Inventory management is the process of tracking and controlling the flow of company inventory: from purchasing and storing to selling. This includes raw materials, components and parts, and finished goods, all tracked from initial purchase through final sale. The goal? Keeping the right amount of stock on hand, in the right place, to consistently meet customer demand.
Insufficient inventory management and increased inventory distortion cause $1.1 trillion in loss worldwide every year. Despite this staggering statistic, inaccurate supply chain and inventory levels and inadequate inventory tracking are near-universal problems for small and large businesses alike.
Proper stock control is crucial for sourcing, storing, and selling goods at the right cost and price. Failing to prioritize inventory organization can be detrimental to the success of any business — no matter its reputation, name, or size.
This guide unpacks inventory management, why it’s important, and the essential steps for optimizing and managing inventory.
Inventory management is the holistic process of sourcing, storing, and selling inventory. It covers tracking goods during manufacturing and sourcing until the final product is in the customer's hands.
Inventory turnover ratio measures the rate at which goods are purchased, used, and sold and is a primary KPI for overall supply chain management.
Successful inventory management benefits companies by enhancing planning and forecasting, improving delivery times, controlling inventory costs, boosting efficiency, and strengthening trust.
Common inventory management challenges are inventory shrinkage, deadstock, out-of-stock inventory, demand changes, and poor use of warehouse space.
Inventory management is the process of controlling inventory at every lifecycle stage, from sourcing to storing to selling. This term also covers the theories, processes, and tools used to move goods from one stage to another. The core purpose of this process is to ensure you have the right amount of stock on hand at the right time and cost.
When it's done well, you reduce stockout risks that disappoint customers. You also avoid overstocking, which ties up capital and cuts into profits. It also helps your business stay agile when demand fluctuates, supply chains hit snags, or other unexpected challenges pop up.
Inventory management is important because it directly connects to your ability to meet customer demand, manage cash flow, and grow profitably. At its core, it's a balancing act. Your finance team wants to minimize capital tied up in unsold stock. Your sales team needs guaranteed product availability to keep customers happy. Without a system to manage that tension, things fall apart fast.
Satisfied customers and market demand depend on accurate inventory counts and organization. Businesses use many metrics — including inventory turnover ratio — to measure how well their inventory management systems are performing. And if your inventory isn't managed properly, storage, manufacturing, and shipping costs can quickly spiral out of control.
There are three main types of inventory: raw materials, work-in-progress goods, and finished goods. However, further classifications can clarify the status of a product at any time.
It's worth noting that for most businesses, inventory represents their primary source of revenue. On your balance sheet, it's recorded as a current asset, and its value reflects the cost to acquire or produce those goods. That's why understanding each type of inventory matters. It's not just about what's in the warehouse, it's about what's on your books.
The nine most common types of inventory in inventory management are listed in the table below.
| Inventory types | |
|---|---|
| Raw materials | Materials or purchased parts that make up finished products |
| Work-in-process (WIP) goods | Partially completed goods in the process of becoming finished goods |
| Finished goods | An industry or company’s completed product that is ready to be sold |
| Transit inventory | Inventory, also known as pipeline inventory, that is in transit from the manufacturer’s place to the retailer or wholesaler shop |
| Safety stock | Extra inventory that can mitigate customer service problems, backorders, stockouts, unexpected costs, and uncertainties in demand, lead time, and supply variations |
| Anticipation inventory | Additional stock designed to protect a company from unprecedented consumer demand during a certain period |
| Decoupling inventory | Extra raw materials or WIP goods that are set aside to avoid production interruptions |
| Cycle inventory | The portion of total inventory that is constantly turned over and replaced with new stock; it’s also considered the minimum stock needed to maintain quotas |
| MRO (maintenance, repair, and operation) inventory | The products that support the production process of the finished goods, such as lubricants, screws and ball bearings, gloves, and packing materials |
Having the right products available at the right time in the right quantities to meet customer needs is the key to achieving a company’s objectives. Inventory management and control help do just that, which also curbs profit loss and helps businesses thrive.
Additionally, stock management for small businesses and large businesses produce other benefits, including:
Knowing the benefits of good stock control is one thing. Putting them into practice is another. Here are some best practices that'll help you get the most out of your operations:
Stick with these, and you'll have much tighter control over your stock and a smoother operation from end to end.
