Inventory management is the backbone of every product-based business. It goes far beyond simply keeping track of stock levels. A robust inventory management strategy touches on multiple aspects of the supply chain — from vendor management and procurement, to warehouse operations, logistics coordination, and sales forecasting.
Whether you run a retail chain, a manufacturing plant, or an ecommerce store, inventory management plays a central role in aligning supply with demand, optimising working capital, and ensuring timely fulfilment. Effective inventory management enables businesses to meet customer expectations while reducing excess stock, minimising waste, and strengthening supplier relationships. Whether you run a retail chain, a manufacturing plant, or an ecommerce store, managing your stock levels effectively can make the difference between profit and loss.
In this comprehensive guide, we’ll define inventory management, explore the different types and methods, and show how businesses like yours can gain efficiency, save costs, and make smarter decisions using the right strategies and tools.
What is inventory management?
Inventory management is the process of ordering, storing, using, and selling a company’s stock. This includes the management of raw materials, components, and finished products, as well as warehousing and processing such items.
In short, inventory management ensures you have the right amount of stock, in the right place, at the right time without overstocking or running out.
Effective inventory management helps:
- Maintain optimal stock levels
- Reduce holding costs
- Improve cash flow
- Minimise stockouts and overstocks
- Enhance customer satisfaction
Four types of inventory to be managed
Inventory isn’t just finished products waiting to be sold. Businesses manage several types of inventory at various stages in the supply chain.
Raw materials
These are the basic materials used to produce finished goods. For example, a clothing manufacturer’s raw materials might include fabric, zips, and thread. Raw materials are typically procured from external suppliers and can be either direct (used in the final product) or indirect (used in the production process). Managing raw materials efficiently is critical to avoid production delays, excess inventory, and cash flow issues.
Work-in-progress (WIP)
WIP inventory includes items that are in the process of being manufactured but are not yet complete. This category bridges the gap between raw materials and finished goods. It typically includes partially assembled products, components at different stages, and subassemblies. Managing WIP efficiently helps reduce production bottlenecks, improves workflow visibility, and supports lean manufacturing initiatives.
Finished goods
Finished goods are products that are ready for sale but not yet sold. These are often stored in warehouses, distribution centres, or on retail shelves, awaiting shipment to customers. Managing finished goods effectively ensures product availability, minimises stockouts, and supports timely order fulfilment. Poor tracking of finished goods can result in missed sales opportunities or excessive holding costs.
Maintenance, repair, and operating supplies (MRO)
MRO items are used in the production process but aren’t part of the final product. Think safety equipment, cleaning supplies, lubricants, light bulbs, and spare parts. Although often overlooked, managing MRO inventory is important to ensure production continuity, minimise equipment downtime, and maintain a safe and compliant workplace. Overstocking MRO can inflate overhead costs, while understocking may lead to operational disruptions.
Bill of materials (BOM)
While not an inventory type in the traditional sense, a bill of materials (BOM) represents a critical structure in inventory management. It lists all the raw materials, components, sub-assemblies, and quantities required to produce a finished product. Managing inventory effectively requires aligning stock levels with the items specified in your BOMs. If your BOMs are incomplete or outdated, you risk production delays, excess ordering, or shortages of critical components.
To maintain operational efficiency, BOM management must be tightly integrated with purchasing, production planning, and inventory tracking systems.
For more: Bill of Materials: What You Need to Know
Accounting for inventory
Inventory accounting is how businesses value and record the cost of their inventory. It directly affects your balance sheet, income statement, and cash flow. Proper inventory accounting is essential for making informed business decisions and ensuring financial compliance.
There are several key considerations:
- Inventory valuation: How you value stock affects profit margins. Common methods include FIFO (First In, First Out), LIFO (Last In, First Out), and weighted average cost. Each method impacts tax reporting, profitability, and cost transparency differently.
- Cost of goods sold (COGS): This reflects the direct cost of producing goods sold during a period. It includes raw materials, direct labour, and manufacturing overheads. Accurate COGS reporting is crucial for profitability analysis.
