As a small-business owner who is struggling to stay on top of inventory management, you know that unforeseen spikes and lulls in customer demand, supply chain snags, and miscategorized products can all make tracking inventory a major headache. But this is a headache that you shouldn’t have to struggle with while trying to run your business.
To run and grow your business successfully, you need to be able to smoothly and consistently track inventory so you know what’s selling, what isn’t, and when to reorder. In this article, we’ll go over all of the basics of inventory tracking and management, from the time new product enters your storeroom or warehouse all the way through to order fulfillment so that you can rest easy knowing that your inventory tracking is in order.
Inventory tracking is the process of monitoring physical resources through all steps of the supply chain within an organization, from acquisition to fulfillment. Most businesses use some type of inventory management software to assist with this process, though businesses with very light inventory needs may be able to get by using manual inventory tracking (pen and paper) or spreadsheets.
Want to learn more about the importance of inventory management for small businesses? Check out our guide here.
The precise way that you track your inventory will vary based on the size of your business, the products you carry, your budget, and many other factors. But here are some high-level steps that any business can use to begin tracking inventory:
If your business handles lots of inventory with many different products (especially if this includes perishable items), you may want to hire a full-time inventory manager. If physical inventory is a smaller part of your business, inventory tracking might be assigned to a manager among their other responsibilities.
“We employ an inventory clerk as a full-time position to track shipments and manage orders,” says Dan Gray, general manager of Kotn Supply , a Toronto-based custom apparel manufacturer. “They sign off on shipments, count the number of available products, and place orders for more inventory according to demand.”
Depending on the size and complexity of your inventory, you may be able to manage inventory with a spreadsheet (or even a notepad in some limited situations). But in most scenarios, inventory management software will save businesses time and money and yield more accurate results when tracking inventory.
Still, if you have limited needs, you might choose the spreadsheet route as you figure things out. If and when you do decide to invest in an inventory tracking system, our buyers guide and inventory management Category Leaders can help you get started in your search.“These tools allow you to efficiently track inventory in multiple locations, determine reorder points, manage stock, cycle counts, and forecasting,” says Gray.
If you’re using inventory management software, much of the daily and weekly inventory monitoring will be handled automatically by your software and updated via dashboards. Inventory managers can review these dashboards on a daily basis and whenever necessary to make sure that everything is in order, and create reports to share with other stakeholders.
“We use cloud-based inventory management software to optimize operations and increase overall efficiency, significantly helping reduce the burden of physically counting inventory and freeing our clerks to spend more time on other critical tasks,” says Gray. “That said, we adjust and monitor inventory accordingly every other day to keep shrink to a minimum.”
If you’re managing inventory without software, you’ll want to check inventory levels weekly or at least monthly to get ahead of shortages, oversupplies, and expiring product. You’ll also need to stay on top of when new inventory comes in and when inventory goes out to manually update stock levels on your spreadsheet (more on this below).
“Having periodic stock counts and wall-to-wall counts will always make you identify your actual stock levels and highlight any process deficiencies or areas for improvement,” says Mike Nemeroff, CEO and cofounder of Rush Order Tees , a Philadelphia-based custom tee-shirt company.
Whether you’re using software or not, some form of inventory tracking equipment (barcode scanners, QR code scanners, RFID scanners, etc.) can help take a lot of the busy work out of inventory tracking. Check out this short video to see just how much time you can save by using equipment versus counting inventory by hand:
“We need mobile scanners to track our inventory,” says Gray. “We scan items using a SKU barcode, and the information is instantly uploaded to our cloud-based system.”
If you aren’t using inventory management software, you can still use barcode scanners to make inventory tracking more efficient. Instead of syncing with your inventory software, the barcode scanner will just send a string of data to whichever computer or mobile device the scanner is connected to, essentially turning your scanner into an input device. This method isn’t nearly as efficient as using inventory management software that automatically recognizes scanned data and updates inventory information accordingly, but it is far more efficient and accurate than manually typing strings of data into a spreadsheet.
Unfortunately, inventory tracking isn’t a “set it and forget it” enterprise. It’s important to regularly (monthly or quarterly) shake down your inventory tracking system to weed out inefficiencies, double check for accuracy, and find areas for improvement.
Here are a few checkpoints for an inventory tracking audit:
Physically count your inventory (electronic scanners can help a lot with this). Make sure the total numbers match with your spreadsheet or inventory management system. It helps to do this when inventory is frozen (after hours or on a weekend, for example) to avoid discrepancies due to outdated information.
Perform cycle counts on a regular basis. A cycle count is similar to a full inventory count, but it’s only done on a subsection of your inventory so that it’s less disruptive. Most businesses perform cycle counts strategically, choosing subsections with high value or high rates of turnover, for example.
