What is inventory management?
Inventory management is the work of a business deciding how much of each product to hold in stock, when and how much to order, and measuring the results of those decisions. Its aim is to tie up as little money as possible on the shelf without running out of stock. Its main tools are ABC analysis (what), reorder point and safety stock (when), order quantity (how much), and inventory turnover, dead stock ratio and count accuracy (are the results good).
Both too much stock and too little stock cost money: one is cash sitting on the shelf, the other is lost sales. Inventory management means striking the balance between the two not by guesswork, but with the same calculation for every product.
This page covers commercial merchandise stock. What is called “IT inventory management” in information technology (recording assets such as computers and software licenses) is a separate subject.
The four questions inventory management answers
| Question | Tool | Details |
|---|---|---|
| How much attention does each product deserve? | ABC analysis | On this page, below |
| When to order? | Reorder point (critical stock) and safety stock | What is a critical stock level |
| How much to order? | Order quantity based on sales rate | On this page, step 4 |
| Are the decisions working? | Inventory turnover, dead stock ratio, count accuracy | Inventory turnover, dead stock, warehouse count |
How it differs from warehouse management
The two terms are often confused because both deal with the same stock. The difference is which question they answer: inventory management makes the “how much, what, when” decision; warehouse management handles receiving that stock, putting it on the shelf, picking it and shipping it out.
| Topic | Inventory management | Warehouse management |
|---|---|---|
| Question it answers | What should I stock, how much, and when? | How do goods come in, where do they sit, how do they go out? |
| Type of decision | Purchasing and money decision | Shelf and process work |
| Main tools | ABC analysis, reorder point, safety stock, order quantity | Goods receipt, shelf addressing, picking-shipping, counting |
| When it goes wrong | Money sitting on the shelf or lost sales | Goods that can't be found, wrong shipments, count discrepancies |
We covered the warehouse side — the four processes from goods receipt to shipping — in the what is warehouse management guide; for shelf layout, see shelf addressing. What people search for as “warehouse inventory management” is mostly the two set up together: without a proper shelf layout the records don't hold, and without proper records you can't make inventory decisions.
Inventory management in five steps
1. First make sure the records are accurate
Inventory decisions are made from the quantity in the system; if that quantity doesn't match what's on the shelf, every decision rests on a wrong number. The first job is to do a count and work out the stock accuracy rate: product types with no discrepancy ÷ product types counted. If the rate is low, fix your record-keeping before talking about reorder thresholds or ABC classes. The counting steps are in the how to do a warehouse count guide.
2. Split your products into three groups with ABC analysis
Not every product deserves the same attention. Find each product's annual consumption value: units sold per year × unit purchase cost. Sort the list from largest to smallest by this value and calculate each row's cumulative share. With the commonly used thresholds, the products making up the first 80% of total value are A, the next 15% are B, and the remaining 5% are group C. Group A is usually a small fraction of the product range, but it carries the money; give it your attention first. There is an example table below.
3. Decide when to order for each product
The order timing is set by the reorder point, i.e. the critical stock level: when stock falls to this quantity, you place an order. The short formula is average daily sales × lead time × 1.2; the final margin is the safety stock. The step-by-step calculation of the formula is in the what is a critical stock level guide. ABC helps here: for group A, calculate the level product by product and review it often; for group C, one common rule per product group is enough.
4. Set the order quantity based on sales rate
The order quantity should equal what you will sell until the next order: average daily sales × number of days between two orders. A supplier's case size or a “discount for bulk buyers” offer shouldn't throw off this calculation: buying a case of 48 of a product that sells 3 a month means a year of stock and is the most common source of goods sitting on the shelf for months. For high-value A products, frequent small orders reduce tied-up money; for low-value C products, infrequent bulk orders save effort.
5. Track the results with four measures
Four numbers tell you whether your decisions are working: inventory turnover (how fast the money tied up in stock is turning over), dead stock ratio (how much money never moves at all), number of stockouts (how many times the shelf was empty when demand arrived) and stock accuracy rate (how far you can trust the records). The calculations are in the inventory turnover and dead stock guides. If turnover is falling and dead stock is rising, your order quantities are too large; if stockouts are rising, your reorder points are too low. Measure all four on the same day every quarter and record them.
