dynamic business world, the importance of effective inventory management cannot be overstated. 

As your business expands in both product development and units sold, the challenges associated with maintaining optimal inventory levels become increasingly complex. 

This guide is designed to provide you with valuable insights and practical knowledge to help you understand the complexities of inventory management successfully.

Let’s begin!

What Is Inventory Management?

Inventory management refers to the systematic process of overseeing, controlling, and organizing a company's goods and materials. It is a vital aspect of online retail, omnichannel distribution, and traditional business operations.

It involves the management of raw materials, finished products, and everything in between. The primary goal is to ensure that the right amount of stock is available at the right time, minimizing holding costs while meeting customer demand.

Why Is Inventory Management Important?

Inventory management holds significant importance across industries. Here are key reasons highlighting the importance of inventory management:

It Ensures Adequate Stock Levels

Inventory management guarantees that your shelves are consistently stocked with the products your customers want. This practice involves calculating ideal amounts of inventory by analyzing demand patterns. Excessive stock leads to ‘dead stock,’ outdated and unsellable, while insufficient stock results in unmet demands and lost sales. 

It Provides Cost-Efficient Storage Solutions

Efficient inventory management strategies help save significant amounts of money on storage. By minimizing excess inventory and optimizing stock levels, businesses can reduce storage space requirements. 

It can lower storage-related expenses and eliminate the risk of holding outdated or short-living stock.

It Helps With the Timely Turnover of Goods

An effective inventory management system ensures a healthy turnover of goods. This means products don’t sit in storage for extended periods, reducing the risk of obsolescence or spoilage. It helps maintain a balance between supply and demand, ensuring products are sold and restocked promptly.

It Helps Accurate Demand Forecasting

Inventory management involves analyzing historical data and market trends to forecast demand accurately. This foresight allows businesses to align their inventory levels with anticipated customer needs, preventing overstocking or stockouts.

It Helps Optimize Cash Flow

By managing inventory efficiently, businesses can free up capital that would otherwise be tied up in excess stock. This improved cash flow can then be utilized for strategic investments, expansion, or other critical aspects of the business.

It Helps Streamline Supply Chain Operations

Efficient inventory management contributes to a streamlined supply chain. It helps in coordinating production schedules and reducing lead times. It also secures a smooth flow of goods from suppliers to customers, enhancing overall operational efficiency.

What Are the Different Types of Inventory?

Inventory can be classified into various categories based on its stage in the production process, purpose, or physical characteristics. These include:

  • Raw Materials
  • Work-in-Progress (WIP)
  • Finished Goods
  • Decoupling Inventory
  • Safety Stock
  • Packing Materials
  • Cycle Inventory
  • Service Inventory
  • Transit Inventory
  • Theoretical Inventory
  • Excess Inventory
  • Maintenance, Repair, and Operations (MRO) Inventory

There are differing opinions on whether MRO should be classified as a distinct type of inventory. 

Inventory Management - 3PL Fulfillment Prep

Inventory Management Process

Good inventory management involves a systematic process to provide optimal control and efficiency. Here are key steps in the inventory management process, incorporating relevant techniques:

Step#1 Goods Receipt

When goods are delivered to your facility, it's essential to have a streamlined process for receiving them. This step involves logging the arrival of raw materials or finished goods. 

Techniques such as barcode scanning or RFID can be applied to automate and enhance the accuracy of this process.

Step#2 Inspection and Sorting

After receiving goods, they undergo inspection to ensure quality and accuracy. ABC analysis (categorizing items into A, B, and C classes based on value) can be applied during sorting to prioritize attention to high-value items. It helps optimize the use of resources.

Step#3 Storage

Next, the goods are properly stored to maintain product quality and accessibility. The FIFO technique makes sure that older inventory is used first, reducing the risk of items becoming outdated. 

Consideration of factors like shelf life and storage conditions is crucial for effective storage management.

Step#4 Inventory Monitoring

The inventory count is monitored on a regular basis to prevent stockouts or overstock situations. Perpetual inventory software allows for real-time tracking. On the other hand, techniques like Economic Order Quantity (EOQ) help in determining optimal order quantities to balance holding costs and ordering costs.

