Inventory Management

• Inventory management involves ordering, stocking and using a business’s materials or products.
• There are various types of inventory, like raw materials, cycle inventory and MRO goods.
• Prioritizing your inventory helps you understand what you need to order or manufacture more frequently so you can continuously fulfill your customers’ needs. 

Inventory management is a crucial piece of a business’s profitability, but a lot of small businesses don’t practice good management when it comes to the items they sell. Some businesses have too little inventory, unable to meet customers’ expectations by supplying enough available products. This often drives customers away, sometimes to another business, and sometimes for good. 

On the other hand, many businesses go the other way, overstocking items “just in case.” Though you’ll always have the items your customers are looking for, the risk with this strategy is bleeding money from your business. Excess inventory not only ties up valuable cash flow, but it also costs more to store and track. 

Effective inventory management lies somewhere between these two extremes. While it requires more work and planning to achieve an efficient management process, your profits will reflect your effort.

Types of inventory

Before you can tackle effective inventory management, you’ll need to understand exactly what inventory comprises. These are some of the many different types of inventory: 

• Raw materials, or materials you use to manufacture your products
  
• Unfinished products, works in progress that are not ready to be sold
  
• Finished products, which are typically stored in a warehouse until sold or shipped
  
• In-transit goods, which are no longer in the warehouse and are being transported to their final destination
  
• Cycle inventory, or products that are shipped to a business from a supplier or manufacturer, then immediately sold to customers
  
• Anticipation inventory, or excess products in anticipation of a surge in sales
  
• Decoupling inventory, which are parts, supplies, or products set aside in anticipation of a slowdown or halt in production
  
• MRO goods, which stands for “maintenance, repair and operating supplies” and supports the production process
  
• Buffer inventory, or “safety stock,” which serves as a cushion in case of an unexpected issue or need for more inventory 

It helps to sort your inventory so you know which items fall into the same category, and then you can manage accordingly. For example, you’ll handle your finished products differently from your raw materials.

What is the best program for inventory management?

Various inventory management software programs are available for small businesses, and the best one for your business depends on multiple factors. For instance, you’ll want to consider your budget, your business type and certain features you’re looking for, like mobile apps and cloud backup. 

Our sister site, business.com, has an inventory software buying guide that explains five popular inventory management software systems: 

1. TradeGecko is easy to use and has many integration options.
2. Odoo is easy to learn and makes it simple to track orders, but it has little customer support and can’t directly import e-commerce products.
3. Fishbowl is organized and easy to use, with sales- and order-tracking features, but it can’t import products from your online sales channel.
4. Stitch is user-friendly software for both digital and physical stores.
5. Contalog is best for e-commerce businesses but makes it difficult to finalize orders.

Tips for managing your inventory

Here you’ll find the 10 essential tips to effectively manage your inventory for increased profitability and cash flow management.

1. Prioritize your inventory.

Categorizing your inventory into priority groups can help you understand which items you need to order more of and more frequently, and which are important to your business but may cost more and move more slowly. Experts typically suggest segregating your inventory into A, B and C groups. Items in the A group are higher-ticket items that you need fewer of. Items in the C category are lower-cost items that turn over quickly. The B group is what’s in between: items that are moderately priced and move out the door more slowly than C items but more quickly than A items.

2. Track all product information.

Make sure to keep records of the product information for items in your inventory. This information should include SKUs, barcode data, suppliers, countries of origin and lot numbers. You might also consider tracking the cost of each item over time so you’re aware of factors that may change the cost, like scarcity and seasonality.