How to Improve Inventory Management: The Best 8 Ways

Improve Inventory Management

The process of organizing, planning, controlling, and optimizing your inventory, while ensuring a constant flow of goods from supplier to warehouse, and then to the customer, is called inventory management. Any business dealing in physical goods simply cannot succeed without managing its inventory effectively. Good inventory management is what sets your business apart from your competitors, while simultaneously increasing your profits and the satisfaction of your customers. These advantages also come with some challenges when it comes to balancing demand with supply, quality, costs, and risks. In this article, we will explore the 8 best ways for your business to improve its inventory management. We will cover the benefits of utilizing technology, stock management, and SKU management. We will delve into analysis and planning, how best to handle unsold inventory, and the benefits of communication and supply chain management. Lastly, you will learn more about the specific rules and practices you should follow, as well as how to integrate technology into your existing systems.

1. Technology Utilization

Leveraging the power of technology is arguably the best way to improve inventory management. One of its many benefits is the automating process. Barcode scanning, the entering of huge amounts of data, and inventory counting are tedious, time-consuming tasks. Technology can automate these tasks, reducing human error whilst additionally saving you time and increasing efficiency. Another benefit is improving inventory tracking accuracy. Inventory losses, discrepancies, and theft can be reduced by increasing the visibility and traceability of your inventory. Technology makes this possible by giving you real-time, accurate locations and statuses on your inventory. A third benefit is that it facilitates real-time data analysis. The insight technology gives you into your inventory performance through timely data and makes it possible to make informed decisions on how best to optimize inventory management.

Living in the digital age that we are, with so many benefits that have arisen from the use of technology in the business space, why not refresh some of the different types of inventory management technology available? There are dedicated software applications that specialize in inventory management. Some of their features include inventory forecasting, replenishment, and reporting, which help optimize your inventory operations. They are designed to easily integrate with your existing accounting, purchasing, and sales systems. Another type of technology is mobile applications, which are software programs designed to run on smartphones and tablets. This is hugely convenient as it allows you to update and access inventory information as and when you need to, with features such as barcode scanning, GPS, and RFID. A third type of technology is Cloud-based solutions. These are internet-hosted software programs, which give you the flexibility to access and manage your inventory from any device and location, with no need for installation or maintenance. Technology has transformed the way inventory is managed. Amazon is a prime example of how advanced technology makes it possible to manage a huge and complex inventory.

2. Stock Management

Managing your stock levels optimally is an excellent way to improve inventory management. The main function of stock management is to ensure you have just enough stock on hand to meet customer demand, without increasing inventory costs by having too much stock. Firstly, one should always look at increasing product availability. Stockouts can lead to lost sales and unhappy customers, which will ultimately damage the reputation of your business. Stock management helps avoid stockouts by ensuring there is always enough inventory available to fulfill customer orders. This could also be looked at inversely. Stocking excess inventory results in a waste of precious warehouse space and increased costs, while also increasing the risk of damage or theft. Stock management helps avoid overstocking. Inventory is most often the area of a business that incurs many additional costs. Employing effective stock management techniques will aid in the optimization of inventory turnover, increasing the rate at which inventory gets sold and improving your overall profits and cash flow.

There are various methods and techniques one can employ when looking to better their stock management strategies. Firstly, let us look at calculating minimum stock levels. Factors such as lead time, safety stock, and demand are used to calculate the optimal amount of individual inventory items needed to meet customer demand while avoiding stockouts. Next, we have ‘calculating safety stock.’ Safety stock is calculated based on demand and supply variability and is the buffer stock kept in case of unexpected demand increases, or supply delays. Furthermore, one should never underestimate the importance of balancing product availability with inventory carrying costs. There is a delicate balance between having enough products available to meet demand and the cost of holding and maintaining the extra inventory. A business has to trade-off between the two because a higher inventory level means increased carrying costs. An optimal level can be determined based on customer expectations, product characteristics, and business objectives.

Using techniques such as Just-In-Time (JIT) and reorder points further aid in inventory management improvement and optimization. The aim of JIT is to avoid stocking large amounts of inventory, and rather order and receive inventory only as and when it is needed. Reorder point is a technique that uses minimum stock levels, lead time, and current inventory levels to determine the optimal time to order any particular product. Both of these techniques help keep inventory carrying costs to a minimum while avoiding stock outs, and improving cash flow. According to a report by IHL Group, retailers worldwide lose $1.75 trillion per year due to stockouts, overstocking, and returns. This shows just how vital stock management is when it comes to inventory management and the financial health of a business. Zara is a great example of a company that successfully uses a sophisticated stock management system which cuts production and delivery time to its stores to just two weeks, giving it a competitive edge in a fast-paced industry.

3. SKU Management

The effective management of SKUs (stock-keeping units) is important when it comes to improving your inventory management. SKUs are unique identifiers that are assigned to each product variant, such as color, model, size, or style. SKU management involves differentiating management strategies for various SKUs based on their performance and characteristics. SKU management can benefit your inventory management in several ways. It can increase operational efficiency by making your inventory mix less diverse, thereby streamlining your ordering, packing, shipping, etc. It can also aid in reducing costs by helping you eliminate low-performing SKUs, which saves on storage and obsolescence costs. This enables you to allocate resources to better-performing SKUs, saving you on opportunity costs. Another benefit is enhanced customer satisfaction. SKU management helps you focus on your more profitable SKUs, which can improve product quality and availability. This increases customer loyalty and satisfaction.

