Editor’s Note
This article provides a foundational overview of inventory management, explaining its core purpose of overseeing goods flow to balance product availability with cost control.
Inventory management is overseeing and controlling the flow of goods within a business. It involves tracking the movement of goods and materials, monitoring inventory turnover, and optimizing replenishment to ensure products are always available. Inventory management aims to minimize the cost of holding inventory by helping you know when it’s time to replenish products or buy more materials to manufacture them.
Raw goods: Materials or substances used in the production or manufacturing of products. Raw materials include wood, metals, plastics, or fabrics used to create finished goods. They come from one or more suppliers and producers.
Work-in-progress (WIP): A partially finished product awaiting completion. WIP represents production costs such as labor and machinery. Costs are transferred to the finished goods account and attributed to the cost of sales.
Finished goods: This type of inventory refers to the number of products in stock available for customers to buy. Once a WIP is complete, it becomes part of the finished goods inventory.
Maintenance, repair, and operations goods (MRO): Materials and equipment used in the production process but not as part of the final product. These include personal protective equipment, cleaning supplies, office supplies, and tech equipment.
Most of today’s inventory management systems are digital and cloud-hosted. They work across devices and users to ensure that everybody interacting with the supply chain is on the same page. While traditional approaches require connecting multiple systems, modern solutions take a different approach. The most effective platforms handle inventory as part of a single retail operating system, where all data naturally flows between online and in-store operations. This unified commerce strategy eliminates the complexity of maintaining separate systems for different sales channels. Stock levels update automatically whenever a sale happens, whether online or in-store, preventing overselling and improving operational efficiency.
Using unified inventory management can save significant time, as shown by Oak + Fort, which reduced staff time by 50 hours per week by simplifying its order management process. After unifying their retail operations, they reduced operating costs by 47%. Plus, with a unified system, you’ll avoid the headache of maintaining separate systems for online and in-store inventory, helping reduce operating costs while ensuring customers can always find what they’re looking for.
Whether you’re a small business or company using enterprise resource planning (ERP), inventory management is important for several reasons:
Improve efficiency: Keep only the inventory you need to cut storage costs. Track how products move from purchase to sale to find and fix inefficiencies. Use methods like just-in-time (JIT) delivery and first in, first out (FIFO) to keep products moving smoothly.
Improve financial reporting: Good inventory records help predict what customers will buy. You can make smarter purchasing decisions and spot trends early by tracking sales patterns. Inventory directly affects sales (by dictating how much you can sell) and expenses (by dictating what you need to buy). Both of these elements factor heavily into your business’s current assets—how much cash you have on hand. This improves financial reports and helps manage cash flow.
Mitigate risk: Good inventory planning protects your business from supply chain problems. You can set up your system to track sales parts and stock levels so you can reorder before running out. Keeping safety stock also helps handle unexpected demand surges.
Economic Order Quantity (EOQ): Economic order quantity (EOQ) helps you determine exactly how much inventory to order each time. Order too much, and you waste money on storage and risk items going bad. Ordering too little will cause unhappy customers and more spending on rush shipping.
Seasonal Planning: If you’re planning seasonal marketing campaigns—for example, a Black Friday sale—make sure your inventory levels can support a sudden surge in demand. You might also create bundles or special holiday packaging that need their own stock considerations.