With so many moving parts, it’s no surprise that inventory management also has its challenges. Some of the most common challenges include:
Despite these challenges, it’s possible to minimize or even solve many inventory management roadblocks with proper organizational systems. Consider implementing the following solutions to common challenges so you can prevent issues — and meet them head-on.
Your suppliers aren't just vendors; they're partners. And the stronger those partnerships are, the better your inventory management gets.
When you've built solid relationships with your suppliers, you're in a much better position to negotiate favorable terms on order quantities and delivery schedules. That means your inventory levels stay more closely aligned with actual demand, and you're not overspending on stock you don't need.
Close supplier partnerships can also shorten lead times and improve the accuracy of your stock predictions — which makes your whole supply chain more responsive. When the market shifts or customer preferences change, you can adjust quickly instead of scrambling. The result? Fewer disruptions, better returns on your inventory investments, and customers who keep coming back.
Managing inventory may not be the most glamorous part of running a business, but it’s crucial, to say the least. Many businesses manage stock levels and product movement in spreadsheets, even as companies outgrow manual tools.
While it may come as a surprise, you’re likely not cutting any costs by manually tracking inventory on spreadsheets. Between time loss and human error, your business might be ready to move on, requiring you to invest in solutions that enable real growth.
No matter your current stock control process, inventory management software is a critical investment. It simplifies product and material tracking, giving you more control over your business.
At its simplest, an inventory management process works by answering three questions in real time: Where are your items right now? Where are they headed? And when do you need more?
With an automated, all-in-one system like Cin7 Core or Cin7 Omni, you get real-time visibility into your inventory. This helps you improve your supply chain, keep customers happy, and minimize inventory loss.
These systems handle inventory-related tasks across various inventory management methods with ease. With convenient back-end management across multiple channels, locations, and currencies, inventory management systems can automate the entire e-commerce operations process.
Selecting an inventory management method isn’t one-size-fits-all — you’ll need to pick the method that suits your business best. There are various ways to manage inventory. Choose the best inventory management technique for your goals:
An inventory control system refers to the physical and digital processes and tools businesses use to track and record inventory. It also analyzes inventory movements and sales performance across the supply chain.
Modern systems go well beyond simple stock counts. They combine data-driven models with your business rules to align suppliers, lead times, and market fluctuations with your goals.
It's no wonder more companies are investing in them. According to Grand View Research, the inventory management software market is projected to reach $7.14 billion by 2033, up from $3.58 billion in 2024.
The best inventory management software tools provide visibility into stock levels, connections to additional sales channels, and reorder processes. These tools automatically track your inventory levels and streamline key activities. These include procurement, production, reporting, forecasting, selling, and order fulfillment.
Pro tip: Your business can leverage Cin7 Core and Cin7 Omni to efficiently perform inventory management tasks and support supply chain resilience.
Effective inventory handling is a crucial success factor that touches all other elements of your business, from the customer experience to your finances. To better understand its impact, let’s unpack the effects of effective inventory management:
Inefficient inventory management ties your business’s hands when it comes to growth. Slow, manual processes can quickly consume your team’s time and lead to errors that push customers away, while streamlined and automatic processes can increase efficiency, trust, and revenue.
If you want to set yourself up to scale your business, you need to think beyond the basics of stock control. Automated inventory management gives you a strategic advantage by leveraging automation, visibility, and data-based insights, along with additional benefits, including:
Pro tip: Access real-time inventory levels across all sales channels with Cin7 Core and Omni. This includes stock levels for e-commerce platforms like Shopify and Amazon.
In-depth sales reports track stock movements so you always know where your products are. Fully customized features like native EDI and third-party logistics (3PL) integrations support growing businesses.
The benefits of an automated inventory management system won’t do you any good if its features aren’t up to par. Keep an eye out for the following features that support connected inventory performance:
You now understand the importance of inventory management, but where do you even start? Here are a few tips and best practices for stock control to remember as you revitalize your processes.
Inventory is often stocked based on average demand. But a rush of sales could leave you out of stock before you can replenish. Keep safety stocks to mitigate stockouts when there is a high variation in demand and supply.