There are various techniques and methods that one can utilize for SKU management. Categorizing SKUs is the sorting of SKUs into different categories based on value, demand, and reorder frequency. A common categorizing method is the ABC analysis. This method divides SKUs into three categories, A (high demand, high frequency, and high value), B (medium demand, frequency, and value), and C (low demand, frequency, and value). The inventory management of each category differs in their order quantity, safety stock, and service level, with the most focus and resources being on category A. Another method is applying specific inventory management policies. Inventory management policies can differ for each SKU category. Category A SKUs policy would include a high service level and frequent replenishment, ensuring those products are readily available while minimizing inventory costs. Category B SKUs policy would have a more moderate service level, and safety stock, with periodic replenishment, to balance the availability of products and inventory costs. Category C SKUs would have the lowest service level, high safety stock, and infrequent replenishment, thereby reducing the frequency of ordering and reducing the risk of stockouts. A third method is reviewing and updating SKU categories and policies. As market conditions, business goals, and customer preferences change, it is necessary to regularly review and update SKU categories. This aligns SKU management with current inventory performance and with future inventory objectives.

SKU management is a crucial part of inventory management, and it is what makes it possible for companies such as Walmart to offer a wide variety of products at the lowest possible prices while maintaining high inventory accuracy and efficiency. In fact, it is so effective that a study by McKinsey & Company found that SKU rationalization could reduce inventory costs by 10 to 30%, and increase sales by as much as 5 to 15%.

4. Analysis and Planning

Analysis and planning involve making strategic decisions based on large amounts of interpreted data. Analysis and planning can benefit inventory management in several ways. It can identify improvement areas by highlighting strengths and weaknesses in your inventory management. By knowing what your inventory turnover, accuracy, and costs are, you are able to identify areas that need to be improved and optimized. It also benefits inventory management by anticipating and preventing future issues. Potential inventory problems, such as supply disruptions and demand fluctuations, can be avoided with accurate analysis and planning. This will improve the resilience and reliability of your inventory. Analysis and planning can also help by aligning business goals. When inventory management is aligned with overall business visions it can help you achieve goals such as market expansion, revenue growth, customer retention, etc.

Your best suppliers are the ones who deliver products and services of better quality, cost, and quantity in the most timely manner. These are the suppliers that your company should want to negotiate better terms and conditions with, as a good supplier can help you improve the availability, quantity, and cost-effectiveness of your products. It is important to identify any discrepancies or errors in your inventory as soon as possible, as this gives you time to solve any issues before they affect your supply. This can be achieved through the conducting of regular inventory audits. Regularly verifying your physical inventory with your inventory records will help improve your inventory accuracy, visibility, and accountability. Furthermore, seasonality, innovation, and fashion have a significant effect on market trends and customer demand. It is important to take this into account when planning, as knowledge and awareness of market trends and demand changes act as a contingency plan, allowing you to adjust your inventory accordingly. A more relevant and responsive inventory enables you to meet customer demand and increase profitability.

A report by Aberdeen Group found that the top companies in their class are 2.5 times more likely to make use of optimization tools when planning and managing their inventory. Toyota is one of these top-class companies that makes use of sophisticated analysis and planning systems, allowing them to adapt their inventory to still meet customer needs during changing market conditions, while still maintaining a high inventory efficiency and quality. Improved inventory management could help make your company top class too.

5. Handling Unsold Inventory

Inventory remaining unsold in your warehouse for an extended period of time will negatively impact your inventory management. Handling this unsold inventory effectively is essential to the financial health of your company. There are several ways this inventory can impact your business. Increasing inventory carrying costs, reducing inventory turnover, and damaging the overall brand image. However, this does not necessarily leave your business at a disadvantage, as there are some important strategies you can use to manage any unsold inventory. Let us look at 3 methods of attack for handling unsold inventory:

  1. Offering discounts or promotional sales: A sure way to attract customers and clear out unsold inventory is by offering good discounts, such as clearance sales or coupons.
  2. Liquidating or donating the inventory: Donating or liquidating unsold inventory not only recovers some value and clears warehouse space, but it also has tax benefits. It is good for the image of your business, while also helping people in need.
  3. Preventing inventory accumulation: Prevention is always the best cure. Making use of techniques such as demand forecasting and SKU rationalization can prevent you from overstocking or understocking so that inventory won’t accumulate.

A report by Coresight Research showed that retailers in the US returned or liquidated about $100 billion worth of unsold inventory in 2019, which represents about 10% of their total sales. H&M is an excellent example of how inventory management can improve inventory performance. They use a smart system that effectively analyzes customer feedback and sales data, allowing them to adjust their prices and inventory levels regularly, and reduce their unsold inventory.

Read our case study on how to keep a lean inventory in a growing business.