Compare inventory numbers to your financial records. If your inventory numbers don’t match your financial statements for revenue from items sold, for example, you’ll want to investigate further.
If you’re a small-business retailer, you definitely need something to help you manage and track your physical inventory. But that solution is most likely not an inventory management system. Why? Because in almost every scenario you’ll be better served by a retail point of sale system with built-in inventory management and inventory tracking.
A system like this will track and update your inventory in real time each time a customer makes a purchase. (And if you exclusively sell your products online, look for an eCommerce solution with built-in inventory management and inventory tracking.)
If your current retail POS system or eCommerce tool is falling short of your inventory management needs, you most likely need a more robust software system rather than adding a standalone inventory management system and trying to get it to work with your POS. This is why standalone inventory management software is best suited for distributors and parts suppliers.
While we generally don’t recommend managing inventory without using inventory tracking software, we understand that some smaller businesses might want to explore all options before investing in an inventory management software system.
For example, a highly specialized parts distributor that distributes a specifically designed screw used by one specific automobile manufacturer might try to track their inventory using an inventory spreadsheet. Let’s see what this might look like.
Your company receives a shipment of 1,000 special screws from the manufacturer, so you enter a line in your spreadsheet with the date the shipment was received, the type of inventory, and the inventory count. One week later, your automobile manufacturer customer orders 200 special screws, so you add a line to the spreadsheet indicating the date of purchase and the new total of 800 special screws.
You can now use this spreadsheet to quickly determine when a shipment came in, how long it took to sell, when it sold, and how many you have left, among other things.
But as you can imagine, this system could quickly become unmanageable when you’re dealing with hundreds or thousands of different types of inventory, multiple manufacturers and customers, and other complicating factors.
What happens if you have two customers ordering the same part on the same day? What happens if someone forgets to update the spreadsheet after an order? What happens if a customer orders too many of one part and asks to adjust their order? What happens if a customer has to return defective parts?
This is where inventory management software, which automates repetitive tasks, reduces human errors, produces inventory reports, and more comes in.
Just like software can make your accounting or customer relationship management much easier and more effective, it can also take a lot of the pain out of tracking inventory. Inventory management tools can be set up to automatically update inventory levels when orders are received from multiple sources, whether online or in-person.
This type of system also enables businesses to use perpetual inventory management, which is a must for businesses that move lots of inventory. Read more about perpetual inventory management here.
Inventory tracking will look a little different depending on which type of inventory management software you’re using, but here are some of the most common software features that can help with inventory tracking:
Product categorization and custom tagging: Rather than manually categorizing your inventory in a spreadsheet, which is prone to inconsistencies and labeling errors, this feature lets users use drop-down menus or custom tags to categorize products by various attributes. You can then create reports to show every type of item purchased by a customer over the previous year, for example.
Inventory reporting: A key element of inventory tracking is visibility and transparency. After all, how can you track what you can’t see? While you could email your inventory tracking spreadsheet to relevant stakeholders, how do you ensure that they all have the latest version, or how do you present it in an easily understandable way? Inventory reporting can handle all of this for you. For example, you can create visuals showing an increase in demand for a certain product over the previous quarter, how long it takes for certain products to go from order to arrival at your facility, shortages in supply versus demand for a specific product, and almost anything you can imagine based on your inventory data.
Barcoding/RFID: Keeping a digital record of all of your inventory is great, but it’s only half of the battle. A barcoding or RFID (radio frequency identification) system allows businesses to physically scan everything coming into and leaving their facility, automatically tracking location and updating inventory levels.
In this article, we looked at how small businesses can do basic inventory tracking without software, how small retailers can use their point of sale system to track inventory, and how inventory management software can make inventory tracking much easier. But inventory management software can do much more than that.
For example, inventory management software can help businesses create automatic recurring orders, manage a warehouse with pick-and-pack assistance, communicate behind the scenes with vendors, and even use AI-powered inventory forecasting to predict future demand.
That’s just a short preview, but when you’re ready to explore inventory management systems that best suit your business needs, we have you covered. Our 2022 Category Leaders in Inventory Management features 15 top-rated inventory management products based on thousands of verified user reviews (full methodology here).
Want to learn more about inventory management? Check out these related articles from our inventory management blog:
Note: The applications mentioned in this article are examples to show a feature in context and are not intended as endorsements or recommendations. They have been obtained from sources believed to be reliable at the time of publication.
1. Dan Gray, general manager of Kotn Supply, LinkedIn
2. Mike Nemeroff, CEO and cofounder of Rush Order Tees, LinkedIn
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