Asset Intelligence and Management

Asset Intelligence and Management

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10 Essential Inventory Management Best Practices Every Business Should Follow

Effective inventory management is important for any business that deals with physical products. It ensures that you have just the right amount of inventory on hand to meet  demand without overspending on extra stock. Implementing best inventory management practices helps companies work more efficiently, cut expenses, and generate more profits. 

What are best practices in inventory management? 

Best inventory management practices are strategies and guidelines that let businesses manage and control material, parts, and consumables used in their production process.  

These practices help companies maintain optimum stock levels by avoiding costs related to storing too many items or purchasing more inventory items than needed. Having a set of best practices streamlines  operations and decision making according to industry approved standards and guidelines.    

Optimizing your inventory management process is crucial for any business to maximize profits as the purchase, organization, and use of inventory items has a substantial effect on the bottom line. This article will cover the importance and top 5 best practices of inventory management. 

Top 10 best practices for effective inventory management 

Here are 10 key inventory management practices that every business should adopt:

1. Batch tracking

Assigning unique batch numbers or allocating codes during the receipt of goods enables tracking inventory by specific batches and purchase orders. This identifies date of manufacture, expiration date, and facilitates targeted recalls or quality control for batches with issues. 

Batch tracking allows specific batch traceability and permits the FIFO method to be implemented. It also links inventory sub-ledgers, purchase orders, and material batches for end-to-end tracking.

2. Implement FIFO  

Using  oldest inventory items first, based on receipt dates reduces losses from product expiration and obsolescence. 

This stock management tip also helps you in maintaining freshness of perishable goods in inventory. Following FIFO results in the most accurate valuation of inventory for accounting purposes. FIFO should be combined with batch tracking for easy identification of receipt dates.

3. Conduct regular audits  

Performing periodic wall-to-wall physical inventory counts and comparing the quantities counted to the balances in the inventory records helps identify discrepancies and variances. Regular cycle counts highlight inventory losses due to damage, expiration, theft, or errors for write-offs.

 It ensures the inventory management system reflects the actual stock available on hand. Conducting audits also provides an audit trail that helps prevent inventory misplacement.  

4. Use inventory management software

A centralized digital system to manage inventory, orders, shipments and other transactions provides real-time visibility into stock levels across the supply chain.

 Inventory management software automates routine processes which minimizes errors and delays. It generates insightful reports to enable data-driven decision making around inventory. A unified system integrates accounting, sales orders, procurement and other functions for smooth information flow.

5. Do ABC analysis

ABC analysis involves classifying inventory into A, B, and C categories based on annual consumption value. Tight controls and  focus needs to be applied to A-items that account for 70-80% of the total inventory value. 

B-items warrant less oversight and get medium level attention and resources. C-items require the least management attention as they make up a small portion of the total value. This targeted approach concentrates resources where they provide maximum impact.

6. Safety stock management

Determining optimal safety stock levels provides a buffer to handle uncertainties in demand as well as variability in supply delivery lead times. Historical sales patterns and demand forecasts help set up the required safety stock levels. The aim is to avoid stockouts but not overstock either. Replenishment cycles can be derived from the agreed upon or projected order frequency and lead times.

7. Manage supplier relationships

Strategically developing partnerships with reliable suppliers enables negotiating long-term contracts that provide assured supply and stable pricing. Involving suppliers early in product design as well as in inventory and production planning allows better coordination. Sharing demand forecasts further facilitates synchronized strategies. Inventory costs can be optimized through approaches like vendor managed inventory.

8. Categorization of inventory

Segmenting inventory into raw materials, work-in-progress, finished goods, and returnables, expendables allows tailored management practices to be applied that are best suited to the characteristics of each category. 

For example, finished goods may need demand forecasting and sales order tracking, while raw materials focus on replenishment times and supply lead times.

9. Continuous process improvement

Regularly reviewing and refining inventory management processes using approaches such as the  lean, and just-in-Time models and advanced automated tools helps identify problem areas. Areas of waste or non-value activity can be addressed and eliminated.

 Improving workflows, storage layouts, procedures, and key metrics boosts overall inventory performance. Small enhancements done consistently over time lead to significant efficiency gains. It also ensures inventory practices keep pace with evolving business needs.

10. Improve warehouse layout

A good warehouse layout improves inventory traceability, space utilization, order fulfillment and inventory accuracy.By designing warehouse layouts based on inventory velocity or frequency of access, material movement and picking efficiency can be improved. 

