Effective Inventory Management: A Game-Changer for Supply Chain Efficiency

What is Inventory Management?

Inventory management refers to the systematic process of overseeing and controlling supply levels to ensure the right products are available at the right time. Inventory management helps companies identify which and how much stock to order at what time. It tracks inventory from purchase to the sale of goods. The practice identifies and responds to trends to ensure there’s always enough stock to fulfill customer orders and provide proper warning of a shortage. Effective inventory management strikes a balance between too much and too little inventory, optimizing supply chain operations and supporting business growth.

What Counts as Inventory?

• Raw goods: Materials or substances used in the production or manufacturing of products. Raw materials include wood, metals, plastics, or fabrics used to create finished goods. They come from one or more suppliers and producers.
• Work-in-progress (WIP): A partially finished product awaiting completion. WIP inventory refers to items in production and includes raw materials or components, labor, overhead and even packing materials.Costs are transferred to the finished goods account and attributed to the cost of sales.
• Finished goods: This type of inventory refers to the number of products in stock available for customers to buy. Once a WIP is complete, it becomes part of the finished goods inventory. 
• Maintenance, repair, and operations goods (MRO): Materials and equipment used in the production process but not as part of the final product. These include personal protective equipment, cleaning supplies, office supplies, and tech equipment.

Inventory Management Techniques

• Just-In-Time (JIT): Stock is replenished only when needed, reducing holding costs. It is a technique wherein businesses only order enough stock to meet current customer demand. This system minimizes holding costs and ensures that businesses always have the products they need on hand. 
• ABC Analysis: “A” items represent high-value, low-quantity items that contribute the most to revenue but require rigorous control and frequent monitoring. “B” items have moderate value and moderate control needs. “C” items are low-value, high-quantity items that require minimal control. This technique focuses on prioritizing inventory based on the value and usage frequency. 
• Economic Order Quantity (EOQ): Determining the optimal order quantity to minimize costs using factors like demand variability, order lead time, and carrying costs.
• First In, First Out (FIFO): FIFO is a useful system for businesses that sell the oldest inventory first. If it was first into the warehouse, it should also be first out the door when someone orders that product. This keeps inventory as fresh as possible, which is essential for perishable or expiring goods.
• Last In, First Out (LIFO): LIFO is the opposite of FIFO, ensuring that the most recently received inventory is the first out the door. LIFO inventory management technique is suitable for businesses that don’t ship perishable goods, because the way this accounting method reports income has potential tax advantages.
• Dropshipping: Dropshipping is the process of receiving an order from a customer and having your supplier ship the products directly to the customer. This cuts out the need for a storage facility or for keeping any inventory on hand. It is best reserved for rare orders or items you cannot accommodate in your warehouse, because it means your customer’s satisfaction is in the hands of your supplier rather than your own business.

Inventory Management Challenges

• Changing Demand: Customer demand is constantly shifting. Keeping too much could result in obsolete inventory you’re unable to sell, while keeping too little could leave you unable to fulfill customer orders. Order strategies for core items, as well as technology to create and execute an inventory plan, can help compensate for changing demand.
• Limited Visibility: Lack of visibility of the inventory in the warehouse makes it difficult to identify or locate goods in the warehouse, leading to incomplete, inaccurate or delayed shipments. Receiving and finding the right stock is vital to efficient warehouse operations and positive customer experiences.
• Inconsistent Tracking: Using manual inventory tracking procedures across different software and spreadsheets is time-consuming, redundant and vulnerable to errors. Even small businesses can benefit from a centralized inventory tracking system that includes accounting features.
• Supply chain disruptions: Traditional systems may struggle to handle unexpected supply chain disruptions, such as production or distribution delays, which can ripple through the entire inventory management process and increases the risk of delays and errors.
• Inefficient order fulfillment: With real-time visibility into inventory levels, traditional systems may lead to efficient order fulfillment processes, delayed shipments, and dissatisfied customers.
• Warehouse Space Management: An effective storage blueprint ensures products are in the right place during inbound and outbound processes. Improper organization, like keeping fast-selling items far from the packaging station, affects efficiency, causing disruptions and lost productivity. Additionally, staff wastes time if products are hard to locate.

Benefits of Inventory Management

• Better Inventory Accuracy: With accurate inventory management, businesses will be able to keep a track of what’s in the stock and replenish the amount of inventory which will be required to meet the consumer’s demand.
• Reduced Costs: Minimizing excess inventory through accurate tracking and demand forecasting lowers the carrying costs associated with storage, handling, and obsolescence. Smart inventory management eliminates the need for large working capital, improves cash flow, and provides you with the required finances to fund payroll, product development, or any other business activity.
• Reduced Waste: Reducing the number of products that become outdated, expired, or damaged reduces waste, improves sustainability efforts, and increases overall profitability. Deploying strategies like FIFO helps optimize inventory rotation.
• Enhanced Customer Satisfaction: Happy customers means repeat business and this is always good for the bottom line. Customers today expect rapid fulfillment of orders, especially when ordering products online. An effective inventory management process ensures that your products are always in stock and that pickers can quickly locate them and send them out for delivery. This, in turn, boosts customer satisfaction and increases the likelihood that you will gain repeat business.
• Risk Mitigation: Staying ahead of challenges like seasonal variations, supply chain disruptions, and market fluctuations mitigates risks and maintains operational stability.
• Data Driven Decision Making: In the world of logistics, data is the king. An effective decision making process is dependent on accurate data. A survey by Deloitte revealed that companies leveraging predictive analytics in supply chain management report up to a 25% increase in forecasting accuracy and a 15% reduction in inventory costs (Deloitte Survey). Therefore, it ensures that the data across warehouse operations is consistent and reliable, which helps the businesses to reduce errors and costly delays. It also allows businesses to leverage predictive analytics. By analysing the historical and current trends, businesses can anticipate demand, improve inventory management and attain the benefit of first mover advantage.

