Inventory Management: How it Works and Tools (2025)

Inventory management covers ordering, storing, and shipping goods and materials. Follow these expert tips and techniques to keep your supply chain flowing.

Inventory management is the process of organizing stock on its way through a supply chain.

The goal of inventory management is to minimize the cost of holding inventory while maintaining consistent stock levels and getting products into customers’ hands faster.

Are you unsure where to start with inventory management? From avoiding overstocking and inflating costs to complete stockouts, this walkthrough contains tips and techniques from inventory management experts for monitoring stock and keeping your customers happy.

What is inventory management?

Inventory management is overseeing and controlling the flow of goods within a business. It involves tracking the movement of goods and materials, monitoring inventory turnover, and optimizing replenishment to ensure products are always available.

Inventory management aims to minimize the cost of holding inventory by helping you know when it’s time to replenish products or buy more materials to manufacture them. 

What counts as inventory?

• Raw goods: Materials or substances used in the production or manufacturing of products. Raw materials include wood, metals, plastics, or fabrics used to create finished goods. They come from one or more suppliers and producers.
• Work-in-progress (WIP): A partially finished product awaiting completion. WIP represents production costs such as labor and machinery. Costs are transferred to the finished goods account and attributed to the cost of sales.
• Finished goods: This type of inventory refers to the number of products in stock available for customers to buy. Once a WIP is complete, it becomes part of the finished goods inventory. 
• Maintenance, repair, and operations goods (MRO): Materials and equipment used in the production process but not as part of the final product. These include personal protective equipment, cleaning supplies, office supplies, and tech equipment. 

How does inventory management work?

Most of today’s inventory management systems are digital and cloud-hosted. They work across devices and users to ensure that everybody interacting with the supply chain is on the same page.

While traditional approaches require connecting multiple systems, modern solutions take a different approach. The most effective platforms handle inventory as part of a single retail operating system, where all data naturally flows between online and in-store operations.

This unified commerce strategy eliminates the complexity of maintaining separate systems for different sales channels. Stock levels update automatically whenever a sale happens, whether online or in-store, preventing overselling and improving operational efficiency.

Using unified inventory management can save significant time, as shown by Oak + Fort, which reduced staff time by 50 hours per week by simplifying its order management process. 

"We go through constant inventory fluctuations and shifting demands," explains Guillaume Jaillet, chief omnichannel officer. "It was hard to reliably and accurately represent which stores had certain items in stock to our digital customers when they wanted to try something on." After unifying their retail operations, they reduced operating costs by 47%.

Plus, with a unified system, you’ll avoid the headache of maintaining separate systems for online and in-store inventory, helping reduce operating costs while ensuring customers can always find what they're looking for.

Benefits of inventory management 

Whether you’re a small business or company using enterprise resource planning (ERP), inventory management is important for several reasons:

Improve efficiency

Keep only the inventory you need to cut storage costs. Track how products move from purchase to sale to find and fix inefficiencies. Use methods like just-in-time (JIT) delivery and first in, first out (FIFO) to keep products moving smoothly.

Improve financial reporting

Good inventory records help predict what customers will buy. You can make smarter purchasing decisions and spot trends early by tracking sales patterns. 

Inventory directly affects sales (by dictating how much you can sell) and expenses (by dictating what you need to buy). Both of these elements factor heavily into your business’s current assets—how much cash you have on hand. This improves financial reports and helps manage cash flow.

Mitigate risk

Good inventory planning protects your business from supply chain problems. You can set up your system to track sales parts and stock levels so you can reorder before running out.

Keeping safety stock also helps handle:

• Unexpected spikes in demand
• Shipping delays
• Raw material shortages
• Supplier issues

A strong inventory system with built-in safeguards helps prevent supply chain management breakdowns and keeps customers happy. For example, the Stocky app for Shopify POS lets you configure minimum stock levels based on supplier lead times and anticipated demand. When quantities in your inventory management system fall below this threshold, Stocky can automatically generate a purchase order for the relevant supplier.

Build customer loyalty

Good inventory management means filling orders quickly and keeping popular items in stock.

Using data from your inventory analytics, you can adjust your procurement schedule so that best-selling items are always in stock. Reliable stocking practices also reduce delivery delays and backorders, so loyal customers trust their orders will be delivered on time. 

Maintain good supplier relationships 

When you routinely monitor stock levels and use data-driven forecasting methods like economic order quantity (EOQ), you can communicate order needs to suppliers with precision and consistency. Clear, predictable ordering patterns strengthen supplier relationships because vendors appreciate reliable partners who place timely and accurate orders.

