The Top 5 Best Practices For Improving Your Inventory Processes

Veronika Krasteva
5 min
The Top 5 Best Practices For Improving Your Inventory Processes

Inventory is usually a major component of many retailers and as such requires to be planned, managed, and controlled to achieve lower costs. For many retailers, managing inventory is quickly becoming a time-consuming and frustrating process. With the increase of online shopping and the use of a new type of eCommerce site - marketplaces - inventory management has become more complex than ever.


According to a survey conducted by the Aberdeen Research Group, 60% of supply chain professionals cited reducing inventory costs as a top priority, and 42% cited improving customer service levels as a top priority.


In this article, we’ll look at the 5 best practices for inventory management that apply to every business:

#1 Define Your Process

One of the best ways to define your inventory management processes is by creating a workflow with which of the process: stock receive, record, count, use, and shipment. Design your workflow before you select a software so you will be able to choose a software that can meet your processes exactly.

Keep in mind that using Excel to manage your inventory and track stock isn't a very smart business decision these days. Excel can’t provide real-time inventory tracking, automated data entry, and control, but Inventory management software can. It can help you efficiently manage inventory, simplify most operations and get the most of your business.

There are many applications, from basic to highly sophisticated, from a few dollars to thousands of dollars. Cloud technologies have made Inventory management systems available for every business even small companies. Choosing the right software for you may depend on the size of your company and the type of business you operate.


#2 ABC Analysis

ABC analysis is an inventory categorization method based on the Pareto Principle, also known as the 80/20 rule or Pareto analysis. The method consists of dividing items into three categories A, B, C. The purpose of this classification is to ensure efficiency by concentrating on those items that have the greatest potential.

  • A-items are the most important goods for an organization. They are your top priority because they generate your largest revenue. You need to execute tight day-to-day control and monitoring over them. A-items should be reordered frequently, with weekly or even daily reorder. You need to avoid stock-outs on A-items by all means.

According to the Pareto rule, 20% of items in your inventory list will account for approximately 80% of annual consumption value. In practice, this means that if you have a stock list of 100 different items the top 20 items will account for about 80% of total sales.

  • B-items are in the middle of items A and C. They can be subject to less precise control. The most important aspect of B-items is the monitoring of potential evolution toward class A or, on the contrary, toward class C.

The B-items accommodate around 40% of all items and account for 15% of the total value of the annual usage.

  • C-items are least important for an organization. They have the lowest consumption value. Reordering C-items is made less frequently, often only when an actual purchase is made. A typical inventory strategy for C-items consists of having stock only 1 unit that leads to a stock-out situation after each purchase.

The C-items ate the last 40% of all items and account for 5% of the total value.

As a result of an ABC Analysis A- items have a greater impact on your business and, therefore, you should manage them more crisply in terms of minimum and maximum inventory levels. The“C” category is the best place to start when performing a periodic obsolescence review.


#3 Maintain Minimal Stock Levels

Minimal Stock Level is the level below which inventory should never fall. It's extremely important for keeping a minimum stock level to avoid running out of stock. In other words, maintaining a minimum level represents the minimum quantity of the stock that should be held at all times. It's not a static number as the quantity should be adjusted regularly because of various factors as seasonal changes, trends, economics, etc.

Maintaining the minimal stock levels lowers the risk of wasting stock if it is not sold in time. This method requires frequent monitoring as a control measure. By carrying less volume, you will need to increase the constant purchase of products which may not save you any additional money.

If you’re using inventory software such as Composity Inventory, you can easily track stock levels and be altered when a stock is low. That way you can constantly monitor your stock quantity and never run out of it.


#4 Just-in-Time (JIT) inventory management

JIT or the Toyota production system (TPS) is an inventory module that refers to “only buy when needed”. It means that products are purchased from a vendor only when a customer has already bought them from us. Maintaining stock takes time and has costs, which is what makes companies implement JIT management.

This inventory strategy is great if you are a retailer. You can reduce the amount of holding space and staff required to manage your physical stock. Using JIT as your inventory management strategy can help you to prevent stock waste and respond more quickly to customer's needs.


The Toyota Production System has four basic aims:

  1. Provide world class quality and service to the customer.
  2. Develop each employee’s potential, based on mutual respect, trust and cooperation.
  3. Reduce cost through the elimination of waste and maximize profit
  4. Develop flexible production standards based on market demand.


#5 Forecasting

The ability to predict future products demands is one of the critical features in a successful inventory strategy. Based on analyzing historical data and algorithms a company can have a very accurate forecast of inventory demands in a period of time. Forecasting can show buying patterns influenced by some factor and help you better understand market behaviors. Some of the benefits a company can achieve with inventory forecasting are lower inventory levels and improve customer service.


In conclusion, these are only a few of the techniques you can implement to optimize your inventory management but doing right they can help you improve your whole supply chain, minimize costs while increasing customer satisfaction, automate most of the process and allow you to focus on more valuable activities.