- Inventory write-downs: When stock becomes obsolete, expired, or damaged, it must be written down to reflect its realisable value. Write-offs affect net income and can signal issues in forecasting or stock rotation.
In addition to accounting methods, businesses monitor key inventory performance indicators such as inventory turnover ratio, gross margin return on investment (GMROI), and stock accuracy. These KPIs help assess the financial efficiency of inventory operations and identify opportunities for improvement.
Learn more: The Ultimate Guide to Inventory Management KPIs
Inventory management methods
Several proven approaches help businesses manage stock more effectively. The right method depends on your industry, size, and supply chain complexity.
Just-in-time (JIT) management
JIT means you order and receive inventory only when needed. This reduces storage costs and waste but requires highly reliable suppliers.
Materials Requirement Planning (MRP)
MRP systems use forecasts, production schedules, and lead times to ensure materials are available when needed. It’s common in manufacturing.
Economic Order Quantity (EOQ)
EOQ is a formula that calculates the optimal order quantity to minimise total ordering and holding costs. It strikes a balance between the two.
Days Sales of Inventory (DSI)
DSI measures how long it takes to turn inventory into sales. A lower DSI suggests faster turnover and better efficiency.
First in, first out (FIFO)
FIFO assumes the oldest inventory is sold first. It’s common in perishable goods industries and is aligned with real-world stock flow.
Last in, first out (LIFO)
LIFO assumes the newest stock is sold first. It can reduce tax liability in times of inflation but isn’t allowed under IFRS rules.
Below is a comparison of key inventory control strategies and their strategic impact:
| Method | Advantages | Disadvantages |
| Just-in-time (JIT) | Minimises waste, reduces carrying costs, enhances efficiency. Allows lean operations with lower capital tied up in stock. | Highly dependent on supplier reliability and transport logistics. Vulnerable to disruptions. Stressful under demand surges or supply delays. |
| Materials Requirement Planning (MRP) | Integrates purchasing and production planning. Helps prevent material shortages and delays. Enhances planning accuracy. | Data-heavy and complex. Requires precise BOMs, lead times, and forecasts. Costly to implement and maintain. |
| Economic Order Quantity (EOQ) | Optimises order size to reduce combined ordering and holding costs. Prevents overstocking. | Assumes constant demand and lead time. Not suitable in volatile environments. Ignores volume discounts and seasonal factors. |
| Days Sales of Inventory (DSI) | Provides visibility into inventory turnover and liquidity. Useful in financial analysis and benchmarking. | Lacks prescriptive power. Doesn’t help directly with operational improvements. Can be misleading across different industries. |
| First in, first out (FIFO) | Prevents obsolescence, particularly useful for perishable or time-sensitive goods. Matches inventory flow with sales patterns. | Can lead to higher tax liabilities in inflationary periods. Doesn’t match recent costs to revenue. |
| Last in, first out (LIFO) | Matches recent costs to revenue, which can improve profit reporting under inflation. Reduces taxable income. | Not compliant with IFRS. Can distort balance sheet values. Doesn’t reflect physical inventory movement. |
Each method has unique impacts on cost efficiency, inventory turnover, customer service levels, and financial outcomes. Selecting the right mix—and aligning it with demand variability, product characteristics, and business strategy—is crucial for sustainable performance.
Source: ResearchLeap – Pros and Cons of Inventory Control Strategies
Managing inventory
Good inventory management isn’t just about counting stock. It’s about creating a repeatable, efficient system that aligns with business goals.
ABC analysis
ABC analysis is a method of categorising inventory based on its impact on overall business performance. Items are typically divided into three categories:
- A-items: high-value, low-quantity products that require tight control
- B-items: moderate-value, moderate-quantity products
- C-items: low-value, high-quantity items that require simpler oversight
Using ABC analysis helps businesses prioritise planning efforts, allocate resources efficiently, and streamline stock replenishment strategies. It’s especially effective when integrated into an automated inventory management system.