Step#5 Order Placement

Customer orders are received through various channels, and the Just-In-Time (JIT) inventory management principle can be applied to fast-moving items. JIT aims to reduce excess stock by ensuring items arrive just in time for production or customer delivery, minimizing holding costs.

Step#6 Order Approval

Once customer orders are received, the next step is to approve stock orders. This can be a manual process or automated through a Point of Sale (POS) system. 

Effective supplier management techniques are employed to maintain good relationships and timely deliveries.

Step#7 Picking and Shipping

Goods are picked from the warehouse based on SKU numbers to fulfill customer or manufacturing orders. Techniques like batch picking (picking multiple orders simultaneously) or zone picking (assigning specific zones to pickers) can enhance efficiency.

 Real-time location tracking systems aid in quick and accurate retrieval.

Step#8 Inventory Update

After goods are picked, inventory levels are updated in real-time using perpetual inventory systems. This ensures that all stakeholders, including sales and finance teams, have access to accurate and up-to-date information.

Step#9 Low Stock Trigger

Automated alerts for low stock levels are implemented to proactively identify when inventory is running low. Reorder point analysis, which establishes a minimum stock level that triggers reordering, helps in maintaining optimal inventory levels.

Step#10 Purchasing/Reordering

When low-stock triggers are activated, the purchasing or reordering process is initiated. Just-In-Time (JIT) principles can be applied here as well to minimize excess inventory, reduce holding costs, and maintain a lean and efficient supply chain.

Step#11 Restocking

Upon receiving new inventory from suppliers, it's important to conduct quality checks to make sure that the incoming stock meets the required standards. This step completes the cycle and prepares the inventory for the next set of orders.

Inventory Management Techniques/Methods

Inventory management methods refer to the various strategies businesses use to oversee the ordering, storing, and usage of their goods. 

Here are some common inventory management methods:

Technique#1 ABC Analysis 

ABC analysis involves classifying inventory into categories (A, B, and C) based on their importance. This approach aids in prioritizing resources and attention to items that contribute the most to the business. 

Technique#2 Just-In-Time (JIT)

This method revolves around ordering and receiving goods precisely when needed for production or customer delivery. This minimizes holding costs and reduces excess inventory, promoting efficiency in the supply chain.

Technique#3 First-In-First-Out (FIFO)

FIFO involves utilizing the oldest inventory first when fulfilling orders, thereby minimizing the risk of outdated stock. It assures the consumption of older goods before newer ones.

Technique#4 Economic Order Quantity (EOQ)

Economic Order Quantity (EOQ) focuses on determining the optimal order quantity that minimizes total inventory costs. It strikes a balance between the costs of holding inventory and the costs of ordering more frequently.

Technique#5 Safety Stock

Safety stock involves maintaining a buffer stock to protect against unexpected fluctuations in demand or supply chain disruptions. This makes sure that there is enough inventory to meet demand even in unforeseen situations.

Technique#6 Dropshipping

Dropshipping, a method where retailers fulfill orders by purchasing products from a third party and having them shipped directly to the customer, reduces the need for businesses to hold extensive inventory as products are sourced on demand.

Technique#7 Bulk Shipments and Order Cycles

Bulk shipments and order cycles entail ordering and receiving goods in large quantities and at scheduled intervals. This reduces per-unit shipping costs and provides a steady supply of inventory. 

Technique#8 Perpetual Inventory System

The perpetual inventory system involves continuously updating inventory records in real time, providing an accurate and up-to-date view of inventory levels.

Technique#9 Reorder Point Analysis

Reorder point analysis establishes a minimum inventory level that triggers the reorder of products, preventing stockouts by initiating the reorder process when inventory reaches a predetermined level. 

Technique#10 Bulk Breaking

Bulk breaking involves breaking down large shipments into smaller units for distribution, enabling businesses to distribute products more efficiently and respond to varied customer demands. 

Technique#11 Cross-Docking

Cross-docking is a method where goods are received and immediately shipped out without being stored in the warehouse. This minimizes the need for warehousing and reduces holding costs.

Technique#12 Real-Time Location Tracking

Real-time location tracking utilizes technology to track the real-time location of inventory within the warehouse, enhancing visibility and accuracy in inventory management, especially in large warehouses.

