Inventory management is the process of ordering, organizing, and using all the inventory your business relies on—including raw materials, work‑in‑progress items, and finished goods. Whether you manage tools, parts, equipment, or products, an effective inventory management system helps you track items accurately, optimize stock levels, and keep your supply chain running smoothly.
This guide breaks down the fundamentals of inventory management, including key terms, essential formulas, common challenges, and the features that make modern inventory management software so effective. You’ll also learn how to streamline your inventory processes and improve forecasting, order management, and overall profitability.
What is inventory management?
Inventory management goes beyond the simple counting of items; it provides visibility into:
- Inventory levels & location: Performing inventory counts to know exactly what is on hand across multiple warehouses or locations. This is also crucial for good demand forecasting and supply chain management.
- Inventory valuation: Tracking the financial value of assets for accounting and tax purposes.
- Inventory lifecycle: Monitoring expiration dates, serial numbers, and “work-in-process” (WIP) materials. Keeping good inventory data, both short-term and long-term, is essential.
- Operational assets: Managing the tools and supplies necessary to keep the business functioning.
While managing inventory can feel overwhelming, using an effective inventory management system can help you automate tasks, reduce human error, and maintain real‑time visibility across your entire operation. Additionally, the benefits—which will be expanded upon later—almost always outweigh the costs. This is largely because good inventory management techniques do everything from improving customer experience to lowering inventory costs.
What are the main types of inventory management systems?
Most businesses use either manual systems like spreadsheets or paper logs, or digital systems, like inventory management software. Manual tools can work for very small inventories, but digital systems offer automation, real‑time visibility, and fewer errors—making them a better fit for growing teams.
Common inventory management challenges
Even well‑run businesses struggle with inventory control. Here are some of the most common issues teams face and why they matter.
Using spreadsheets or manual systems
Manual tracking is slow, error‑prone, and difficult to scale as your inventory grows. This is even more true in larger or more complicated businesses.
Lack of real‑time visibility
Without up‑to‑date data, teams can’t see stock levels, reorder points, or what’s out of stock until it’s too late. When a business doesn’t have a handle on physical inventory, everything is at risk, including the timely fulfillment of customer orders, the quick usage of perishable goods, and even its ability to order inventory from preferred vendors at regular, no-rush prices.
Miscommunication across teams
When updates aren’t centralized, information gets lost, duplicated, or never recorded at all. At any given time, teams should be able to reference inventory data to make good decisions. Data leads to clarity, and clarity leads to smarter decisions and better-run businesses.
Lost, misplaced, or overstocked items
Whether due to disorganization or an honest mistake, lost or overstocked inventory leads to delays, unnecessary procurement, and wasted time searching for items. While some human error is unavoidable, good inventory management tools can prevent most inventory shrinkage.
Inconsistent reordering or supplier tracking
Without clear reorder points or forecasting, businesses risk stockouts, rush orders, or overbuying.
These challenges create both emotional strain, like late nights, stressful audits, constant searching, and financial consequences, including excess waste and shrinkage, service disruptions, excessive delays, and reduced customer satisfaction.
This is especially true in warehouse management, where order fulfillment is crucial and ecommerce brands, in particular, fight steep competition.
Manual vs. digital inventory management: What’s the difference?
Businesses typically manage inventory using either manual tools or digital inventory management systems. Understanding the difference helps you choose the right approach for your team.
The limits of spreadsheets and manual management
Relying on spreadsheets isn’t just slow; it’s a liability that creates a ceiling for your growth. When you manage inventory manually, you face:
- Wasted time: Constant manual updates drain hours of productivity that could be spent on high-value tasks.
- Wasted money: Simple typing errors lead to stockouts or over-ordering, directly hitting your bottom line.
- Lack of visibility: Without real-time inventory management capabilities, your team is always making decisions based on “yesterday’s” data.
Benefits of inventory management
Switching to a digital system isn’t just about new tools—it’s about gaining total control over your assets and your time. Here are a few benefits of managing your inventory with modern inventory software:
- Saving time: Inventory software handles the “busy work,” allowing you to focus on growing your business.
- Saving money: Real-time alerts and better forecasting ensure you never over-purchase slow-moving items or lose sales due to unexpected shortages.
- No more lost inventory: With mobile access and photo records, anyone on the team can find what they need in seconds, even from the field.
- Full visibility: Reporting gives you a bird’s eye view of your entire operation, making it easy to spot trends and optimize your budget.
