12 Tips for Improving Inventory Management Efficiency

With the right tactics, inventory management can help reduce waste and greatly improve the overall efficiency of your operation. In this week’s post, we look at 12 tips to improve your inventory management efficiency.

The importance of efficient inventory management

Efficient inventory management is the backbone of a well-functioning production or distribution operation. Keeping inventory organized helps optimize the supply chain, reduce costs, prevent stockouts, and avoid excess. The key lies in access to real-time inventory data, which informs better decision-making. Here’s a closer look at why you should improve your inventory management:

Save money

Efficient inventory management helps you hold just the right amount of goods. Fewer excess items mean fewer chances for dead stock and reduced holding costs. Conversely, too little inventory can also be expensive as emergency purchases often come at an added cost.

Improve your cash flow

Excess inventory ties up money that could be used elsewhere in your business. Efficient inventory management frees up that cash, allowing purchase orders to match up with actual demand. By maintaining optimal stock levels and movements, you avoid waste, lower storage costs, and have more funds available for business growth or to cover unexpected costs.

Create happy customers

Nobody likes waiting for their order because it’s out of stock—or worse, finding out it’s been discontinued after the fact. With a well-managed inventory, you can fulfill customer orders quickly so that your customers get what they want when they want it. Reliability builds trust and keeps your customers coming back.

Increase visibility

Optimal inventory management means sufficient visibility into stock movements. Real-time tracking systems give you a clear view of your stock at all times. This allows insight into what’s selling, what’s sitting idle, and when it’s time to reorder. This visibility helps you make better decisions, avoid stockouts or overstocking, and respond quickly to shifting customer demand and market trends.

Enhance productivity

Do your employees waste time looking for items instead of focusing on tasks that grow the business? Do you find your system riddled by human error? Streamlining your inventory management system means that your team can spend less time picking stock or correcting mistakes and more time on productive tasks that drive growth, like timely order fulfillment. Clear organization and efficient workflows are sure to boost your team’s overall productivity. 

Minimize risk

Spoiled, damaged, or stolen goods can eat away at profits. Efficient inventory management minimizes those risks by tracking everything closely, helping avoid discrepancies like mismatched inventory counts that lead to operational delays, overstocking that ties up cash and takes up valuable space, and order errors that frustrate customers. 

12 Tips for improving inventory management efficiency

Here are 11 essential steps you can implement right away to start improving your inventory management process.

1. Set your warehouse up properly

An organized warehouse is key to an efficient inventory management system. To create a system that reduces mistakes and boosts productivity, start with these steps:

• Plan your layout. Divide the space into logical zones like receiving, storage, picking, and packing. Place frequently used items near workstations for easy access.
• Maximize space. Utilize both vertical and horizontal storage, but leave enough room for workers, trolleys, and equipment to move freely.
• Mark pathways. Use signs and floor markings to guide workers and define work areas. This prevents confusion and keeps operations running smoothly.
• Prioritize safety and lighting. Ensure the space is clean, well-lit, and regularly maintained to prevent accidents and improve ergonomics. 

For more tips, explore our guide on Warehouse Organization.

2. Create an SKU system and label everything

Creating an effective SKU (Stock Keeping Unit) system is key to a smooth inventory process. An SKU system organizes your inventory records, making it easier to track, find, and manage products. This reduces errors, speeds up tasks like picking and packing, and helps maintain accurate stock levels.

Start by designing clear, consistent SKU codes that describe product attributes like category, color, size, and material. Consider using simple alphanumeric codes that are short, intuitive, and easy for your team to recognize at a glance. Don’t forget to leave room for future growth by using a format that can accommodate new products or variations. 

For example, a blue running shoe in size 10 might use the SKU code SRB-10US: S for sneakers, R for running, B for blue, and 10US for size.

Once your codes are ready, label everything clearly, including items, shelves, and bins. Place labels where they’re easy to see or scan and maintain consistency across all locations to avoid confusion.  

For a detailed guide on building and managing SKUs, visit our in-depth article: What Are Stock Keeping Units (SKUs) and How to Manage Them?

3. Track your inventory meticulously

Inventory management isn’t just about maintaining the right stock levels, but also knowing what you have in stock, where it’s located, where it came from, when it expires, and where it’s going. Inventory tracking also gives insights into cash flow, production status, orders, and more.