How is Inventory Management Different From Other Processes?

Let’s understand how inventory management differs from other processes in order to seek comprehensive business optimization:

Inventory Management vs. Inventory Control

While both inventory management and control involve overseeing the movement of goods, inventory management is a broader concept. It encompasses strategic planning, forecasting, and optimization. 

On the other hand, inventory control is more focused on regulating stock levels to prevent shortages or overages.

Inventory Management vs. Inventory Optimization

Inventory management involves the overall supervision of stock, including ordering, storage, and tracking. 

In contrast, inventory optimization specifically concentrates on maximizing efficiency by minimizing excess stock. It also makes sure that inventory levels align with demand, ultimately reducing costs.

Inventory Management vs. Order Management

Inventory management revolves around the strategic handling of stock levels. 

On the other hand, order management primarily focuses on the order fulfillment process. It includes taking and processing customer orders, coordinating shipments, and ensuring timely delivery while maintaining accurate order information.

Inventory Management vs. Supply Chain Management

Inventory management is a component of supply chain management, which encompasses the end-to-end coordination of all activities involved in producing and delivering goods. While inventory management specifically deals with stock levels, supply chain management encompasses a broader scope, including procurement, manufacturing, and distribution.

Inventory Management vs. Warehouse Management

Inventory management spans the entire stock lifecycle, including procurement, storage, and distribution, while warehouse management focuses on the efficient operation of physical storage spaces. 

Warehouse management includes tasks such as layout design, picking, packing, and shipping, with a more concentrated emphasis on the warehouse facility itself.

Inventory Management vs. Logistics

Logistics encompasses the entire process of moving goods from the point of origin to the point of consumption, covering transportation, warehousing, and distribution. Inventory management, as a subset of logistics, specifically addresses the strategic control and optimization of stock levels.

Inventory Management vs. ERP (Enterprise Resource Planning)

Enterprise Resource Planning (ERP) systems integrate various business processes, including inventory management. While inventory management is concerned with optimizing stock levels and flows, ERP systems provide a comprehensive solution by incorporating various functions like finance, human resources, and manufacturing into a unified platform.

Why Do I Need an Inventory Management System?

Here are key reasons why investing in an inventory management system is essential:

Inventory Visibility Challenges

Businesses often struggle with obtaining real-time visibility into their inventory at the SKU (Stock Keeping Unit) level. Lack of accurate and up-to-date information on stock counts can lead to operational inefficiencies and potential errors.

Reorder Management Complexity

Without an efficient inventory management system, businesses face challenges in automating reorder notifications. This can result in the risk of stockouts or overstock situations, impacting customer satisfaction and financial performance.

Reporting and Forecasting Hurdles

In the absence of a robust inventory management system, running reports on inventory trends and forecasting becomes a time-consuming task. This hinders the ability to make informed strategic decisions based on accurate data.

Poor Processes Impacting Efficiency

Many small businesses encounter challenges related to poor inventory management processes. Inefficient workflows, lack of standardized procedures, and manual handling of inventory tasks can lead to errors, delays, and increased operational costs.

Inaccurate Stock Details

Getting accurate stock details is a common challenge for businesses without a proper inventory management solution. Inaccuracies in stock levels can lead to misinformed decision-making, affecting overall supply chain efficiency.

Inefficient Order Fulfillment

Manual handling of inventory processes often leads to inefficient order fulfillment. Delays in locating products, picking, and packing can result in delayed shipments and dissatisfied customers.

Compliance and Regulatory Risks

Businesses without a comprehensive inventory management system may struggle with compliance and regulatory requirements. This poses the risk of penalties, fines, and reputational damage.

Best Inventory Management Software

Inventory management software isn't universally applicable; the needs vary for each business, particularly in e-commerce fulfillment. Here are the top choices for online store inventory management due to their popularity and diverse functionalities.

3PL Fulfillment and Prep

3PL Fulfillment and Prep is a unique solution that combines order fulfillment capabilities with built-in inventory management tools. While it is not a standalone inventory management system, its integration with order fulfillment makes it a comprehensive solution for businesses looking to streamline both aspects.

