What Is Inventory Management? Real-Time Visibility and Other Techniques
Avoid empty shelves and unhappy customers with these inventory management best practices.
Oct 12, 2022
9 Minute read
Editorial Lead, Commerce Cloud, Salesforce
The goal sounds simple enough. However, the data tell a different story: 43% of retailers rank inventory management as their number one day-to-day challenge. When you consider supply chain problems like delayed lead times, unanticipated demand, and higher storage and delivery costs, a complicated picture emerges. So, what’s the difference between the businesses that can withstand these challenges and the ones that can’t? Embracing tools that deliver insights and real-time visibility into inventory.
Whether you’re a raw materials supplier or a retailer selling finished products to consumers, implementing inventory management best practices will save your organization time and money. In this guide, we’ll answer your inventory management FAQ and show you how greater visibility facilitates the strategies you need to succeed.
What is inventory visibility?
Inventory visibility is the ability to view the quantity and flow of goods in real time. From a single view, companies can quickly track and store massive quantities of data, match supply with demand, and reduce instances of overselling and underselling. The ability to do this enables growth at scale. That’s why creating inventory visibility is considered an inventory management best practice.
Tools like barcode scanners and SKUs can track the physical flow of goods and give companies an easy view of their inventory. However, the most advanced systems also account for real-time reservations across selling channels — for example, a platform that integrates sales data from a retailer’s website, app, and brick-and-mortar stores. At these companies, operations and merchandising teams know at a glance exactly how many units of each item are in stock at each location, how many await shipment, and where they are stored within a fulfillment center or warehouse location. Automated reordering and predictive analytics ensure brands can replenish goods at key moments, such as when demand is rising but the reorder point hasn’t been reached.
Why is inventory management and real-time visibility important?
The underlying challenge behind inventory management is clear: Buy too much and risk accumulating outdated stock, but buy too little and you won’t have anything to sell — resulting in unhappy customers who will leave to shop elsewhere. Knowing when and how much to order is key to successfully managing inventory. With real-time inventory data, companies can apply automation and predictive analytics to surface key moments earlier. Automating inventory management systems saves money and avoids wasted labor — and it all starts with inventory visibility.
The improved visibility companies gain when they implement a real-time inventory management system is significant. Not only does greater visibility enable bulk purchasing while cutting storage costs, embedded analytics make it possible to more accurately predict demand and make timely purchases. Automated reporting and reordering reduces costly mistakes like out-of-stocks, overstocks, mis-picks, and mis-shipments. This increases the chances you can keep shelves stocked and deliver goods quickly and correctly. That builds customer satisfaction and drives repeat business.
How to improve inventory visibility
Many businesses use spreadsheets to manage inventory. But even the most well organized and routinely updated spreadsheet can’t, on its own, deliver real-time insights into marketplace conditions or emerging supplier problems, such as a ship with goods that is stuck in port. It also doesn’t support flexible fulfillment options like Buy Online, Pick Up in Store (BOPIS) — which are becoming increasingly popular with consumers.
The bottom line is that manual inventory management is not a sustainable practice as companies grow and scale. But by elevating inventory data from siloed teams to the right digital platform, you can efficiently manage the flow of goods across your entire supply chain. That’s true even for omni-channel companies that sell on brick-and-mortar, social media, and app-based channels. This protects your business from easily avoidable problems like overselling online.
Digitizing and automating inventory management:
- Facilitates the tracking, storage, and analytics of massive quantities of inventory data.
- Ensures accurate inventory counts in real time, lowers holding costs, cuts down on deadstock, and streamlines dock-to-stock journeys.
- Enables order tracking and accountability along pick, pack, and ship processes.
- Delivers granular visibility to the location and warehouse location level, ensuring you can accurately match demand and delivery, and reduce overselling and underselling.
To facilitate growth and agility, you need to have an inventory service that shares those insights. Claire’s introduced an up-leveled ecommerce experience that gave consumers more flexibility. By connecting its commerce platform with a new order management system, the retailer expanded its digital capabilities, introduced same-day BOPIS, and delivered frictionless engagement at scale.
How can I follow inventory management best practices?
To follow inventory management best practices, you’ll need to know how much to order, how long it takes to exhaust your supply, when to reorder goods, and how much to keep in reserve. You’ll also need to consider storage and delivery costs.
These basic principles are the same from industry to industry. But a deeper dive into the specific needs of companies in certain sectors reveals important differences in inventory management best practices:
Inventory management FAQ
There are five types of inventory:
- Raw materials: Manufacturing materials used to produce finished goods
- Work in progress: Semi-finished goods still on the production floor
- Finished goods: The final saleable product
- Packing material: Inventory necessary for usage or for transport
- Maintenance, repair, and operations (MRO) goods: Supplies and consumables used to maintain machinery during production
Other types of inventory include:
- Anticipatory stock: Inventory investment in raw materials or finished goods based on expected rising demand.
- Buffer inventory: Inventory held to ensure smooth production and delivery during periods of unanticipated rising demand — also called safety stock.
- Cycle inventory: Inventory held to balance carrying and holding costs.
- Decoupling inventory: Work-in-progress inventory that ensures machinery throughout the plant is kept running.
- Goods in transit: Any raw materials or finished, work-in-progress, packing, or MRO goods being transported to another location.