Avoids spoilage

If you’re selling products with expiry dates, every sale opportunity has a time limit. Managing inventory helps you avoid unnecessary spoilage by optimizing inventory control.

Prevents dead stock

Dead stock won’t sell—not because it’s expired, but because it may have gone out of season, out of style, or otherwise become irrelevant. By adopting a diligent strategy, you can address this costly inventory mistake.

At the opposite end of the spectrum, you should also monitor your inventory levels to reduce the risk of overselling or accounting for phantom inventory.

15 inventory management techniques

1. Economic Order Quantity (EOQ)
2. Demand planning
3. Inventory counts
4. LIFO vs FIFO
5. RFID technology
6. Barcodes
7. ABC reporting
8. Inventory valuations
9. Minimum order quantities
10. Safety stock alerts
11. Inventory audits
12. Dropshipping
13. Supplier relationships
14. Outsource inventory management
15. Just-in-time

Regardless of the system you use, the following techniques will improve your inventory management—and your cash flow:

1. Economic order quantity 

Economic order quantity (EOQ) helps you determine exactly how much inventory to order each time. Order too much, and you waste money on storage and risk items going bad. Ordering too little will cause unhappy customers and more spending on rush shipping. 

EOQ finds the perfect balance by looking at how much you sell each year, what it costs to place an order, and how much it costs to store items. While many software systems can calculate this automatically, understanding EOQ will help you make smarter ordering decisions.

2. Demand planning

A huge part of good inventory management comes down to accurately predicting demand. While countless variables are involved in projecting future sales, pay close attention to last year’s sales during the same period, guaranteed sales from contracts and subscriptions, seasonality, and upcoming promotions. Some demand forecasting tools also use machine learning algorithms to analyze large datasets and anticipate demand more accurately. 

3. Inventory counts

In most cases, you’ll rely on inventory software and reports from your warehouse management system to know how much product you have in stock. However, it’s important to make sure the facts match up. There’s no better way to gain peace of mind than a physical inventory count or stock take.

Update inventory records in real-time to ensure inventory reconciliation. Access to fresh, correct inventory data is key to moving products quickly and efficiently.

4. LIFO vs. FIFO

Last in, first out (LIFO) inventory management assumes that the merchandise you acquired most recently was also sold first. If prices rise over time, then the most recently purchased inventory will also be the most expensive. That means higher inventory costs will yield lower profits and, therefore, lower taxable income.

First in, first out (FIFO) determines the cost of goods sold (COGS). It means your oldest stock gets sold first—especially important for avoiding spoilage. 

5. RFID technology

Radio-frequency identification, or RFID technology, certainly has a place in the future of inventory management. It can update figures in your inventory management system without requiring a direct line of sight to the tag.

Many companies already use RFID tags to search for stock, combat phantom inventory, and decrease excess inventory. For example, fashion retailer Rebecca Minkoff uses RFID tags to track inventory when it arrives at their store. Levels are automatically adjusted in its inventory management system with 99% accuracy compared to manual methods. 

6. Barcodes

Some retail stores use a barcode scanning system to keep track of product stock levels. This involves scanning some type of barcode that identifies each product, sending that information back to your IMS so you can track each item. 

Barcode inventory systems automate the tracking of products from the moment they enter your store to the moment they're sold. It provides accurate, real-time insights into your inventory, helping you make smarter decisions and keep your customers satisfied.

7. ABC reporting

Categorize your inventory using an ABC analysis. You can use an ABC report to grade the value of your stock based on a percentage of your revenue:

• A = % of stock that represents 80% of your revenue
• B = % of stock that represents 15% of your revenue
• C = % of stock that represents 5% of your revenue

Your A stock represents your most profitable and valuable products. You’ll want to make sure you always have these products on hand so you don’t miss out on future sales. Conversely, C stock is slow-moving or dead. Discount these items to free up cash and shelf space.

8. Inventory valuations

Inventory valuation is the cost of unsold inventory at the end of a reporting period. Since inventory is often your largest asset, it’s important to consistently measure its value. How you value inventory impacts your cost of goods sold, net income, and ending inventory—all factors that directly affect profitability. There are also tax implications associated with your inventory valuation method. 

9. Minimum order quantities

Minimum order quantity (MOQ) is the smallest number of products that you must purchase in one order from a supplier. Suppliers set MOQs to avoid wasting resources on orders that deliver them little or no profit.

By strategically managing this metric, you can optimize inventory levels, reduce costs, and maintain a smooth supply chain, ultimately contributing to the success and profitability of your retail business.