Implementing traceability tools like barcode scanning systems, RFID systems, and inventory tracking software can hugely boost inventory management efficiency. For retail businesses, integrating POS (Point of Sale) systems ensures that inventory levels are updated with every sale. Advanced systems like ERP/MRP software take it a step further by connecting inventory tracking with production planning and order management.

For more tips, check out our guide on Inventory Tracking.

4. Use historical data to forecast demand

Forecasting demand is one of the most powerful functionalities of modern production management solutions, and historical data is the key to making it work. Modern inventory management systems can help predict future demand and stay one step ahead by analyzing past sales data, production cycles, and inventory trends. This helps you allocate resources more effectively and focus on the right products so you don’t miss opportunities to capitalize on popular items. Recognizing patterns like seasonal peaks or slow periods allows you to adjust production accordingly.

Historical data also gives you insight into market trends, such as seasonal peaks or recurring slow periods, that allow you to adjust your operations accordingly. For example, if sales spike every holiday season, you can stock up on high-demand items well in advance. With that, effective demand forecasting strengthens not only your inventory but the entire supply chain. 

5. Set reorder points and safety stocks

Keeping your stock levels in check is a balancing act, and setting reorder points (ROPs) is one of the simplest yet most effective ways to maintain sufficient stock. A reorder point marks the minimum stock level at which new inventory should be ordered. Pairing ROPs with safety stock – a buffer to handle unexpected supply shortages, is a smart way to keep your operations on track even when things don’t go as planned.

To calculate a reorder point, you’ll need three factors: supplier lead time, demand rate, and safety stock. Lead time is the number of days it takes for new stock to arrive after an order is placed. Demand rate reflects how quickly you consume or sell the product daily. And safety stock is a minimum stock level you can set to guard critical items against stockouts. Tracking your order quantity further ensures you’re purchasing just the right amount to maintain balance.

The formula looks like this:

Reorder Point = (Lead Time × Demand Rate) + Safety Stock

For example, if it takes three days for an item to arrive, and you use 100 units per day, your lead time demand is 300 units. Add a safety stock of 400 units, and your reorder point becomes 700 units. This ensures you always reorder before running low, even if supply or demand fluctuates.

While some businesses may use spreadsheets to manage reorder points and calculations, modern inventory management systems streamline the process by automating ROP tracking and adjustments. For a deeper look into managing reorder points, check out our guide: What is Reorder Point and Reorder Point Formula?

6. Use the appropriate valuation method (FIFO, LIFO, FEFO)

Choosing the right inventory valuation method is key to accurate accounting and decision-making. It also affects stock management to a degree. Different valuation methods fit different goals:

• FIFO (First In, First Out). Ideal for businesses that need to use or sell older inventory first. FIFO provides accurate financial reporting and aligns with current market costs.
• LIFO (Last In, First Out). Useful in markets with fluctuating costs. LIFO lowers taxable income by valuing inventory based on newer, higher-cost stock.
• FEFO (First Expired, First Out). Crucial for perishable goods. FEFO prioritizes using or selling items nearing expiration to reduce waste.

Methods like Weighted Average Cost (WAC) and Specific Identification (SI) also offer unique advantages based on product variability and valuation precision. 

For a more detailed overview, explore our guide: Inventory Valuation Methods – Finding the Right Approach.

7. Consider using Just-in-Time inventory management

Just-in-Time (JIT) inventory management is a management strategy that minimizes holding costs and waste by stocking only what’s needed, exactly when it’s needed. Instead of keeping extra stock just in case there’s a spike in demand, JIT inventory focuses on increased inventory control and holding only what’s needed. This helps businesses save money and stay lean while reducing the risks associated with overstocking, like obsolescence and tied-up capital.  

JIT depends wholly on accurate demand forecasting, reliable suppliers, and real-time inventory tracking. Capable production management tools are essential for providing visibility, enhancing production scheduling, and managing the supply chain effectively. The just-in-time strategy aligns best with make-to-order producers with good supply chain management practices.

Learn more about implementing JIT in our guide: What Is Just-in-Time (JIT) Inventory?

8. Use ABC analysis

ABC analysis is an inventory management technique that helps businesses prioritize inventory optimization by categorizing items into three groups:

• A-items. High-value, high-impact items that require frequent monitoring and careful management (the top 20% of items that altogether hold up to 80% value).
• B-items. Moderate value and management effort that bridges A- and C-categories.
• C-items. Low-value, low-priority items that are best managed with bulk orders (bottom 50%). 

