Inventory management process: 5 essential steps

Andy Foot
21 november 2023
An efficient inventory management process should cover: Planning & forecasting, purchasing & ordering, receiving, storing, & packing, inventory tracking, and, lastly order fulfillment.

Inventory is at the core of any successful business, ensuring an appropriate balance between supply and demand. The inventory management process encompasses five essential steps that, when implemented effectively, result in seamless operations and customer satisfaction.

Every dollar counts for online retail sales, where competition is intense, and profit margins can be slim. Unfortunately, businesses often face challenges related to poor inventory management, threatening their profits over time.

Inventory practices that fail can have far-reaching repercussions that go far beyond inconvenience; they can result in considerable financial losses that threaten the profitability of a business.

This article will look at five essential steps that make up the inventory management process.

What is an inventory management process? 

Inventory management is the systematic practice of overseeing and controlling a company's stock. It involves everything from ordering products, storing them safely, tracking customer orders, fulfilling them as quickly as possible, minimizing excess inventory, and preventing stockouts.

Reports reveal that 34% of businesses have experienced situations in which they sold an unavailable item from their inventory, creating overstock or understock issues for themselves and affecting profitability. Companies that implement an efficient inventory management process can avoid such problems through more effective planning of inventory levels.

Imagine running an online retail store selling various products. Without proper inventory management, such a store could encounter multiple issues, including stockouts when popular items run out, resulting in lost sales and customer discontentment.

Maintaining excess inventory ties up valuable capital increases holding costs, and risks exposing retail stores to losses from expired or obsolete products. 

Therefore, adopting an effective inventory management process becomes vital to navigate these hurdles and optimize storage space efficiently. 

The five essential steps of the inventory management process

Navigating inventory management requires taking five essential steps. Think of these tasks as basic must-do tasks for keeping things on track. 

In this section, we'll explore these steps and their connection to one another as they keep your business on track.

1. Inventory planning and forecasting

At the outset of their inventory management activities, businesses thoroughly research market trends and historical data to accurately predict future demand, providing a solid basis for strategic decision-making. 

The process involves making informed choices regarding stock levels to guarantee timely and sufficient product deliveries to satisfy customer demands. Precision in demand forecasting becomes vital, safeguarding against overstocking - which ties up capital - and stockouts, potentially leading to customer dissatisfaction. 

Ecommerce businesses should utilize advanced forecasting tools and data analytics to develop an agile supply chain that responds efficiently in a customer service-driven environment.

2. Purchasing and ordering process

The purchasing and ordering process begins once you've determined what's in demand. This phase involves getting products from suppliers and handling the entire order journey. 

For ecommerce, particularly vital for those reselling products, nailing down efficient purchasing practices is the key to keeping profit margins robust. To optimize your purchasing and ordering process in ecommerce, focus on building strategic ties with suppliers and setting up efficient procurement systems. 

For example, according to a BCI Report, over 20% of organizations surveyed said they would be looking to source local suppliers post-Covid-19 to avoid possible shipping delays. While foreign suppliers are typically cheaper, you must do adequate due diligence to ensure the chain is robust. 

Keeping a close eye on market changes is just as critical, allowing you to stay nimble and align your inventory management with the ever-shifting demands and trends in the ecommerce landscape.

3. Receiving, storing, and packing

After the procurement phase, the focus shifts quickly toward receiving, storing, and packing stock. The details of these processes vary depending on whether the seller model is a first-party vendor (1P), third-party seller (3P), or a hybrid approach. 

An effective 1P model could be a direct-to-consumer brand, in which all operations from receiving goods through storage and packing are done internally - giving them direct control of quality standards and delivery schedules.

Conversely, brands selling on multiple marketplaces often utilize third-party fulfillment centers. Their stock is sent there and then stored and packed by these facilities before shipping is organized; this gives greater flexibility but sacrifices some control.

In a hybrid model, businesses may manage certain products (1P) themselves while outsourcing others (3P) to fulfillment centers for efficient product category management. This flexibility provides greater management efficiency across different product lines.