10. Safety stock alerts

Safety stock or par levels are the minimum amount of product required at all times. You know it’s time to make an order when your inventory dips below these predetermined levels. Par levels should vary by product, customer demand, and the time it takes for new stock to arrive (your IMS will track this information in a retail sales report).

11. Inventory audits

It’s important to audit inventory regularly. Run monthly and annual audits to ensure accuracy between your stock quantity and financial records. Investigate discrepancies until you find and address the root cause. 

12. Dropshipping

With dropshipping, you never touch the products you sell. When a customer buys from you, your supplier ships the item directly to them. This means you don't need to buy inventory upfront or find space to store it. 

While this makes it easier to start selling, you'll need to pick good suppliers since they're handling your products and shipping. Many stores use dropshipping to test out new products before buying their own inventory.

13. Supplier relationships 

Strong relationships with suppliers give you more leeway when unexpected problems arise. When you have an existing supplier relationship, minimum order quantities are often negotiable. To maintain your end of the relationship as a retailer, let your supplier know when you expect an increase in sales or a large number of purchase orders so they can adjust production and lead times. 

It’s also important to go over supplier performance. Identify where suppliers can improve or when to cut them off. 

14. Outsource inventory management 

Prefer not to handle the logistics of inventory management? Outsource it to a third-party logistics (3PL) partner with the resources to store, fulfill, and ship orders on your behalf. 

Shopify Fulfillment Network distributes your inventory across a network of US warehouses on your behalf. As a result, you can offer two-day delivery to your customers at an affordable rate. As your fulfillment partner, Shopify will take customer orders, receive your customer returns, and reenter usable inventory into circulation.

15. Just-in-time

Just-in-time or JIT inventory management is about keeping the lowest inventory levels possible to meet demand, replenishing them just before a product goes out of stock. It requires careful planning and forecasting but works well for rapidly growing brands with scheduled launches and product line extensions.

How to manage inventory 

1. Analyze suppliers

Finding good suppliers is key to fulfilling orders on time. Before you commit to one, check how fast they deliver, what other businesses say about them, and how well they communicate. 

Share your plans with vendors about when you'll need more products. This helps them prepare and avoid delays. Work with a mix of local and international suppliers to reduce risks like slow delivery and dealing with customs. It's also smart to have backup suppliers for your most important items, just in case something goes wrong with your main supplier.

2. Categorize inventory

Classify your products by their value and demand frequency. High-value items (A) need tight controls and frequent checks, while low-value items (C) can be managed in larger quantities.

You should also store similar products, keep perishable items in a FIFO sequence, and label everything clearly. Then, use SKUs to identify and locate products in your system and physical storage. 

3. Track inventory levels

If you want to compete with other online retailers, selling on multiple channels is no longer a question. Customers expect products to be in stock wherever and however they choose to shop. Having a single source of truth for all product data across multiple channels reduces errors and prevents stockouts.

Monitor real-time inventory updates for each product, including quantities that are available, incoming, committed, or located in multiple store locations. This unified view helps you optimize stock levels across all channels—online, offline, or otherwise. When you sell something in your store, Shopify POS immediately updates your online store. This means you'll always know exactly what you have in stock, both online and in your shop, which helps avoid selling items you don't actually have.

When Allbirds adopted Shopify POS and Shopify Plus, it took advantage of all the business tools that came included, notably inventory management. This allowed the retailer to optimize store stock levels, keeping less in-store inventory and requiring less retail space to operate. 

“With Shopify Plus, we have our point-of-sale and ecommerce systems under one umbrella, which serves our ultimate purpose of being an omnichannel retailer and viewing the customer as one customer—no matter where they shop with us,” says Travis Boyce, head of global retail operations. 

4. Set reorder points

Use past sales data and average lead times to calculate a safety margin. Get low-stock alerts and notifications when certain items reach their reorder point. This proactive approach helps you restock before running out.

If you’re on an eligible plan, you can set up custom workflows in Shopify Flow that trigger when an item reaches its reorder point. For instance, Flow can automatically:

• Send a Slack or email notification to your purchasing manager
• Tag products that need replenishing
• Create and send a purchase order to the supplier
• Hide products that are out of stock

These automated workflows help you reorder stock so you won't run out of items and disappoint customers.

5. Conduct regular audits

Physical inventory checks (stocktaking) verify that your online records match your actual stock on hand. Inventory audits help identify theft, damage, or administrative errors early. 

Set a schedule to:

1. Plan the audit date and who will conduct it.
2. Organize inventory in a clear, labeled way.
3. Count and verify each item carefully, investigating discrepancies.
4. Update your records in Shopify accordingly.