3PL Fulfillment and Prep

Key Features:

  • Order Fulfillment Integration: The primary strength lies in its seamless integration with order fulfillment processes. They guarantee a cohesive workflow from inventory management to order processing and shipment.
  • Cost Efficiency: As the inventory tools come at no extra cost, they offer a cost-effective solution for businesses seeking both inventory management and order fulfillment capabilities.
  • Real-time Updates: Provides real-time updates on inventory levels, helping businesses stay informed and make timely decisions regarding restocking and order fulfillment.

Ideal For:

  • E-commerce businesses that prioritize a unified solution for both order fulfillment and inventory management.
  • Businesses seeking a cost-effective option that eliminates the need for separate tools for fulfillment and to track inventory.

Extensiv Order Manager

Extensiv Order Manager is a comprehensive inventory management system designed to meet the diverse needs of businesses across various industries. It offers a robust set of features for inventory control, order processing, and strategic decision-making.

Enstensiv order managemnet - 3PL Fulfillment and Prep

Key Features:

  • Multi-channel Integration: Enables integration with multiple sales channels, providing a centralized platform to manage inventory across various online and offline channels.
    Advanced Analytics: Offers data analytics tools for in-depth insights into inventory performance, demand forecasting, and overall business trends, facilitating informed decision-making.
  • Scalability: Designed to scale with the growth of businesses, accommodating an expanding product range or increased order volume.

Ideal For:

  • Businesses with a diverse range of products and sales channels require a scalable and feature-rich inventory management system.
  • Those seeking advanced analytics tools to leverage data for strategic planning and optimization.

Why Outsource Inventory Management to a 3PL?

Outsourcing inventory storage and e-commerce order fulfillment to a 3PL provider like 3PL Fulfillment & Prep offers numerous advantages. Let’s take a look at what you will get with our services:

  • Tools, Data, and Transparency:

As a reliable 3PL Fulfillment & Prep partner, we equip merchants with tools to seamlessly manage multiple warehouses. Our 3PL software seamlessly integrates with major e-commerce platforms, allowing easy connectivity without the need for a developer.

  • Real-Time Inventory Visibility:

Once your inventory is at 3PL Fulfillment & Prep's state-of-the-art fulfillment centers, merchants can access real-time data on quantity on hand and units sold per day. This visibility aids in making informed decisions about what is available for shipment.

  • Proactive Reordering:

Our tech-based fulfillment utilizes documented inventory data to project when to reorder inventory, effectively preventing stockouts and backorders. Merchants can set reorder notification points for automatic reminders to restock.

  • Strategic Inventory Distribution:

3PL companies with multiple fulfillment centers help determine optimal locations based on customer shipping destinations and 3PL Fulfillment & Prep just does that. We distribute inventory strategically and provide last-minute fulfillment that reduces shipping costs.

  • Trend Analysis for Growth:

Accurate insights into customers' purchasing trends empower merchants to optimize inventory levels. At 3PL Fulfillment & Prep, we provide built-in reports for trend analysis, facilitating better supply chain decisions.

  • Control and Flexibility:

Our 3PL technology allows merchants to have precise control over how inventory is grouped. This includes bundling products, merging products across channels, separating inventory by lot numbers, and kitting items before shipment.

The Bottom Line!

Effective inventory management is vital for business success. The right system and techniques not only save costs but also ensure timely customer satisfaction and operational efficiency. 

If you are in need of real-time inventory support, explore 3PL Fulfillment and Prep. Our 3PL service has advanced tech and multiple fulfillment centers that handle inventory and orders seamlessly. 
Stay ahead in the competitive market by embracing smart inventory strategies and technological solutions.

Optimize your operations for growth and excellence now!

William K. Turner


William K. Turner (Supply Chain Management)

Willian K. Turner, our esteemed author with expertise in International Trade, Global Logistics, and Supply Chain Management, has a lot to offer when it comes to writing about these topics. He has a wealth of experience and knowledge to share with readers. Whether he's writing blog posts or articles his insights will be surely valuable to anyone interested in these industries.

Willian K. Turner, our esteemed author with expertise in International Trade, Global Logistics, and Supply Chain Management, has a lot to offer when it comes to writing about these topics. He has a wealth of experience and knowledge to share with readers. Whether he's writing blog posts or articles his insights will be surely valuable to anyone interested in these industries.

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