Inventory Management Examples in Different Industries

• Retail: Inventory management has been a game changer for the retail industry. Both online and  offline retailers deal with hundreds of SKUs and with these automated systems in place, stockouts are a thing of the past and orders are guaranteed to be delivered on time. AI along with inventory management utilizes real-time data analytics to forecast demand accurately. Technologies like RFID tagging and automated replenishment systems help manage inventory levels, reduce stockouts, and improve customer satisfaction.

• Manufacturing: For the manufacturing industry, it’s all about having the right raw material in the right amounts at the right time. Inventory Management helps businesses to keep a balance of having enough raw materials to meet production demands and avoid excess inventory that ties up working capital. 
• Food and beverage: Restaurants, cafes, and food retailers face unique inventory management challenges due to the perishable nature of their products. Real-time monitoring of storage conditions, such as temperature and humidity, ensures product quality, while predictive demand planning addresses seasonal and event-driven spikes.
• Healthcare: Hospitals, clinics, and pharmacies rely on inventory management to ensure the availability of critical medications and medical supplies. Automated inventory systems help healthcare facilities track usage rates, monitor expiration dates, and streamline ordering to prevent shortages.

Inventory Management Trends in 2025

The future of inventory management lies in innovation and adaptability. Not only are today’s businesses managing inventory digitally—often across multiple, geo-distributed sites—but inventory management is expected to lean even more heavily into transformative technology in the future.

• Hyperlocal Inventory Hubs: Businesses are setting up smaller, localized inventory hubs closer to urban centers to reduce delivery times and meet the increasing demand for same-day or next-day delivery services.
• Advanced AI Capabilities: AI-driven capabilities, can understand complex queries, predict demand surges from social trends or global events, and suggest adaptive strategies. Furthermore, AI systems now enable seamless collaboration between departments by providing unified dashboards, breaking down silos in inventory management. AI-powered inventory management platforms are analyzing historical purchase data and economic indicators to proactively identify demand trends and fine-tune inventory strategies. 
• Collaborative Inventory Management Platforms: Supply chain partners are adopting collaborative platforms that provide shared visibility into inventory levels, enabling synchronized replenishment and reducing overstocking or understocking across the network.
• Circular Supply Chains: As sustainability takes center stage, businesses are implementing circular supply chains to reuse, recycle, and refurbish inventory items. This reduces waste and promotes a greener approach to inventory management.
• Predictive Analytics for Demand Sensing: The power of predictive analytics is reshaping inventory management, predicting potential supply chain interruptions and forecasting future demand, ensuring more precise inventory levels.
• Omnichannel and cloud inventory management: Now that the most cutting edge businesses have moved away from traditional and manual inventory control – investing in programs that digitalise and record flows – the future of inventory management lies in omnichannel automation. The goal is to create seamless buying experiences for users, ensuring consistency between online platforms and physical shops. Cloud-based inventory management systems offer businesses the flexibility to access real-time inventory data anytime, anywhere, enabling informed decision-making. These systems integrate inventory across physical stores, warehouses, and online platforms, ensuring accurate stock levels and faster order fulfillment.

How Shipsy Can Help in Inventory Management

• Demand Forecasting: Advanced algorithms provide actionable insights into inventory levels and demand patterns by analyzing the historical data and market trends. These help the business to keep a record of the products which are likely to expire soon. Additionally, consumers are often price sensitive and implementing dynamic pricing strategies can help manage inventory effectively. The products that are nearing their expiry date can be offered on discounts or bundled with some other items. This will encourage the customers to purchase the products immediately, improving the bottom line and reducing the risk of waste. The analytics tool also suggests the best times to reorder stock or implement promotional strategies to clear out soon-to-expire items.
• Real-Time Tracking: IoT enabled tools provide end-to-end visibility across the supply chain, ensuring businesses can track inventory movements in real time. This capability reduces errors, prevents stockouts, and improves decision-making.
• Warehouse Automation: Automation streamlines the inventory tracking, picking, packing and sorting. Smart algorithms optimize picking and packing by consolidating orders for faster processing and reduced delivery times. Automated labeling ensures compliance with packaging standards, achieving 100% accuracy while reducing errors.
• Expiry Date Management: Businesses can keep a track of inventory items with their expiration dates, and automatically prioritize the sale or disposal of products nearing expiry to minimize waste and losses. Additionally, AI alerts inventory managers to impending expirations, enabling timely action such as markdowns, donations, or returns to suppliers, thus reducing inventory holding costs and mitigating the risk of spoilage. This proactive approach minimizes waste and maximizes revenue potential, ensuring efficient inventory management and profitability.
• Inventory Risk Assessment: By analyzing factors such as market volatility, supplier reliability, and geopolitical conditions, businesses can proactively manage inventory-related risks and uncertainties. Risk management tools examine historical data, current market patterns, and external influences to predict potential disruptions in the supply chain.
• Storage Optimization: IoT-enabled sensors help maintain optimal storage conditions, ensuring temperature-sensitive goods remain fresh and safe for consumption. Additionally, it helps in maximizing warehouse capacity using intelligent slotting algorithms that assign products based on demand, size, and turnover rates.

Whether you’re a retailer, an e-commerce business, or operating in any other industry, effective inventory management is the cornerstone of efficient supply chains, enabling businesses to deliver exceptional customer experiences consistently. Book a demo today with Shipsy and see the difference for yourself.