The three main inventory management techniques are:
- Manual: Spreadsheet- or paper-ledger-based systems that businesses use to track goods.
- Periodic: Manual counting of goods at predetermined intervals. Quantities are recorded in a spreadsheet.
- Perpetual: The most accurate inventory system because quantities are updated in real time. Barcode and radio frequency inventory systems are perpetual inventory systems.
Four common demand planning methods include:
- Qualitative inventory forecasting: Predicting demand based on macroeconomic factors like the state of the economy or a government shutdown. It can also include focus group data and market research.
- Quantitative inventory forecasting: Predicting demand using historical sales data. Quantitative forecasting does not, on its own, take into account important factors such as unanticipated demand or current market conditions.
- Trend forecasting: Predicting demand based on changes in demand over time. It may or may not include seasonal or irregular trends.
- Graphical forecasting: Trend forecasting data presented in a visual format to more easily surface changes in demand.
The right inventory management system makes a direct impact on profitability.
- Improve sales and service at a glance: Find out what products are selling quickly and place reorders before you run out.
- Strengthen expense controls: Buy the right number of products to ensure they don’t sit on shelves. Find mistakes in calculations like reorder point faster. Reduce theft, loss, and warehouse costs. Mark down slow movers and free up cash for investment elsewhere.
- Speed time to market and improve productivity: With a digital inventory management system, you can automate reorders, monitor lead times and delivery schedules, and use real-time data to make informed decisions.
- Build more accurate demand forecasts: Use embedded analytics to anticipate periods of high and low demand. Keep goods moving efficiently by reordering at the right times.
What’s the difference between an inventory management system and an enterprise resource planning (ERP) system?
Inventory management glossary
Important inventory management terms you need to know include:
- ABC analysis: This helps companies figure out which goods have the most impact on inventory cost. “A” is your most profitable and valuable product. “C” goods are small-dollar transactions that aren’t significant individual contributors to the bottom line. “B” goods fall somewhere in the middle.
- Average inventory: Calculated by adding beginning inventory to ending inventory over an accounting period and dividing by two.
- Beginning inventory: The monetary value of unsold goods at the beginning of an accounting period.
- Bundles: Multiple products sold together under one unique alphanumeric code (SKU).
- Carrying costs: The amount of money spent holding and storing unsold goods.
- Cost of goods sold: Also known as COGS. The amount of money spent purchasing or producing goods, including raw materials, machinery, and labor. It does not include indirect costs such as advertising, sales, or distribution.
- Days inventory outstanding: The amount of days it takes for inventory to sell. Fewer days are generally better. This varies between companies, even for the same product.
- Deadstock: Outdated (and probably unsellable) goods.
- Economic order quantity: Also known as EOQ, this formula calculates the ideal amount of goods a company should purchase to minimize storage and other buying costs.
- Ending inventory: The monetary value of unsold goods at the end of an accounting period.
- First-in-first-out valuation: An asset-management and valuation method in which assumes goods that are bought first are sold first.
- Inventory count: Taking a manual count of inventory to verify the accuracy of records. Also called a stock take.
- Inventory variant: Variations on a single product (for example, different sizes of the same shoe).
- Just-in-time: Specific to raw materials orders, companies buy goods on an as-needed basis and they arrive “just in time” to begin production. Cross-docking, where companies bypass warehousing and transfer goods from inbound trucks directly to outbound trucks, is typically a piece of the JIT puzzle. This is because cross-docking limits the amount of money companies have to spend on storage.
- Last-in-first-out: Assumes goods that are bought last are sold first.
- Lead time: How long it takes to deliver purchased goods to the buyer’s location.
- Materials requirements planning (MRP): With MRP, companies start by estimating demand for specific raw materials. Then, they order the materials or components to manufacture the product, distributing the goods by need based on what’s already in stock. Once the resources are allocated, production is scheduled.
- Mis-pick: When the wrong item is pulled from inventory and delivered to the customer. This includes cases where the item is omitted or is correct but is damaged or mis-labeled.
- Mis-shipments: Goods delivered to the wrong destination.
- Overselling: Taking orders for out-of-stock products. This leads to a poor customer experience.
- Pipeline inventory: Goods that are in production or in transit somewhere along the supply chain.
- Reorder point: The reorder point factors in lead time and tries to ensure the company doesn’t run out of stock. The reorder point can change based on the product or the company’s own sales cycle.
- Safety stock: The extra product a company should have on hand just in case there is an unforeseen change, like a sudden increase in customer demand or a forecasting error. Also called buffer inventory.
- Shrinkage: Damaged or stolen goods that cannot be sold.
- Stock-keeping unit (SKU): An alphanumeric code assigned to goods that help keep track of inventory. SKUs are unique by inventory variant.
- Supply chain: The flow of goods from their raw materials origins to finished products. Companies are often only directly responsible for one aspect of the supply chain (for example, retailers).
- Third-party logistics (3PL): A partner company that manages customer service, fulfillment, or warehousing for retailers.
How can I improve my current inventory management system?
Find out how to streamline systems, connect with customers, and build brand loyalty.
- Create a single source of truth on one shared platform
- Use analytics to made demand planning easier
- Automate relevant communications to deliver the right messages at the right times