Inventory management is how businesses keep track of the products they buy, store and sell. It covers everything from raw materials and components to finished goods that are ready to go out to customers.
At its core, inventory management is about balance. Businesses need enough stock to meet demand without tying up too much cash in products that sit on shelves. When done well, inventory management helps businesses run smoothly, avoid delays and make better decisions about purchasing and sales.
Key takeaways
- Inventory management is about keeping the right amount of stock available without overbuying or running out.
- There are different inventory management methods, including JIT, MRP, EOQ and DSI, each suited to different business needs.
- Businesses typically begin by inventory manually, with spreadsheets, but require inventory management software as they grow.
- Good inventory management improves stock visibility, cash flow and control, especially for ecommerce and multi-channel businesses.
The 4 types of inventory management
There are several inventory management methods that businesses use, depending on how they operate and how predictable their demand is.
Just-in-Time Inventory Management (JIT)
Just in Time inventory management focuses on ordering stock only when it is needed. This approach reduces storage costs and limits the risk of holding excess inventory.
The downside is that it leaves little room for error. If a supplier is delayed or demand suddenly increases, stock can run out quickly. Because of this, JIT works best for businesses with reliable suppliers and steady sales patterns, such as automotive manufacturers, consumer electronics, fast fashion, and publishing & construction companies.
Materials Requirement Planning (MRP)
Materials Requirement Planning, often shortened to MRP, uses sales forecasts and production plans to calculate what stock is needed and when it should be ordered. This method is commonly used in manufacturing, where multiple parts are required to produce a finished product. MRP can be very effective, but only if the data feeding into it is accurate. Poor forecasts or incorrect stock records can lead to shortages or overstocking.
Economic Order Quantity (EOQ)
Economic Order Quantity is a method that helps businesses decide how much stock to order at one time. It takes into account the cost of placing orders and the cost of storing inventory. By finding the most efficient order size, EOQ helps reduce unnecessary expenses while ensuring stock is available when needed. It is particularly useful for products that sell in high volumes.
Days Sales of Inventory (DSI)
Days Sales of Inventory measures how long it takes for stock to be sold after it has been purchased or produced. A lower number usually means inventory is moving quickly, while a higher number can indicate slow-moving or excess stock.
Businesses often use DSI alongside financial reports to understand how efficiently inventory is being turned into revenue.Get in touch with our team to understand how to manage your inventory most effectively, and how Khaos Control’s Inventory Management Software can help.
How to Manage inventory
Managing inventory effectively starts with having accurate, up to date stock information. Businesses need to know what they have in stock, where it is stored and how quickly it is selling.
In practice, this means setting clear reorder points, understanding supplier lead times and reviewing sales data to anticipate future demand. Regular stock checks are also important, as they help identify errors early and keep inventory records reliable as the business grows.
There are several ways businesses manage inventory, ranging from fully manual approaches to more automated systems, but typically a mix of both.
Manual Stock Counts
Some businesses manage inventory by physically counting stock on a regular basis and updating records by hand. This might be done weekly, monthly or at key points in the sales cycle. Manual stock counts can work for very small businesses with limited product ranges. However, they are time-consuming and errors become more likely as stock levels and order volumes increase.
A better approach is rolling stock counts, Perpetual Inventory, which reduces the pressure on the warehouse team, improves efficiency, and keeps track of inventory on an ongoing basis. Within Khaos Control Enterprise it’s possible to schedule perpetual inventory counts at specified intervals for different location types, ensuring that high value or high wastage SKUs can be monitored more frequently. If a sales order is being picked from a location that is due to counting, the user will be prompted to count the location, this is optional so they can postpone the count during peak times.
Spreadsheets
Many businesses start out using spreadsheets to track inventory. Stock levels are updated manually as products are bought and sold, often using tools like Excel or Google Sheets.
Spreadsheets offer more flexibility than pen and paper, but they rely heavily on manual input. If updates are missed or multiple people are working on the same file, inaccuracies can quickly creep in.
Inventory Management Software
As businesses scale, manual inventory tracking becomes harder to manage. Inventory management software brings all stock data into one place, making it easier to see what is available across warehouses and sales channels.
With the right system in place, businesses can automate stock updates, receive alerts when inventory runs low and generate reports that support better purchasing decisions. Many systems also integrate with ecommerce platforms and accounting software, reducing the need for manual data entry.If you want to see how inventory management software works in practice, you can book a free demo and explore features in more detail.
Types of Inventory Management Systems
Businesses use different types of inventory management systems depending on their size, complexity and operational needs. Some systems are designed for basic stock tracking, while others support more advanced processes across multiple locations or departments.
Standalone Inventory Management Systems
Standalone systems are often used by small to medium-sized businesses with straightforward requirements. These systems focus on core stock tracking, basic reporting and simple inventory control. They are typically easier to set up and manage, making them suitable for businesses that need better visibility than spreadsheets but do not require full business integration.
Cloud-Based Inventory Management Systems
Cloud-based systems are popular with growing businesses that need flexibility and scalability. Because they are accessed online, stock data can be viewed and updated from anywhere.
These systems usually include automatic updates, lower upfront costs and easier integrations with ecommerce platforms. They are well suited to businesses managing inventory across multiple sales channels or locations.
ERP-Integrated Inventory Management Systems
ERP-integrated inventory management systems are designed for larger businesses with more complex operations. Inventory management is connected to other areas of the business, such as accounting, purchasing, sales and production.
This level of integration provides a more complete view of inventory and supports advanced reporting, forecasting and multi-location management.
Warehouse Management Systems (WMS)
This is used by businesses where warehousing and distribution play a central role. These systems focus on managing stock within the warehouse itself.