Faster moving items should be stored nearer to shipping areas, while slower items can be in zones further away. 

Standardizing logical layouts within and across warehouses is key. Ensure inventory labels and signages are highly visible.

Why is it important to follow best practices in inventory management?

Following best practices in managing inventory is critical for several reasons:

Optimizes inventory costs  

In order to reduce needless carrying expenses, inventory levels must be optimized. Keeping extra inventory that isn’t used takes up working capital and increases costs associated with handling, storage, insurance, taxes, and other costs. 

By closely coordinating inventory procurement with real consumer demand, you can prevent overstocking. Businesses can reduce inventory carrying costs by as much as 20% by putting best practices into effect, claims Deloitte. 

Leveraging automation in inventory management minimizes overall inventory carrying costs. Modern cloud-based inventory management software provides businesses with real-time inventory visibility so they can keep stock quantity at optimum levels. The ability to keep stock quantity at optimal levels frees up working capital for other business purposes.

Provides actionable data 

Inventory analysis provides valuable insights that can help fine-tune stock management approaches across procurement, production and fulfillment. Tracking key metrics helps assess inventory turnover rates, identify slow-moving stock that needs markdowns, determine optimal reorder points and order quantities, etc. 

Adopting best practices allows data-driven decisions to continuously improve inventory operations. Real-time inventory tracking through modern technology solutions further enables informed data-based management.

Improves customer service

Proper demand forecasting combined with optimum safety stock levels guarantees that there is enough inventory on hand to fulfill client orders and reduce backorders. When orders cannot be completed promptly, stockouts resulting from low inventory lead to lost sales opportunities and unhappy customers. 

Carrying appropriate levels of inventory  provides the ability for quick production  fulfillment and enhances customer satisfaction and loyalty. 

Increases efficiency

Implementing standardized processes like batch tracking, unique SKU numbers, and automatic identification and data capture streamline warehouse workflows and inventory management operations. 

Automation and optimized warehouse layouts drastically reduce the time staff spends on routine inventory maintenance, counting, and picking activities. Workers freed from repetitive manual tasks can focus their time and energy on value-adding activity. 

Identifies gaps and improvement areas 

Performance metrics generated from automated inventory management software highlight specific processes that may need enhancement or refinement. Detailed data analysis aids fact-based review of current practices across the inventory lifecycle to discover issues, gaps and opportunities for improvement. 

Management can then use actionable insights to take timely corrective actions whenever needed. Continual assessment and enhancement of inventory management practices enables sustaining optimal performance over time.


In a nutshell, implementing inventory management best practices is vital for efficient business operations, optimal use of resources, and boosting profits. It is very important to maintain adequate stock levels and implement robust processes.

 The 10 best practices for inventory management covered in the article provide a solid foundation for assessing and improving current inventory management approaches. While specific techniques may vary, adhering to these core principles enables smooth inventory operations.

EZOfficeInventory – Leading Inventory Management Software

EZOfficeInventory provides a robust, cloud-based solution to efficiently manage inventory from procurement ro usage . It offers comprehensive inventory tracking, costing, and reporting capabilities within an intuitive mobile-friendly interface. EZOfficeInventory integrates seamlessly with popular ecommerce platforms, accounting solutions, and barcode scanners to enable a unified system. You get real-time visibility into inventory status anytime, anywhere while minimizing overhead costs. 

Frequently asked questions (FAQs)

Why is real-time inventory tracking important? 

Real-time inventory tracking is important because it offers up-to-date visibility into stock levels throughout the inventory lifecycle  This enables informed decision-making to avoid stockouts or excess inventory. Real-time data allows dynamic adjustments to purchasing, production and fulfillment. It also improves customer service with inventory accuracy and order status visibility.

What are the benefits of accurate forecasting in inventory management?

Effective inventory management requires accurate demand forecasting. With the aid of modern inventory management tools, accurate projections of expected sales allow inventory policies to be better aligned with demand predictions. 

Quality demand projections enable companies to precisely size and control inventories in order to optimize revenue. They also provide critical data to increase efficiency in planning and inventory control.

Which is the best inventory management tool? 

EZOfficeInventory is a cloud-based inventory management software, designed to serve businesses of all sizes. With the support for multiple warehouses, barcode scanning, inventory forecasting tools, purchase order automation, mobile access, and reasonable pricing plans, EZOfficeInventory is one of the top inventory optimization tools out there.