3 Basics of Inventory Management (and Key Terms Explained)

3 Basics of Inventory Management (and Key Terms Explained)

If you run a business, then it’s almost inevitable that inventory management is a process you’ll need to master.

Should you be out of the loop on this issue, read on and we’ll explain everything you need to know about the art of inventory management.

Introduction to Inventory Management: What is it and Why Does It Matter?

There’s no question that inventory management is an essential business process used by companies all over the world.

It helps organizations track, control, and manage their stock in order to maximize ways to improve manufacturing productivity and efficiency while maintaining customer satisfaction.

In short, managing your inventory effectively can make or break a business’s success.

1. The Different Types of Inventory Systems Uncovered

When it comes to inventory management, several different types of systems can be used. 

Here’s a quick overview of four common methods:

  • Manual Counting

This is when stock items are manually counted and tracked on paper or in a spreadsheet format.

Although this method may be suitable for smaller businesses with minimal stock levels, it’s not recommended for larger companies as accuracy can suffer due to human error.

  • Perpetual Inventory System

This type of system allows companies to continuously track their inventory levels in real-time by constantly updating records whenever goods move into or out of their warehouse facilities, reducing the need for periodic physical counts and saving both time and money.

  • Barcode Scanning

Barcoding technology uses scanners connected directly to the company’s inventory system, a more advanced approach than the perpetual inventory system.

This allows for instantaneous stock updates, improved data accuracy, and a much faster scanning process.


  • Automated Inventory System

As its name implies, this type of software automates many aspects of inventory management such as tracking orders, managing shipments, generating reports, and more, making it an ideal solution for larger businesses with complex operations in need of greater control over their supply chain activities.

2. JIT (Just in Time) Inventory Management Explored

Just-in-time inventory management is all about managing an inventory of materials. This is so that you know you’ve got what you need, when you need it, without having a surplus or deficit of stock at any point.

This popular approach focuses on the efficient delivery of goods and resources needed by a company when they are required. It helps to reduce costs associated with storing excess or obsolete items.

The key to a successful implementation of JIT is careful planning and precise timing – both of which require accurate data about demand patterns and lead times from your chosen suppliers.

You should know how to choose the right supplier for your business.

Additionally, it’s crucial to have up-to-date information about the available stock so that orders can be made only when necessary.

This helps businesses reduce their overall spending while maintaining customer satisfaction levels.

3. Common Terminology in Inventory Management Demystified

There are a lot of phrases and pieces of specific jargon that need to be in your vocabulary before you can handle inventory management successfully, including:

  • Cycle Counting

A process used for verifying inventory accuracy by counting selected items at regular intervals throughout the year. It is opposed to doing one large count on an annual basis.

  • Reorder Point

The minimum level at which an order must be placed so that there’s always enough stock available on hand when needed.

It helps avoid costly disruption or customer dissatisfaction due to insufficient supplies on the e-commerce store you created.

  • Safety Stock Level

An additional amount is kept in reserve in case demand unexpectedly rises above expected levels. Or, suppliers can’t deliver goods on time due to external factors, such as weather or political instability.

  • Stock Out

A situation arises when demand for an item exceeds the amount of stock currently on hand, resulting in delayed orders and customer dissatisfaction.

To avoid situations like that, you have to understand how to improve your customer experience. It will also help you to have satisfied clients who will be willing to return for another purchase.

  • Lead Time

This is the time it takes to get goods from the supplier to the warehouse, or vice versa. It must be considered when calculating reorder points and safety stock levels.

With that, your understanding of the ins and outs of inventory management should be sufficient to put you in the driving seat!

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Post Author: Explicit Success

Explicit Success is a place you can get some impetus and at the same time, get some relaxation. The articles you’ll find here have a lot of anecdotes you can relate to, which will help you to feel good about yourself and achieve success. Connect with our Team Lead on Instagram @abimbolajoe.

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