Inventory management is the management of inventory and stock.

As an element
of supply chain management, inventory management includes aspects such as
controlling and overseeing ordering inventory, storage of inventory, and
controlling the amount of product for sale.

The definition of Inventory Management is easy to understand. Simply put,

inventory management is all about having the right inventory at the right
quantity, in the right place, at the right time, and at the right cost. But how do
you implement the best inventory management techniques to ensure the best
results? Read on to find out our insights for inventory management best
practices.

1. How do I calculate the “right amount” of inventory to stock?

Stocking the right amount of inventory is crucial. If you order too little, your
customers will start looking elsewhere. If you order too much, there’s a chance
you’ll be stuck with lots of extra stock that you’ll be forced to sell at clearance
prices, or risk having them become obsolete.

In a poll by GetApp, business owners were asked how they decided when to
reorder inventory. A resounding 46% of them decided based on information
from previous months. If you’re part of that 46%, you want to make sure you’ve
got the right inventory data - which means looking for a solution that’ll
automatically track your inventory movements as much as possible.

In fact, even if you chose to use inventory forecasting software (15%) or Excel
formulas (13%), you’re still going to need information from the previous months.
(If you’re wondering about the remaining 26%, they selected “Other” - we’re
still betting information from previous month’s factor in somewhere though!)

2. How do I determine the “right price” for my inventory?

You don’t want to pay more for your products than you have to, but lower prices
aren’t always better. Suppliers often promise price quantity breaks - you just
need to order 20% more stock to save 10% - and you may find yourself digging
into your savings to make this purchase.

But is that the best choice for your business? After all, purchasing stock is only
the beginning. There’s a whole host of carrying costs attached to your products.
The more stock you have on hand, the more you’ll have to spend on storage
facilities, while increasing your risk of having products going out-of-date. This is
where the Economic Order Quantity (EOQ) formula comes in.

Economic Order Quantity is a formula that calculates the number of units your
business should be adding to inventory order. This question is aimed at reducing
the total costs of inventory management – including factors like order costs,
holding costs, and shortage costs.

Economic order quantity formula

We know it can be challenging to do all the calculations manually, so to help you

out, we've built an EOQ calculator.

EOQ Calculator Excel Download

3. How do I know the reorder point for new inventory?

Knowing your EOQ lets you know the inventory level you want to maintain, but
how do you decide when it’s time to place a new order? Of course, you want your
shipment to arrive just in time… ideally when your previous batch is about to sell
out. If it arrives too early, you’ll be looking for space to store these items. And if
it arrives too late, well, you’ll be forced to announce that you’re out of stock.
Opening backorders offers a way to deal with out-of-stock situations, but there’s
a chance your customers will prefer looking elsewhere to find the products that
they want. So, you always want to make sure you’ve got stock on hand, which is
where your reorder point comes into play.

When it comes to calculating your reorder point, you need to account for:

The time it takes to get your items picked

The time it takes to get your items packed

The time it takes to get your items to be shipped (lead time)

Reorder point formula

Head here to use our Reorder Point Calculator

But wait. What is safety stock and why is it important? Safety stock is the
emergency stock you need to endure unexpected occurrences - like seasonal acts
of nature like blizzards and typhoons. And if you’re curious about how to
calculate your safety stock, we’ve included this easy formula.

Safety Stock Calculation

This safety stock formula aims to cover the difference between extreme situations
and the everyday - which should be enough to keep you safe.

4. How do I figure out the right place to sell and distribute my inventory?

Do you sell on multiple channels? If you do, ensuring you’ve got the right amount
of products in the right place is probably a challenge you face constantly.
The great thing about selling products online is that you’re fulfilling all orders
from the same pool of stock. So, you don’t have to think too much about how
many items you want to allocate to individual sales channels.

But this can come with a whole different host of problems: If your online
inventory shows five items available, you want all five ready for sale in your
warehouse - not traveling the country in a mobile shop or lying idle in your
consignment store at the opposite end of the country.

5. What is the best tool for optimal inventory management?

To prevent situations like the above from occurring, consider an inventory

management system that tracks inventory movement across all your sales
channels in real time. Many small businesses will try to manage their inventory
through excel spreadsheet and formulas. However, once your business starts to
grow, relying on Excel spreadsheets for inventory management becomes
extremely limited.

An inventory management system that updates your stock movements across all
channels will significantly reduce your risk of overselling – and that’s what we’re
aiming for.

One recurring theme to good inventory management highlighted above is the

need to track inventory movement constantly, instead of doing it periodically.
Automation is one of the biggest advantages of making the move to inventory
management software - you won’t have to worry about missing reorder points or
overselling by accident.

By automating the inventory management process as much as possible, you’ll be

able to reduce the likelihood of human error. Once you take the plunge and make
the move to inventory management software, you’ll have more time on your
hands, giving you more time to focus on what’s really important - growing your
business.

The best place to start is a free trial of inventory management software. Try out
TradeGecko - add your products or connect TradeGecko to your sales channels
to automate inventory management instantly!

GetApp: Inventory management apps save small businesses more than five hours
a week

Need a Smarter Way to Manage Your Inventory?