Businesses can maximize efficiency by adopting model-specific practices highlighting systematic storage solutions and meticulous packing procedures tailored specifically for this operation step, ensuring products reach customers accurately while upholding high-quality standards.

4. Inventory Tracking and Control

Effective inventory control requires monitoring inventory levels in real time, tracking stock movements, making adjustments as necessary, and taking measures to resolve any issues. Robust tracking mechanisms are crucial in accurate financial reporting and streamlining overall operations.

Businesses should utilize advanced tracking technologies, conduct regular audits, and implement stringent security measures - this combination not only safeguards assets but also boosts operational efficiency for increased business success.

5. Order fulfillment and shipping/delivery

Order fulfillment planning is another critical element when it comes to customer satisfaction. 

The stage encompasses various tasks, from picking and packing orders to making strategic decisions on shipping methods. Businesses should prioritize optimizing this phase for maximum efficiency. 

Considerations should include exploring options like quick commerce and choosing between third and fourth-party logistics providers. According to the Logistics Bureau, 12% of companies become unprofitable after factoring in distribution costs. Careful consideration of your logistics options is vital to maximize the bottom line.  

In general, 3PL handles day-to-day logistics services to ensure direct control over supply chain management operations. Small to midsize businesses find 3PLs ideal, offering cost-efficiency, customization, and flexibility at a cost-effective rate. On the other hand, 4PLs take an all-encompassing view of supply chain management by providing strategic oversight and comprehensive services. Large enterprises with complex logistic needs and long-term optimization in mind often find 4PLs beneficial.

Achieving order fulfillment and shipping successfully not only pleases customers but also creates a more reliable logistics ecosystem.

Leading inventory management techniques

This section will discuss practical approaches that can significantly enhance your inventory management. These tried-and-tested approaches serve as effective tools to maintain control and increase efficiency.

Just-in-Time (JIT)

Just-in-Time (JIT) inventory management in ecommerce refers to ordering and receiving goods specifically when needed, such as an electronics store that anticipates customer demand for new gadgets.

By employing JIT inventory management strategies, they avoid excessive storage costs while minimizing risks related to outdated or unsold inventory. JIT's success relies upon accurate forecasting and a reliable supply chain, so products arrive precisely when customers are ready to buy.

Following the COVID-19 pandemic, which caused significant supplier chain delays, some large firms are moving to a "just-in-case" model to negate potential failures. Between 2019 and 2020, there was a 14% increase in supply chain disruptions. 

While JIT reduces overstocking, it can be a risk if you do not have robust supply chain relationships. 

ABC analysis

ABC Analysis categorizes inventory into three groups. Inventory managers create classes of items based on demand, cost, and risk data to group items together in ABC rankings.

Items, like flagship smartphones, fall under this category, while B items (midrange laptops) and C items (basic office supplies) fall into another group altogether. 

An online retailer would do well to focus on managing A items to meet high demand while taking a more flexible approach towards low-value C items and preventing unnecessary investments in lower-value products.

In a 2020 McKinsey report, 47% of executives planned to increase critical product inventory post-COVID-19. That may indicate that they are favoring an ABC inventory management process to avoid supply chain failures. 

ABC analysis is similar to the Pareto Principle where 20% of the goods are responsible for 80% of business revenue.

Economic order quantity (EOQ)

Ecommerce businesses often utilize EOQ to determine an optimal order quantity. An online bookstore may use this formula to balance order and holding costs and overall inventory expenses. The bookstore will order enough copies of popular books without incurring excess stocks and excess holding costs - thus improving profits while managing inventory effectively. 

The EOQ formula is expressed as the square root of [2(setup costs)(demand rate)] divided by holding costs. This formula provides businesses with a strategic tool to strike a balance in their ordering practices, ensuring optimal inventory levels for cost-effective and streamlined operations.

EOQ proves invaluable for fine-tuning inventory management for sustainable profitability in business operations.

Successful businesses center around efficient inventory management. Businesses can enhance operational efficiency, reduce costs, and please customers by applying the five crucial steps we covered in this article. These factors are vital for sustained growth in competitive markets.

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