Read more: Unlock Strategic Inventory Management with ABC Analysis
Good inventory management isn’t just about counting stock. It’s about creating a repeatable, efficient system that aligns with business goals.
Planning and ordering
Accurate demand forecasting ensures you order the right stock in the right quantities. Automating this step reduces human error and improves efficiency.
Effective planning and ordering go beyond guessing or relying on past sales alone. Advanced systems now use historical data, sales trends, lead times, and seasonality to predict future demand. Incorporating buffer stock strategies, supplier performance tracking, and lead time variability can significantly reduce uncertainty.
According to AGR, inventory planning should focus on identifying optimal reorder points and quantities that balance availability and cost. Leveraging ABC classifications and data-driven forecasting tools enables supply chain planners to stay ahead of demand, even in complex, multi-location operations.
AGR’s automated ordering module takes this further by generating optimal order proposals, adjusting to changes in demand, supplier constraints, and budget limits—without manual intervention. This ensures you’re always ordering the right amount, at the right time, from the right vendor.
For deeper insight, read: What Is Inventory Planning? The Foundation of Good Inventory Management
Accurate demand forecasting ensures you order the right stock in the right quantities. Automating this step reduces human error and improves efficiency.
Effective planning and ordering go beyond guessing or relying on past sales alone. Advanced systems now use historical data, sales trends, lead times, and seasonality to predict future demand. Incorporating buffer stock strategies, supplier performance tracking, and lead time variability can significantly reduce uncertainty.
According to AGR, inventory planning should focus on identifying optimal reorder points and quantities that balance availability and cost. Leveraging ABC classifications and data-driven forecasting tools enables supply chain planners to stay ahead of demand, even in complex, multi-location operations.
For deeper insight, read: What Is Inventory Planning? The Foundation of Good Inventory Management
Accurate demand forecasting ensures you order the right stock in the right quantities. Automating this step reduces human error and improves efficiency.
Delivery
When stock arrives, it should be checked, recorded, and stored properly. Barcode scanning and digital receipts speed up the process.
These tasks typically fall under the umbrella of warehouse management, a specialised area of supply chain management that focuses on the movement and storage of goods. While not the primary focus of an inventory management solution, warehouse management systems (WMS) play a critical role in ensuring that goods are received efficiently and accurately.
Learn more about warehouse management systems: What Is a WMS?
When stock arrives, it should be checked, recorded, and stored properly. Barcode scanning and digital receipts speed up the process.
Review and storage
Conduct regular inventory audits and cycle counts. Use warehouse management systems (WMS) to optimise storage locations.
WMS platforms help manage physical inventory processes, including bin allocation, space utilisation, and picking efficiency. While inventory management tools focus on planning and stock levels, WMS handles the execution of storage and retrieval. A well-integrated WMS improves visibility and reduces errors in high-volume operations.
For more on this topic, see: What Is a WMS?
Conduct regular inventory audits and cycle counts. Use warehouse management systems (WMS) to optimise storage locations.
Selling
Ensure your sales channels are synced with your inventory levels to prevent overselling and backorders.
Modern inventory processes play a crucial role in connecting sales with supply. By integrating real-time inventory data into sales and operations planning (S&OP), businesses can ensure alignment between what’s available and what’s promoted across all channels. This reduces costly fulfilment issues and improves customer satisfaction.
Improved collaboration between sales and inventory teams also enables better promotional planning, more accurate sales forecasting, and optimised inventory allocation during peak periods or campaigns.
Learn more: S&OP Software for Inventory Optimisation
Ensure your sales channels are synced with your inventory levels to prevent overselling and backorders.
Reporting and auditing
Generate reports on turnover rates, shrinkage, and supplier performance. Use these insights to improve decisions and reduce risk.
