Order Management System (OMS)
Warehouse Management System (WMS)

How to manage inventory effectively in 3 minutes

Ngoc Lee
How to manage inventory effectively in 3 minutes
Share this:

Inventory management is a system for controlling the movement of goods and services in and out of a business. Knowing how to manage inventory effectively will help businesses have many benefits for businesses. It will help the company understand what types of items are in stock, which are potential, and which are not selling, but have a lot of space to store. From there will be more informed decisions for the future.

Why is inventory management important?

Inventory management is fundamental to a long-term business. When a business's inventory is neatly arranged, it will help the supply chain run more smoothly. Without it, you will run the risk of making many mistakes such as being out of stock and sending the wrong item leading to loss of company reputation. Therefore, inventory management is an important thing. Business owners must come up with the most appropriate strategies to avoid causing undesirable things. Problems such as disorganized inventory or mislabeling of products will lead to the wrong shipment being sent. 

- Read More: Order Management System: Definition, Process And Value 

- Read More: Order management system for Ecommerce: Definition, Key Effect, Benefit

 Inventory management helps the supply chain run more smoothly

Overstock or out-of-stock occurs when your business doesn't know the status of its inventory. One of the reasons for this is that businesses use manual ordering methods, which are prone to errors in the working process. This is a poor inventory forecasting method, resulting in excess or insufficient inventory. 

All these errors not only cost you money but also cost you time and effort to fix them later. When you don't use management tools, the potential for human error increases by the minute. Customer ratings and loyalty are also negatively affected.

Avoid spoilage

If the category you're selling is a product with a shelf life, like fruit or coffee, it's bound to go bad if you don't sell it before it expires. So, effective inventory management can prevent this.

Avoid deadstock

Dead inventory is an inventory that can't be sold anymore - not because it's expired, but possibly because it's out of season, out of fashion, or has somehow become obsolete. With a detailed and meticulous management plan, you can handle this problem satisfactorily, avoiding loss of costs and human resources.

Save storage costs to manage inventory more effectively 

Warehousing costs are not usually fixed, which means they vary depending on how much product your business has in stock. When you stock up on too many things at once or come across a product that's hard to sell, your storage costs go up. Knowing this will save you money.

Improve your cash flow

Good inventory management not only saves money but also increases cash flow in other ways. Remember that inventory is an item that you buy with cash and will sell for cash. However, it is not cash when it is in your inventory.

 Improve cash flow

This is why it is important to consider inventory while managing your cash flow. Inventory has a direct effect on sales (by limiting how much you can sell) and spending. Both of these have an effect on your money. In short, if you want to manage cash flow well, it's important to know how to manage inventory effectively. 

When you have a stable working inventory system, you will always know how much stock you currently have in stock. Based on that, you can predict which items are selling well and will replenish them before they run out of stock. 

Not only will this help you avoid lost revenue, but it will also allow you to plan ahead for future purchases by making sure you have enough cash on hand. Save money on inventory for more money to invest in warehouse expansion. 

Improve fulfillment

In a number of ways, effective inventory management has the potential to improve fulfillment for a business. To make sure your items get close to your customers, you can use methods like inventory distribution, which requires keeping inventory in several fulfillment locations. 

This reduces shipping costs while also shortening delivery times, helping to keep consumers satisfied. Proper inventory management also entails providing a smooth return experience for buyers while ensuring that usable goods get into circulation quickly.

How to manage inventory effectively with 15 suggestions

Arrange your inventory by priority

Categorizing your inventory into priority categories is an effective inventory management practice. It can help you understand what you need to bulk order often and what's important to your business but can be more expensive and have lower transaction rates. Experts recommend categorizing your inventory into groups A, B, and C. 

Things in category A will be typically higher-priced items with lower necessity. Items in group C are low-cost items but the demand for these items is high. Class B are the ones in between those with relative prices and sales rates lower than C items but higher than A items.

Keep track of all product details

Make a note of product information for each item in your inventory. All items should include SKU, vendor, barcode data, and country of origin. You should also track the price of each item from time to time to see if there are other factors that affect the product's cost, such as scarcity or seasonality of the product.

👉 Read More: QR Code Inventory Management: How To Create And Specific Example 

👉 Read More: How to Create a Barcode Inventory in Excel

Examine supplier performance

An unreliable supplier can negatively affect your company's inventory. If you have a supplier who is consistently late with deliveries or under-delivers on orders, it's time to take action. You can determine the cause of the problem by discussing the company's concerns with the supplier. Prepare to change partners or cope with unknown supply levels and the risk of running out of merchandise as a result.

Use the 80/20 inventory rule

In general, 20% of your shares make up 80% of your earnings. Set inventory management as a top priority for the remaining 20% of items. You should closely monitor and understand the entire sales lifecycle of these, including how much you sell in a given time period. These are the items that bring in the most money, so don't waste your money without investing in it.

How to manage inventory effectively? Using 80/20 inventory rule is one of the suggestions
 How to manage inventory effectively? Using 80/20 inventory rule is one of the suggestions

Maintain consistency in how you receive stock

Ensuring that goods that arrive at the warehouse are handled is something any business will do. However, its effectiveness depends on whether you come up with a specific strategy for employees to follow or whether each unit does it differently. Small changes to the way your goods are received will make it difficult for you in the last days of the month to check your books, not knowing why the current amount doesn't match the total amount you bought. 

