Inventory Management

The Importance of Small Business Inventory Management

Jun 24, 2022

Inventory management is critical for any business that deals with physical product. Learn about the importance of inventory management—and how software can help—here.

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Andrew ConradSr Content Writer
The Importance of Small Business Inventory Management

What we'll cover

Inventory management can be a big challenge for any business that deals with the supply and demand of physical products. 

“One day, there could be a stock shortage, the next you have too much inventory,” says Kevin Callahan, cofounder and CEO of Flatline Van Co., an Oregon-based van parts supplier. “Always have a contingency plan in place for multiple scenarios to address constantly changing demands. Not having one leaves you open to all sorts of problems.”

If you’re responsible for inventory planning or management at your small or midsize business, the last thing you need is “all sorts of problems.” In this article, we’ll look at the importance of inventory management along with potential solutions that will keep you covered even when conditions change unexpectedly. Let’s get started.

What is inventory management?

Inventory management is the practice of monitoring all replenishable parts and supplies in an organization, and adjusting the storage and replenishment of these items as necessary, in order to meet customer demand.

Most modern companies use some sort of inventory management system to assist with this process, rather than do it manually with spreadsheets.

inFlow inventory

Product categorization in inFlow Inventory software (Source)

An inventory management system is a software tool that helps businesses track physical inventory throughout the supply chain, from supplier to warehouse to the end customer. These tools help businesses optimize their inventory management, helping to make sure that they always have enough inventory to meet customer demand without carrying too much, resulting in wasted resources.

Want to learn more about how inventory management fits into the bigger picture of logistics? Check out this short video from the University of Arkansas:

Introduction to inventory management (Source)

Are you a small retailer?

If you’re a small-business retailer, you might be here looking for inventory management solutions for your business. But you probably don’t need an inventory management system. Why? Because you’ll most likely be better served by a retail point of sale (POS) system with built-in inventory management that updates your inventory in real time every time a customer makes a purchase. (And if you exclusively sell your products online, look for an eCommerce solution with built-in inventory management.)

If your current retail POS system or eCommerce tool is falling short of your inventory management needs, you most likely need a more robust system rather than adding a separate inventory management system and trying to get it to work with your POS system. This is why standalone inventory management software is best suited for distributors and parts suppliers.

Why is inventory management important for businesses?

It might seem obvious why good inventory management is important for any business that deals with physical inventory, but to put it simply: If you don’t have enough inventory you’ll lose revenue by missing out on potential sales, and if you have excess inventory you’ll lose revenue in extra storage costs and wasted product. That’s why it’s so important for businesses to find the sweet spot in inventory planning between these two extremes.

Advanced inventory management software includes inventory optimization that is powered by machine learning. This technology helps inventory managers know exactly when to reorder to avoid shortages while maximizing warehouse space availability. On the other hand, trying to optimize your inventory level too much can result in shortages when unforeseen factors come into play, so it’s not a bad idea to err on the side of a little extra supply. Take, for example, the great toilet paper shortage of 2020.

Fortunately, effective inventory management practices backed by technology can help you prepare for changing demands and avoid getting caught short handed or stuck with unsellable product. For example, AI-powered inventory forecasting can help you anticipate spikes in demand or cold periods and prepare accordingly, and supplier management can help you improve communication with vendors to replenish goods faster during a shortage.

Ready to learn more about inventory forecasting? Check out our guide for small businesses here.

In the next section, we’ll take a closer look at these and other inventory management software features.

What are the essential features of inventory management software?

Software can help take a lot of the repetitive work out of inventory management, such as updating stock levels, inventory tracking, recording transactions, and calculating when to reorder. Let’s take a closer look at some of the essential features that make inventory management software work.

  • Product categorization allows inventory managers to tag products with various attributes and custom tags, such as type, supplier, and price, to help with forecasting and reporting.

  • Reporting helps inventory managers create reports that can be used to share sales numbers, supply levels, costs, warehouse utilization rates, and inventory visibility.

  • Purchase order management enables inventory managers to create and edit purchase orders which can be used to order more product and create recurring orders. Some systems can even automatically submit these purchase orders when stock reaches a certain threshold.

  • Order management organizes and processes orders from all incoming sales sources, whether online, over the phone, or even a physical sale (for example, at a trade show). This feature also helps with real-time inventory data by updating stock levels as soon as a sale is processed.

  • Warehouse management helps inventory managers keep track of exactly where specific products are stored in a warehouse, receiving and shipping orders, and picking and packing products.

  • Barcoding and RFID allows inventory managers to attach physical barcode stickers and RFID (radio frequency identification) tags to items, allowing workers to scan and track items with barcode scanners and RFID readers.

  • Supplier (vendor) management gives inventory managers visibility into the status of incoming inventory from third-party vendors and distributors.

  • Reorder management works behind the scenes of your inventory management software to calculate the optimal time to reorder based on trends and AI-powered forecasting. This feature can typically be configured to send alerts when stock reaches a certain level, and even reorder automatically.

Can I do inventory management without inventory management software?

If you have a small product line or only a handful of customers, you may be wondering if you can manage to get by without investing in an inventory management solution. The short answer is yes, you can manage your inventory without inventory management software. In fact, you could technically manage your inventory without computers or software at all, just using a pad of paper the way businesses did before computers.

You could also manage your budget and customer relationships this way. But would you really want to? Sure, you might save some money on software fees, but imagine the time you’d have to spend manually entering transactions, updating stock levels, and double checking numbers. Even if you’re comfortable doing all of this work manually, you’ll still be missing out on features like automatic reorders, real-time stock updates, barcoding, and much more.

Taking a DIY approach to inventory management also makes it impossible to use perpetual inventory management, which is a must for businesses that move lots of inventory. Check out our primer on perpetual inventory management here.

If you still feel like you’re not ready to invest in an inventory system, you might consider using a spreadsheet to manage your inventory.

Here’s a video guide that will help you do this:

How to keep inventory using a spreadsheet (Source)

Ready to explore inventory management software?

In this article, we looked at why proper inventory management is so critical to the success of your business, along with insights into how technology can help you prepare for the inevitable shortages and surpluses that come with dealing with inventory and supply chain issues.

The most effective way to implement this technology is through inventory management software.

If 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).

category leaders inventory management

GetApp’s 2022 Category Leaders in Inventory Management (Source)

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.

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About the author

Andrew Conrad

Sr Content Writer
Andrew Conrad is a senior content writer at GetApp, covering business intelligence, retail, and construction, among other markets.

As a seven-time award winner in the Maryland, Delaware, D.C. and Suburban Newspapers of America editorial contests, Andrew’s work has been featured in the Baltimore Sun and PSFK. He lives in Austin with his wife, son, and their rescue dog, Piper.
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