WMS software supports activities such as picking, packing, stock movement and space optimisation, helping improve accuracy, efficiency and order fulfilment at scale.
Tools Used to Manage Inventory
Alongside systems and processes, many businesses rely on physical tools to help track and manage inventory more accurately. These tools are especially useful in environments where stock moves frequently or is stored across larger spaces.
Barcode Scanners
Barcode scanners are widely used to record stock movements quickly and accurately. By scanning a product or location barcode when goods are received, moved or dispatched, inventory records can be updated without manual entry.This approach helps reduce errors and speeds up routine tasks such as stock checks and order fulfilment. Barcode scanning is commonly used in retail, ecommerce and warehouse settings, where accuracy and efficiency are essential.
RFID Scanners and Tags
RFID technology allows inventory to be tracked without the need to scan each item individually. Products are fitted with RFID tags, which can be read automatically by handheld or fixed scanners as items move through a space. Because RFID does not require line-of-sight scanning, it can significantly speed up stock picking and counting in busy warehouse environments. It is often used where large volumes of stock need to be tracked quickly and with minimal disruption.
Mobile Inventory Devices
Mobile inventory devices combine scanning and data entry in a single handheld unit. These devices allow warehouse and store staff to update inventory records as they work, rather than returning to a fixed workstation.
This real-time updating helps keep stock data accurate throughout the day and is particularly useful in operations where inventory is constantly being moved between locations.
Bin and Location Labelling
Clear bin, shelf and location labelling plays an important role in organised inventory management. Labels make it easier for staff to find the correct items and confirm they are working in the right location.
When used alongside scanners or mobile devices, labelling supports faster picking and reduces mistakes, especially in larger storage areas with high product volumes.
Weighing and Measuring Tools
In some businesses, particularly those shipping a wide range of products, weighing and measuring tools are used as part of inventory management. Recording accurate weights and dimensions helps with storage planning, packing and shipping decisions.
Over time, this data can also support better forecasting and reduce inefficiencies caused by incorrect product information.
Benefits of Inventory Management
Good inventory management supports day-to-day operations and helps businesses stay in control as they grow. While the benefits will vary depending on the type of business, there are a few advantages that apply almost universally.
Better Visibility Over Warehouse Stock
Effective inventory management gives businesses a clear picture of what stock they hold and where it is stored. When inventory data is accurate and up to date, orders can be picked and fulfilled more quickly, and errors caused by missing or miscounted stock are far less likely. This level of visibility also makes it easier to plan ahead, particularly during busy periods or when managing multiple storage locations.
Smoother Stock Flow
When inventory is managed properly, stock moves through the business more efficiently. Products are reordered at the right time, slow-moving items are easier to spot, and excess stock is reduced. This is especially important for businesses selling across multiple channels, where poor stock control can quickly lead to overselling or missed sales opportunities.
Improved Cash Flow Control
Holding too much stock can tie up cash that could be used elsewhere in the business. Inventory management helps strike a balance between having enough stock to meet demand and avoiding unnecessary overstocking.
With better visibility over what is selling and what is not, businesses can make more informed purchasing decisions and manage cash flow more effectively.
Fewer Operational Disruptions
Poor inventory control often leads to last-minute issues, such as missing items, delayed orders or rushed reordering. Consistent inventory management reduces these disruptions by creating clearer processes and more reliable data, allowing teams to spend less time fixing problems and more time focusing on growth and customer service.
How Different Sectors Use Inventory Management
Inventory management plays a role in most industries, but how it is used often depends on the type of business and how stock moves day to day.
Ecommerce Businesses
For ecommerce businesses, inventory management is critical to keeping stock levels accurate across websites, marketplaces and fulfilment locations. If a product sells on one channel, inventory needs to update everywhere else immediately.
Good inventory management helps ecommerce businesses avoid overselling, manage returns more effectively and understand which products are driving the most revenue. It also becomes especially important during busy periods such as sales events or seasonal peaks, when stock can move quickly.
Retail Businesses
Retail businesses need to manage stock across shop floors, back rooms and sometimes multiple store locations. Inventory management helps retailers ensure popular items stay available while reducing the amount of slow-moving stock sitting in storage.
Accurate inventory data also supports better merchandising decisions and makes it easier to plan promotions based on what is already in stock, while also supporting better planning for promotions and seasonal demand.Read about our retail ERP software for more information.
Wholesale and Distribution
Wholesale and distribution businesses often deal with large order volumes, repeat customers and longer supplier lead times. Inventory management helps track bulk stock levels, manage incoming deliveries and ensure customer orders can be fulfilled on time.
With clear inventory visibility, wholesalers can forecast demand more accurately and reduce the risk of running short on key products. Clear stock visibility also makes it easier to plan ahead and manage supplier lead times.For more information on how inventory management software can help, check out our wholesalers distribution software.
Manufacturing
Manufacturers use inventory management to control raw materials, components and finished goods. It helps keep production running smoothly and reduces the risk of delays caused by missing materials or excess stock.
Find out more about how inventory management software helps manufacturers here.
Warehousing and Logistics
While manual methods and spreadsheets can work for smaller businesses, many find they reach a point where these approaches become difficult to maintain. Inventory management software helps bring everything together in one place, offering better visibility and reducing the reliance on manual updates.
For businesses managing multiple products, locations or sales channels, software can make inventory easier to control and far more reliable over time. Inventory management focuses on knowing where stock is stored and how quickly it can be picked and dispatched. With accurate tracking improving fulfilment speed and reduces errors as order volumes increase.
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Inventory management is ultimately about having control and confidence in your stock, no matter how your business operates or how quickly it grows. If you’d like to see how a centralised inventory management system can help simplify stock control, you can book a free demo to explore how it works in practice.