Ensure that all consignees follow the same specific procedure and that all containers are verified, received and unloaded together, and checked for accuracy.

Keep track of sales

You should know what you sold or how much you sold on a daily basis, and you should update your total inventory. However, you will also need to check this data. Do you notice when specific things sell out or go on sale? Is this product a seasonal thing? Is there a certain day of the week when you sell specific items? 

Is it true that certain things are usually sold together? Not only knowing your total sales, but also knowing the bigger picture of how goods are selling is crucial to keeping your inventory under control.

Order restocks by yourself

Some sellers will handle the inventory reordering for you. On the surface, this seems like a positive thing - you save money and time by delegating the process for at least some of your products to someone else. However, keep in mind that your sellers do not share your preferences. 

They want to move their inventory, but you want to stock up on the things that are most profitable for your company. That's why you should take the time to go through your inventory and ask for all the things you want.

Invest in inventory management software

If your company expands, you'll need to spend more time on inventory than on other aspects of your organization or risk having inventory spiral out of control. All of these operations are made simpler with inventory management software. Before you choose a software solution, make sure you understand what you want, it provides information that is important to your organization, and it's simple to use. 

Invest in inventory management software
 Invest in inventory management software

Use technology integrating well

Inventory management software isn't the only technology that can help you manage your inventory. For example, POS systems and mobile scanners can help you stay on schedule. You should prioritize systems that can work together when investing in technology. Don't worry too much if your POS system can't interact with your inventory management software, but it can take extra time to move data between different systems and make your inventory count. Inventory is at risk of error.

Laid out the process clearly 

Without a specific strategy, things can become more difficult to control and lead to many mistakes. Therefore, one of the most important things you can do to ensure good inventory management is to clearly map out all of your organization's processes. When each step is clearly defined, there is less confusion for employees about what to do next. A well-defined process is exemplified by an inventory management system. 

You can describe every stage of the sales and purchasing process with an inventory management system, from Invoices to Purchase Orders and Goods Receipts.

Identifying items by proper methods

With systems in place, the next step to good inventory management is to have an appropriate method for identifying and tracking products. Surprisingly, many companies use Excel spreadsheets or other spreadsheet applications to track their inventory. Spreadsheets don't provide the necessary means of identification for your things when your company requires more sophisticated means of identification, such as serial number or row count control, nor can spreadsheets force the user to submit all necessary information. 

👉 Read More: How to calculate inventory turnover: Formula and example in 2022 

For example, Excel does not need to provide the necessary inventory tracking information while processing a transaction, which means that users may forget to add additional information because they are not prompted. Because the individual submitting the transaction may not have entered the data correctly, this approach is prone to human error. 

However, using inventory management software allows companies to maintain things like multiple units of measure for a single item, rather than needing to keep some products as "parts" of others. each other (package or box). This technology allows you to view all available funds from a single window, which you can sell or buy in different units of measure.

Post inventory transactions timely 

When it comes to inventory management, timing is everything. This is especially true when using transaction date-based costing techniques, such as First In, First Out (LIFO), and First In First Out (FIFO). If you do periodic statistics, you will also require transactions to be posted on time. Inventory costs are kept as accurate as possible by recording transactions on time. 

When selling items to consumers or fulfilling orders for production and assembly, you'll also want exact quantities. When you don't keep up to date with modern methods, such figures will no longer be accurate. If you don't post in a timely manner, you run the risk of not having enough customers to sell, resulting in inventory build-up. 

Your company can manage inventory in real-time thanks to inventory management software. 

 Inventory transactions

Internal checks and balances

Using an inventory management system with the appropriate user rights can provide you with the internal controls needed to keep your business running correctly. This allows you to do things like preventing specific users from accessing product cost information. Perhaps you don't want all users to post specific transactions. Internal controls, such as permissions, also play a role in this.

 Internal check

Precise with third-party integrations

Electronic data interchange (EDI) and web store services are two aspects that your company may employ or plan to utilize as it grows. As a result, it is critical to evaluate the connection of your inventory management system with the solutions your company will require. Some systems interact with EDI providers directly, while others integrate with online store platforms. You should ensure that the inventory control system you choose is compatible with each "piece of the jigsaw." Integration is critical for maintaining open lines of communication and ensuring accuracy while obtaining inventory.

👉 Read More: Barcode Inventory System: Its Benefits & How To Use It 


Knowing how to manage inventory effectively is important for any business owner because it has a direct impact on the entire operating process of the company from revenue to employee working time. You've found this article so helpful? Let's forget to follow our Fanpage and Efex to get many more interesting articles!

Ngoc LeeNgoc Lee is an Content Creator Manager at EFEX. She wields her long-term expertise in Logistics and Supply Chain, harnessing her top-notch writing and research skills to bring incredibly valuable content. Whether you're a small startup or a well-established enterprise, Ngoc Lee is here to equip you with the essential knowledge of e-commerce, fulfillment, and all things business-related.