- Scales with you: Whether you have ten items or ten thousand, the effort required to manage them stays the same
Essential inventory management terms to know
From barcode to FIFO, good inventory management often comes hand-in-hand with certain terms and phrases. Below are key terms often used in optimized inventory management strategies:
Barcode
Barcodes are a machine‑readable pattern that stores item data and can be scanned using a barcode scanner or smartphone.
QR code
QR codes are two‑dimensional barcodes that stores more data and can be scanned with most smartphones.
Cost of goods sold (COGS)
Cost of goods sold refers to the direct costs of producing the goods your business sells, including materials and labor.
Carrying costs
Carrying costs refer to the total cost of holding inventory, including storage, insurance, and depreciation.
Lead time
Lead time is the amount of time between placing a purchase order and receiving the goods.
Reorder point
Reorder point is the inventory level at which you should reorder an item to avoid running out.
Safety stock
Safety stock is the extra inventory kept on hand to prevent stockouts during unexpected delays or spikes in demand.
FIFO, LIFO, and JIT
- FIFO (first in, first out): Use the oldest inventory first.
- LIFO (last in, first out): Use the newest inventory first.
- JIT (just in time): Receive inventory only when needed to reduce holding costs.
EOQ (economic order quantity)
EOQ determines the ideal order quantity to minimize holding and ordering costs.
SKU
SKU is a unique alphanumeric code assigned to each item in your inventory.
This easy, comprehensive guide will help you:
Free Ebook: Getting Started With Inventory Tracking
Important inventory management formulas
These formulas help you understand how your inventory moves, when to reorder, and how much stock you need. If you’re using inventory management software to keep track of inventory, many of the numbers and figures you need to solve for these formulas will be at your fingertips.
Inventory turnover ratio
This formula shows how many times your inventory is sold or used during a specific period. A higher turnover rate usually means you’re managing stock efficiently and not tying up cash in slow‑moving items.
Formula:
Inventory Turnover = Cost of Goods Sold / Average Inventory
Cost of goods sold (COGS)
COGS represents the total direct costs of producing the goods your business sells, including materials and labor. It helps you understand profitability and is a key input for several other inventory formulas.
Formula:
COGS = Beginning Inventory + Purchases – Ending Inventory
Average inventory
Average inventory calculates the typical amount of inventory you have over a set period. It smooths out fluctuations so you can better analyze turnover and stock levels.
Formula:
Average Inventory = (Beginning Inventory + Ending Inventory) / Number of Periods
Days’ sale ratio
This formula shows how many days, on average, it takes to sell or use your inventory. It helps you understand how quickly inventory moves and whether you’re holding too much.
Formula:
Days’ Sale Ratio = 365 / Inventory Turnover Ratio
Sell‑through rate
Sell‑through rate measures how much inventory you sold compared to how much you received. It’s a quick way to evaluate product performance and demand.
Formula:
Sell‑Through Rate = Units Sold / Units Received
Ending inventory
Ending inventory reflects the value of the stock you still have at the end of a period. It’s essential for calculating COGS, profitability, and future purchasing needs.
Formula:
Ending Inventory = Beginning Inventory + Purchases – COGS
Reorder point
This formula tells you exactly when to reorder an item so you don’t run out. It accounts for average daily usage, lead time, and safety stock to prevent stockouts.
Formula:
Reorder Point = (Average Daily Use × Lead Time) + Safety Stock
Safety stock
The safety stock formula helps you calculate the right amount of buffer inventory to protect against demand spikes or supplier delays. It ensures you have enough stock even when conditions aren’t predictable.
Formula:
Safety Stock = (Maximum Daily Usage × Maximum Lead Time) – (Average Daily Usage × Average Lead Time)
Key features of inventory management software
Modern inventory management software offers powerful features that help teams stay organized and efficient. While every business has different inventory management needs, some features are simply must-haves, whether a company oversees construction, provides healthcare, or designs the interiors of its clients’ homes.
Mobile barcode and QR code scanning
Instantly track, move, or audit items by turning your smartphone into a high-powered scanner, eliminating the need for manual data entry.
Customizable item details
Keep every essential detail—from SKUs and costs to custom tags and expiration dates—organized in one centralized, easy-to-search database.
Inventory photos
Build a visual catalog by adding multiple photos to every item, ensuring your team can identify exactly what they’re looking for at a glance.
Low stock alerts
Stay ahead of shortages with automated notifications that ping your team the moment stock levels dip below your custom thresholds.