Merchandise planning, or the strategic stocking, managing, purchasing, displaying, and pricing of products, can increase ROI and decrease inventory costs by:
The bread and butter of inventory management is tracking products at all times. You should be able to track a single item from when you order raw materials until the finished goods are in customers’ hands. Create a tracking system for each step by identifying responsible parties, selecting a tracking method, and training employees.
It’s been said before — manually tracking inventory is a process that you’ll likely outgrow fast. As your business expands, a more robust system is needed. Replacing manual management with connected inventory performance and systems allows automation and integrations to drive visibility, traceability, and efficiency throughout the inventory lifecycle.
It also offers solutions for understanding real-time insights and analytics on stock levels, sales trends, and more. Plus, cloud-based technologies connect point-of-sale bases that automatically update inventory levels after transactions and shipments. These systems also allow businesses to set up alerts for low inventory to avoid high-demand stockouts.
Though inventory management software offers endless benefits, you should still periodically count your inventory levels to ensure your stock reflects the software’s levels. Depending on your stock size, it may be best to schedule a thorough inventory review annually, biannually, or even quarterly.
Regular audits paired with systematic spot-checking may catch unexpected inventory shrinkage, improperly stored items, and more.
If you've made it this far, you know that good inventory management isn't optional — it's the backbone of a healthy, growing business. But you don't have to tackle it alone. Whether you need POS and e-commerce integrations, streamlined fulfillment support, or real-time visibility across every channel, you need a system that actually delivers.
With two cloud-based solutions, Core and Omni, Cin7 was named the best overall inventory management software provider of 2023 by Forbes. Built to meet the inventory demands of small and mid-size businesses, these tools provide unprecedented insights into your inventory processes. They also support native EDI and 3PL connections for growing operations.
Ready to manage your inventory more efficiently? Start your free trial today.
Still have inventory management questions? We answer some of your most frequently asked questions below.
Inventory management is how you track, organize, and control every item your business buys, stores, and sells. It covers everything from sourcing raw materials to shipping finished goods to customers. The goal? Having the right products, in the right amounts, at the right time..
The four main types of inventory refer to raw materials, work-in-process inventory, MRO inventory, and finished goods.
You can reduce inventory costs by investing in an automated inventory management system, centralizing stock, setting reorder points, eliminating deadstock, and avoiding overstocking.
The 80/20 inventory rule, also known as the Pareto Principle, states that roughly 20% of your product range typically drives 80% of your sales. Outside of inventory, it suggests that 20% of customers drive 80% of profits.
So what does that mean for you? Focus your attention (and your reorder budgets) on that top 20%. Those are the products you can't afford to run out of.
You can use Excel for inventory management, but most businesses outgrow this solution very quickly. Tracking inventory through spreadsheets is a manual, time-consuming process. There’s a greater chance of human error and security breaches when relying on Excel spreadsheets for inventory management.
Good stock control helps you solve problems related to inefficient inventory handling. These can include difficulty scaling your business, costly manual errors, over- or understocking, and excess data capture.
Because manual tracking is a full-time job that still makes mistakes. Inventory management software automates the repetitive stuff — reorders, stock counts, sales tracking — so your team can focus on growing the business instead of chasing spreadsheets. It also connects with tools you already use, like your e-commerce platform, POS, and accounting software, so everything stays in sync without the headaches.
Red flags that your stock control needs attention include rising carrying costs, frequent stockouts, and growing deadstock. Also watch for increasing customer complaints about fulfillment and a declining inventory turnover ratio.
If you're spotting any of these, your current processes or tools aren't keeping up. It might be time to invest in a more robust inventory management system.
The four main types of inventory management are just-in-time (JIT), materials requirement planning (MRP), economic order quantity (EOQ), and days' sales of inventory (DSI). Here's a quick breakdown:
Not sure which method fits your business? Check out our inventory management techniques guide to find the right match.
Yes, inventory management combines analytical thinking, attention to detail, and understanding of supply chains and customer demand. The right inventory management system automates reorders, flags low stock, and generates reports so your team can focus on strategic decisions rather than manual tracking.