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6. Communication and Supply Chain Management

Enhanced communication within and outside your company is an excellent mechanism one can use to improve inventory management. Effective communication throughout your supply chain management ensures a smooth flow of information, aligning everyone’s objectives.  There are many benefits one can enjoy by improving communication and supply chain management. Response time, as well as how you respond is the first step to achieving improved communications. Good communication enables everyone in the supply chain to respond to any issues or requests much faster and improves collaboration and problem-solving. A quicker response means shorter lead and delivery times. Additionally, improved communication and supply chain management helps the entire supply chain to know exactly what the inventory status is at all times. Knowing the supply and demand status helps prevent stockouts and excess stock, ensuring inventory reliability. Inventory operations are far more efficient as communication and supply chain management integrates inventory planning, and enables optimal execution and control. An added benefit is increased inventory productivity and improved quality.

Let us break down the various methods and techniques for utilizing communication and supply chain management that your company can benefit from into more digestible chunks.

  1. Using technology to facilitate communication and information sharing: Communication has never been easier thanks to emails, phones, video conferences, etc. These all make it possible to share information, documents, and data securely and quickly.
  2. Establishing clear and consistent communication standards and protocols: It can be easy to misunderstand the tone or intention of a quick message or email. Having standards and protocols in place guiding everyone on how and when to communicate, can help avoid any conflict and communication gaps.
  3. Building trust and transparency with the inventory stakeholders: Mutual understanding and respect among inventory stakeholders can be gained by building trust and being transparent. Some ways to do this are through open information sharing, honoring commitments, and giving recognition when it is due.

Dell is an example of how vital communication and supply chain management is. They use a direct-to-customer model which makes it possible for them to interact directly with their customers. It enables them to customize and deliver their products faster and cheaper. A report by EY says that 83% of supply chain leaders have experienced improved performance by improving collaboration across their supply chains.

7. Specific Rules and Practices

What better way to learn how to improve inventory management than by learning from the experts themselves? These rules and practices have come from inventory experts who have a wealth of experience and wisdom to share. Firstly, there is the 80/20 inventory rule. Also known as the Pareto principle, this rule states that 80% of the inventory value should be represented by 20% of the inventory items. With a small amount of items accounting for the largest portion of your inventory value, you are able to focus most of your resources and efforts on those items. Secondly, there is consistent stock reception. By consistently inspecting, recording, and updating inventory as it is received from the suppliers, you are able to ensure that the inventory received is the correct quantity, quality, and condition. This keeps your inventory records up-to-date and accurate. Thirdly there is complete product information tracking. SKUs, serial numbers, expiration dates, barcodes, batch numbers, and locations are all ways to track and record your product attributes and relevant information. This enables you to locate, identify, and control each product with ease and accuracy.

IKEA is a highly successful example of how following these rules and practices can improve inventory management. They make use of complete product tracking systems and consistent stock reception, which enables them to efficiently manage their large and diverse inventory. A study by the University of Arkansas found that implementing the 80/20 rule could reduce inventory costs by as much as 10% while increasing turnover by 25%.

8. Technological Integration

Beginning and ending with technology, the final way in which you can improve inventory management is by using inventory management tools such as ERP (enterprise resource planning), e-commerce platforms, and CRM (customer relationship management). These tools integrate easily with existing systems and connect all the data and processes together to form one seamless system. Let’s look at some of the many ways in which inventory management can benefit from technical integration. Offering a holistic view of business activities: There are many aspects of inventory management, such as sales, purchases, customer service, etc. Technological integration makes it possible to get a comprehensive picture of all these aspects at once. This holistic view enables you to manage and monitor every aspect of your business more efficiently and effectively. Improving decision-making: With the accurate and timely data that technological integration provides, it gives you the insight needed to make better, evidence-based decisions. Increasing overall productivity: Automated systems streamline the inventory processes, saving time and resources, while reducing errors. Together, this increases the quality and output of your business.

These are some of the types of inventory management tools available that can integrate well with other systems.  ERP systems: This software system optimizes business operations by integrating and managing core business processes, such as sales, accounting, inventory, production, etc. It consolidates all the aspects of a business into one accurate picture. CRM systems: This software system anticipates every need and preference a customer may have, and enhances the customer relationship with tailor-made marketing, service, and support. It then aligns inventory and business strategies accordingly. E-commerce platforms: These online platforms expand your market to reach far more customers, allowing them to buy online with ease. They can also synchronize the inventory with the online sales.

A perfect example of how vital technological integration is to a business is Shopify. Without e-commerce, this hugely successful business would not exist. Their e-commerce platform integrates with various inventory management tools, such as QuickBooks and TradeGecko. A report by Oracle states that 81% of companies’ inventory has improved with the implementation of ERP systems.

Intuendi is a demand planning software with mature integration with all of these systems. Check out our integrations:


Written by
 Tanique Allers
Content Marketing Specialist

A young South African with a passion for writing, social media management, and content creation. I graduated with a Bachelor of Arts in Film and Television majoring in Producing and a Bachelor of Arts Honours Degree in Political Communication. You'll be able to find me in 3 places: behind a laptop, behind a camera, or behind a makeup brush - creating in my favourite ways.

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