ABC analysis follows the 80/20 rule to improve accuracy, cut holding costs, and avoid stockouts for key items. For even better tracking and real-time updates, pair using ABC analysis with a competent ERP system.

Learn more about ABC Analysis (80/20 Rule) in Inventory Management here.

9. Implement barcodes

Barcodes make inventory tracking faster, more accurate, and less stressful. By giving each item a unique barcode, you can scan items to track their movements and automatically update inventory levels using connected software. This reduces errors and saves time, making tasks like receiving shipments, picking orders, and cycle counts quicker and easier. 

Whether you’re running a small shop or managing a large warehouse, barcodes are a simple but powerful way to optimize inventory management. Learn more about barcoding systems: Barcode Inventory Control – Benefits and Tips.

10. Cycle count your inventory

Cycle counting is a smart way to keep your inventory accurate without halting operations. Instead of shutting down the stockroom every time you need to ensure the accuracy of stock records, cycle counts enable auditing small portions of stock on a regular basis. This blends counting into your regular daily or weekly routines.

Popular cycle counting methods include:

• ABC analysis. As mentioned above, this method prioritizes frequent counts for high-value or fast-moving items.
• Random sampling. This method checks items at random to maintain overall accuracy.
• Control group. This method focuses on a small set of items to spot errors and refine processes.

With tools like barcodes or RFID systems, cycle counting becomes even quicker and less error-prone. Regular checks help avoid overstocking, stockouts, and unnoticed errors.

11. Periodically review your product portfolio

Regularly reviewing your product portfolio, also known as SKU rationalization, helps streamline your catalog by phasing out underperforming or obsolete items. 

To conduct an effective review:

• Analyze SKU performance. Evaluate sales, demand, production costs, and inventory turnover to identify strengths and weaknesses.
• Identify overlaps. Remove products that compete with or cannibalize the sales of similar items.
• Consider external factors. Look at competitor pricing, promotions, or trends that may influence your products’ performance.
• Reassess your marketing. Determine if low-performing items are underperforming because of insufficient marketing.

Categorize SKUs into groups to decide which to keep and which to discontinue. Reviewing your portfolio every 6–12 months helps align it best with your business goals.

12. Implement inventory management software

Managing inventory using spreadsheets or paper-based systems is time-consuming and prone to errors. Inventory management software saves heaps of time, eliminates human errors, and aligns your inventory with the rest of the operation. It tracks inventory in real-time, streamlines reordering, simplifies booking raw materials and order management, increases accounting accuracy, and helps you avoid costly issues.

Software like MRPeasy gives you a host of features to stay organized and efficient. This cloud-based solution integrates inventory management with your entire operation. 

Here’s how MRPeasy can help improve your inventory management:

• Real-time inventory tracking. MRPeasy provides live visibility of stock levels, including on-hand, available, and expected inventory.
• Purchase management. Generate pre-filled purchase orders for low-stock items, easily manage all your suppliers, and keep a close eye on suppliers’ lead times.
• Integrated production planning. Features like drag-and-drop rescheduling, a master production schedule, and one-click product cost estimation lead to more efficient production planning.
• Barcoding and scanning. Integrated barcoding for enhanced tracking reduces manual input, speeds up workflows, and improves accuracy across inventory, shipments, and production processes.

Key takeaways

• Proper inventory management is essential for maintaining operational efficiency. It helps ensure optimal stock levels, reduce costs, and prevent disruptions in production or order fulfillment.
• Efficient inventory management plays a key role in saving money and improving customer satisfaction. Minimizing waste, optimizing cash flow, and meeting customer demand on time help build profitability and trust.
• Organizing and labeling inventory effectively can significantly enhance accuracy and productivity. A well-structured warehouse, clear SKU systems, and barcoding streamline tasks like tracking, picking, and packing.
• Data-driven approaches are crucial for smarter inventory management. Using historical data for forecasting, setting reorder points, and applying ABC analysis help prioritize stock and improve decision-making.
• Implementing modern tools and strategies can transform inventory management. Software solutions and clever management strategies help automate processes, reduce errors, and integrate inventory with overall business operations.

Frequently asked questions

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