Modern inventory systems provide real-time dashboards and customisable reports that give visibility across SKUs, locations, and planning stages. These tools support better forecasting, help track stockout risks, and enable cross-team collaboration by sharing centralised data insights. With access to trend analysis and historical performance, planners can make more strategic decisions and optimise inventory policies.
Explore more on how reporting can empower inventory management: Insights & Reports
Generate reports on turnover rates, shrinkage, and supplier performance. Use these insights to improve decisions and reduce risk.
Reordering
For a deeper dive into common inventory management pitfalls and how to fix them, see our blog: 5 Common Inventory Management Mistakes (and How to Fix Them)
Automated reorder points and safety stock levels help you restock at the right time, reducing manual intervention. In more advanced systems, scheduled ordering ensures that replenishment happens automatically at fixed intervals, aligned with vendor constraints, order cycles, or internal processes. This reduces the burden on planners and helps maintain consistency across complex supply chains.
Learn more about scheduled orders.
For a deeper dive into common inventory management pitfalls and how to fix them, see our blog: 5 Common Inventory Management Mistakes (and How to Fix Them)
Automated reorder points and safety stock levels help you restock at the right time, reducing manual intervention.
Inventory management system
An inventory management system (IMS) is software that tracks your stock, automates routine tasks, and provides real-time visibility across your supply chain.
Key features of a good IMS include:
- Real-time inventory tracking
- Forecasting and planning tools
- Multi-location management
- Barcode/RFID scanning
- Integration with ERP and ecommerce platforms
- Alert systems for low stock, reorder points, and expiry
Without a reliable IMS, it’s nearly impossible to scale inventory operations or respond to supply chain disruptions with agility.
Managing inventory with AGR
AGR’s inventory management software transforms the complexities of demand planning, stock replenishment, and forecasting into a streamlined, automated workflow. As a bolt-on to your ERP system, it delivers powerful insights and accurate forecasting at the item/SKU level—all via a simple, intuitive interface.
AGR typically delivers ROI within three months. Clients report up to 40% fewer manual tasks and 5% reductions in inventory holding costs by using AGR’s demand-driven approach.
What AGR offers:
- ERP integration & item-level planning with platforms like SAP, Sage, and Dynamics
- Statistical forecasting and safety stock calculation to reduce risk of stockouts
- Automated order suggestions with container optimisation and vendor rules
- ABC classification across six dimensions for better prioritisation
- Visual dashboards showing projected stock-outs and performance metrics
Explore more features of AGR and how it helps you move from reactive to predictive inventory planning.
Also read: Is your ERP enough for inventory management? How AGR closes the supply chain gaps
Advantages of inventory management
Effective inventory management delivers measurable business value:
- Increased efficiency: Fewer manual processes and less time spent on routine tasks.
- Lower costs: Reduce storage fees, shrinkage, and lost sales from stockouts.
- Better cash flow: Optimise purchasing to free up working capital.
- Improved customer satisfaction: Deliver faster, more reliably, and with fewer errors.
- Stronger supplier relationships: Order with precision and maintain accurate records.
It also makes your business more resilient in the face of demand volatility, supply chain disruption, and market shifts.
FAQs about inventory management
What is meant by inventory management?
Inventory management is the process of overseeing and controlling the flow of goods — from raw materials to finished products — to meet customer demand efficiently while minimising costs.
What are the four types of inventory management?
The four main types include raw materials, work-in-progress (WIP), finished goods, and MRO (maintenance, repair, and operations).
What are the 4 inventory methods?
- Just-in-time (JIT)
- Materials Requirements Planning (MRP)
- Economic Order Quantity (EOQ)
- Days Sales of Inventory (DSI)
Each serves different purposes based on operational needs.
How do I manage inventory?
Use a reliable inventory management system, forecast demand accurately, review stock levels regularly, and automate reordering processes. Stay agile and data-driven.
Related resources
- Demand Planning & Forecasting with AGR
- What is the Bullwhip Effect?
- Guide to SKUs for Inventory Efficiency
- Deadstock Management Strategies
- Bill of Materials: What You Need to Know