ABC analysis example
A sample list of six products from an auto parts shop. The figures were chosen to illustrate the method:
| Product | Annual sales | Unit cost | Annual value | Share | Cumulative | Class |
|---|---|---|---|---|---|---|
| Engine oil 4 L | 1,200 units | 400 ₺ | 480.000 ₺ | %48 | %48 | A |
| Brake pads | 500 units | 600 ₺ | 300.000 ₺ | %30 | %78 | A |
| Wiper blades | 600 units | 150 ₺ | 90.000 ₺ | %9 | %87 | B |
| Headlight bulb | 1,000 units | 60 ₺ | 60.000 ₺ | %6 | %93 | B |
| Fuse set | 800 units | 50 ₺ | 40.000 ₺ | %4 | %97 | C |
| Gasket | 150 units | 200 ₺ | 30.000 ₺ | %3 | %100 | C |
The lesson of the table: the product sold in the largest quantity (after engine oil, the headlight bulb at 1,000 units) stayed in group B because its unit value is low. ABC ranks by money, not by quantity. Two of the six products carry 78% of the total value; calculating the reorder point product by product and counting first in a stock count start with these two. The same classification is used on the shelf too: A products go in slots close to the door — we covered the placement rules in the shelf addressing guide.
Stock valuation methods: FIFO, weighted average, LIFO
When you buy the same product at different prices, the valuation method determines which price you use to calculate the cost of goods sold. This choice affects the result of the turnover and profit calculations:
| Method | Cost of goods sold | When prices are rising |
|---|---|---|
| FIFO (first in, first out) | At the oldest purchase price | Cost looks low and profit looks high; stock on hand is valued close to current prices |
| Weighted average | At the average unit cost recalculated after each purchase | Price swings are smoothed out; the result falls between the other two |
| LIFO (last in, first out) | At the newest purchase price | Cost looks high and profit looks low; stock on hand stays at old prices |
FIFO also has a physical meaning: goods put on the shelf first are sold first. For a product with an expiry date, this means putting the older batch in front, and it's the simplest habit for reducing waste; how to apply it on the shelf, the FEFO difference and a numerical cost example are in the what is FIFO guide. Which method to use in financial records depends on tax regulations; settle this with your accountant. What matters for inventory decisions is to use the same method every period when comparing ratios.
What does inventory management software do, and what doesn't it do?
The program doesn't make decisions; it collects the data the decision rests on and reminds you of the threshold. In Ofisx you define a minimum level for each product; when stock falls below it, a critical stock notification arrives. On the count screen, the system quantity and the counted quantity sit side by side and the difference is calculated. As sales are recorded, a date-range “Best-selling products” report and each product's movement history build up. The program has no separate ABC analysis screen: you export the product list to Excel and build the table above yourself. For working in the warehouse from a phone, the mobile and web versions share the same data.
If you'd rather start without a program, all of the calculations can be done by hand too: there are free calculators for critical stock, safety stock and inventory turnover, and an inventory tracking Excel template is ready for record-keeping.
Frequently asked questions
Are inventory management and stock management the same thing?
In everyday use, yes: both describe deciding how much of each product to hold and monitoring the result. The word “inventory” has a second meaning in accounting: the list of goods on hand at a given date, counted and valued (inventory count, inventory ledger). Inventory management is keeping that list continuously accurate and balanced.
What is the difference between inventory management and warehouse management?
Inventory management decides what to stock, how much and when; warehouse management handles how that stock is physically received, where it is put, and how it is picked and shipped. The first is a purchasing and money decision, the second is shelf and process work. For warehouse processes, see the what is warehouse management guide.
How is ABC analysis done?
Multiply each product's annual units sold by its unit purchase cost, sort the list from largest to smallest by this value and calculate each row's cumulative share. Products making up the first 80% of total value are classed A, the next 15% B, and the rest C. These thresholds are convention, not a rule; what matters is to use the same threshold every period. As sales rates change, the classes change too, so refresh the analysis at least once a year.
How is safety stock calculated?
There are two ways. The practical one is to add a percentage of the quantity that will be sold during the lead time: 20% for most products, 30-50% for products with volatile demand or an unreliable supplier. The more precise one subtracts the average from the worst day: (highest daily sales × longest lead time) − (average daily sales × average lead time). You can do the second with the safety stock calculator.
Do you need software for inventory management?
Not necessarily: all of the decisions can be made in Excel. The difference with a program is that it collects the data on its own — stock drops with every sale, you get a notification when a product reaches its critical level, and sales history builds up without manual compilation. The program doesn't make the decision for you; what to hold and how much is still the calculations on this page. We covered when to move on from Excel in the how to track warehouse stock guide.
Is there an inventory management PDF or lecture notes?
This page was written independently of any program and can be used as lecture notes: you can download it by choosing “Save as PDF” in your browser's Print menu. Topics covered: ABC analysis, reorder point, safety stock, order quantity, inventory turnover, dead stock, count accuracy and stock valuation methods (FIFO, weighted average, LIFO).
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Critical stock, counts and sales report in the app
The data behind inventory decisions builds up automatically with every sale and every count.
You make the decisions, let the program do the tracking
Open a free account, import your Excel list and start by defining minimum levels for the products in group A.