6. Forecast demand accurately

Use Shopify’s analytics to spot trends in sales volume, seasonal demand, and best-selling products. If you know particular items sell out quickly during peak seasons (like holiday gifting), place larger orders or order earlier than usual to avoid last-minute scrambling or stockouts.

If you’re planning seasonal marketing campaigns—for example, a Black Friday sale—make sure your inventory levels can support a sudden surge in demand. You might also create bundles or special holiday packaging that need their own stock considerations.

Even with careful forecasting, seasonal spikes can exceed expectations. Keep a safety buffer for high-demand items, especially if supplier lead times increase during busy periods.

7. Review and optimize your process

Inventory management is an ongoing cycle of refinement and improvement. Once you have a clear system for managing online and offline data, review your processes to see how effectively they meet customer expectations and support growth. Here’s what that might look like:

• Track inventory turnover, days of supply, and carrying costs.
• Explore techniques like JIT or EOQ to see which suits your business model best.
• Adjust your reorder points, supplier list, and categorization strategies as your product offerings grow or your customer base changes. 
• Regular reviews keep your processes agile and effective.

Inventory management tools 

Inventory management software comes as a standalone program or is built into an ecommerce platform such as Shopify. If you run your business with Shopify, inventory management is already built in.

You can set up inventory tracking, view your inventory, and adjust your inventory levels in the Inventory area of your Shopify admin. You can also view the history of inventory adjustments and transfers for variants tracked by Shopify.

Shopify also provides inventory reports that show you a month-end snapshot of your inventory. You can access various reports like:

• Average inventory sold per day
• Percent of inventory sold
• ABC analysis by product
• Product sell-through rate
• Days of inventory remaining

To find these reports:

1. From your Shopify admin, go to Analytics > Reports.
2. Click Categories.
3. Click Inventory to filter the reports to show only inventory reports.

Inventory management apps let you monitor the live status of your stockroom. These apps are handy for employees involved in running your business actively, allowing them to access information from a smartphone or tablet. Most offer features such as inventory quantity and location tracking, stock level alerts, and order monitoring.

If you’re a Shopify merchant, try these popular inventory management apps for your store:

• Stocky: Powerful and detailed real-time inventory tracking.
• Thrive by Shopventory: Connect multiple Shopify accounts and automate purchase orders.
• ShipHero: Demand forecasting, purchasing automation, and more.
• Zoho: Integrates with Zoho CRM and Zoho Books.

The future of inventory management

Technology continues to grow and develop at an incredible pace, and many of these new and emerging technologies have applications for inventory management:

Predictive analytics 

Predictive analytics uses a combination of automation, data, and machine learning to deliver accurate forecasts and analyses. Based on algorithms, these analytics models can give retailers data-backed insights that can improve inventory management. This technology only continues to improve over time. And the more data you give it, the better it will know your business. 

Artificial intelligence

Artificial intelligence (AI) continues to develop and gain new applications within inventory management solutions. Self-correcting AI solutions can empower businesses to automate inventory decisions and react to customer demands in real-time.

IoT

Internet of Things, or IoT, devices can reduce the time it takes associates to find inventory by providing real-time location data. This data can also help you make more informed and effective inventory management decisions by knowing exactly how much stock you have and where.

Run an efficient inventory management process Shopify

An inventory management system will reduce your holding costs, help you analyze sales patterns, predict future sales, and prepare for the unexpected. With proper inventory management, businesses have a better chance of profitability and survival.

Inventory management FAQ

What does inventory management do?

Inventory management helps retailers track and control the flow of goods within the business. It involves tracking the movement of goods and materials, monitoring inventory turnover, and optimizing replenishment to ensure products are always available.

What are the 4 main steps in inventory management?

The four main steps in inventory management are: (1) Set up your inventory management software, (2) Decide on an inventory management technique, (3) Input your existing data, and (4) Analyze the results.

What is the key to managing inventory?

The key to managing inventory is having a single system where all your retail operations naturally work together. This provides real-time visibility across your business without the complexity of maintaining multiple systems or integrations.

What is the main purpose of inventory management?

The main purpose of inventory management is to optimize stock levels. It helps retailers avoid stockouts, minimize surplus inventory, and maximize efficiency in business operations.

What are the 5 stages of the inventory management process?

The five stages of inventory management are: (1) Demand forecasting, (2) Replenishment, (3) Order processing, (4) Storage and organization, and (5) Reporting and analysis.

What is an example of inventory management?

An example of inventory management is a retail store using a barcode scanning system to track stock levels. The system forecasts demand and sales trends to determine optimal stock quantities and automatically reorders products when stock hits a predetermined threshold.