How Do Businesses Manage Inventory?

Published on Feb 23, 2025

If a business doesn’t manage their inventory properly, then they’re probably out of business or going to be soon. Seriously, inventory management is one of the most important things a business that sells products needs to get right. By the end of this article, you’ll know how its done.

What is inventory management?

Inventory management is the process of tracking stock levels for raw materials, consumables, and finished goods throughout a facility and/or warehouse(s). With this information correctly monitored, a business can make better informed decisions on when to buy new materials and how much to buy. For example, if stock is running low, the business needs to know about it quickly in order to restock. Alternatively, if a business has more than enough on hand, they need to know about this so they don’t waste money on an excess amount of certain items (this is especially important for items with a shelf life). EOQ (economic order quantity) is a formula used to optimize the total order quantity which minimizes the cost of inventory through a balance of order and hold costs. The formula is √(2DS/H) where D is the annual demand, S is the cost per order, and H is the holding cost/unit/yr. This formula is widely used in automated software solutions looking to streamline inventory management and supply chain operations.

Proper order management also improves order fulfillment and customer satisfaction. Have you ever ordered a product, only to have the company tell you it’s out of stock and you won’t see it for a month? Yeah, that’s pretty annoying. However, if the business was managing their inventory properly, they would’ve been able to notify the customer before they even purchased the product.

How important is inventory management?

If a business doesn’t have their inventory process in check, they can lose millions of dollars or go out of business all together. Toys "R" Us is a great example of what happens when a business doesn’t manage its inventory properly. At one point, they were one of the biggest toy retailers in the world, but they failed to keep up with modern inventory systems. This meant they often ran out of popular toys during peak shopping seasons, frustrating customers, while also being stuck with too much stock of items that weren’t selling. On top of that, they couldn’t compete with online retailer companies like Amazon, who used real-time inventory tracking to fulfill orders quickly. This poor inventory management, combined with other financial struggles, eventually led to their bankruptcy in 2017.

Inventory Management software

Now that you know the meaning of inventory management and how important it is, you may be asking, what’s the solution? Well, that’s exactly what inventory management software is designed for. A quality inventory management system should seamlessly track stock levels at all times, saving the business time and effort from doing it manually or with a lag time. The software should also provide real-time updates and alert the business of over/under stocking so they can make informed decisions in a timely manner. An example of such a decision could be updating their website to mark a product as sold out. With the right system in place, businesses can reduce waste, improve efficiency, and keep customers happy by ensuring products are always available when needed.

Conclusion

Effective inventory management is essential for any business who is selling and/or warehousing products that want to stay competitive and profitable. Without it, they risk wasting money on excess stock and running out of popular products at critical moments. Orfula will be able to help solve these issues effectively. Our inventory management solution will help track stock levels in real-time by combining an order channel integration and product items which can be customized to support an associated BOM or a basic raw material. By using the right tools, you can streamline supply chain operations and set your business up for long-term success.