Customizable folders
Customize your inventory into an intuitive folder hierarchy based on location, project, status, or any other way you choose.
Mobile access
Empower your entire team to manage and update inventory in real-time from any device, whether they are in the warehouse, the office, or out in the field.
The ROI of better inventory management
Improving your inventory management process delivers measurable benefits across your business. The following three benefits are often major returns on investments for businesses:
Saved time: Reduce searching, eliminate duplicate work, and streamline replenishment and restock workflows.
Saved money: Avoid overstocking, prevent lost tools and materials, and improve cash flow.
Peace of mind: Gain visibility, accountability, and confidence that your inventory levels are accurate and up to date.
How to start improving inventory management now
You don’t need a full overhaul to make meaningful progress on your inventory management. Optimizing how you manage inventory begins with understanding your current process, then determining what aspects of your strategy create challenges for your team. Once you know what’s not working, you can start selecting the right solutions to improve how you manage inventory, get your team aligned, and keep making small improvements to your strategy over time.
Here are five steps to getting started:
1. Map your current process
No matter how simple or sophisticated your inventory management process is, optimizing it must begin with auditing how things work right now. To get started, document how items are received, stored, tracked, and reordered.
If you have a current standard operating procedure, you can use this as a basis, but keep in mind that many SOPs aren’t adhered to. If that’s the case, you’ll want to focus on what the actual strategy is, not the ideal (but unimplemented) one.
2. Identify friction points
Now that you have a clear picture of your current inventory management process, it’s time to look for friction points. It’s crucial to identify what causes delays, errors, or information to get lost. Sometimes, the best way to get this information is through interviewing.
Your team, whether you work in a small business or a huge corporation, likely knows what’s causing them problems when it comes to inventory. Chat with as many people in as many departments as you can until you’ve figured out your company’s unique barriers to great inventory management.
3. Use digital tools
Once you’ve had time to review all the challenges your inventory management strategy currently faces, it’s time to start looking for solutions. Yes, there is often hard work to be done regarding education and training, but before this begins, selecting the right system to support your human teams is essential.
This is where inventory management software usually comes in. After all, such software is designed to make managing inventory easier. It not only centralizes data in a digital dashboard, but also offers a host of features designed to make inventory management faster and more accurate. These features often include barcode and QR code scanning, low stock alerts, the ability to track and organize items by location, picture-rich and attachment-friendly item profiles, and much more.
4. Set alerts and train your team
If you’ve decided on inventory management software to optimize your strategy, now’s the time to start leveraging all it has to offer. Your SOP should be updated, of course, and teams should be thoroughly trained. But, just as importantly, try to figure out what features can really solve the pain points you identified earlier.
For example, if you have inventory that’s stored in 50 different locations across the country, you’ll want to build out an inventory system that makes viewing inventory by location and holistically a breeze. And if you have inventory with hard-to-remember or very similar names or SKUs, take the time to upload images of every item so your team can eyeball inventory with confidence.
You’ll also want to set low-stock alerts so you’ll know before inventory levels for a given item get too low. Set them so you can order at just the right time to save yourself money and stress, but don’t give in to setting the minimum so high that you aren’t practicing smart inventory control.
5. Monitor and optimize regularly
Once your new management system is in place and your SOP is completely updated, don’t take your foot off the gas. Set a reminder—at least once a year or even quarterly—to review metrics, adjust reorder points, and refine workflows over time.
And don’t forget to update your SOP and offer retraining and employee updates when your strategy changes.
Take control of your inventory management today
Sortly is an inventory management solution that helps you track, manage, and organize your inventory from any device, in any location. We’re an easy-to-use inventory software that’s perfect for large or small businesses. Sortly builds inventory tracking seamlessly into your workday so you can save time and money, satisfy your customers, and help your business succeed.
With Sortly, you can track inventory, supplies, parts, tools, assets like equipment and machinery, and anything else that matters to your business. It comes equipped with smart features like barcoding & QR coding, low stock alerts, customizable folders, data-rich reporting, and much more. Best of all, you can update inventory right from your smartphone, whether you’re on the job, in the warehouse, or on the go.
Whether you’re just getting started with inventory management or you’re an expert looking for a more efficient solution, we can transform how your company manages inventory—so you can focus on building your business. That’s why over 15,000 businesses globally trust us as their inventory management solution.
Start your two-week free trial of Sortly today.
