Inventory tracking plays an increasingly important role in an economy where eCommerce customers expect fast on-time delivery. The basis for this is having inventory in the right locations to match product demand – so if you want to guarantee customer satisfaction, you need an effective way to have visibility over your inventory at all times, and in all locations. In this guide, we’ll walk you through the essentials of what you need to know about how to track your inventory.
First we’ll define what inventory tracking is and consider why inventory tracking software is important for supply chain management. Then we’ll look at different tracking methods and what each one is most suited for. Next we’ll consider how you can leverage automation for more efficient inventory tracking by using inventory management software. Finally we’ll offer some top tips for optimizing your inventory tracking system.
What is inventory tracking?
Inventory tracking is the process of counting how much raw materials, finished goods and finished goods you have available. It includes tracking the locations where these items are kept – usually in multiple warehouses, stores, and fulfillment centers – so that they can be retrieved as needed.
This process also provides accurate data that can be used to plan restocking of items in the relevant locations.
Inventory tracking is critical to planning future inventory ordering to meet customer demand as well as delivering inventory to customers to complete sales orders.
Inventory tracking is a prerequisite for effective inventory management, so the terms are often used together, and they’re handled together in practice. Here we’ll focus on tracking inventory but we’ll also cover tips on how to manage your inventory.
The term “inventory” includes three types of items:
- Raw materials, which are used to manufacture products, such as steel, plastic, corn or electronics components
- Unfinished goods that have started the process of being transformed from raw materials into finished products but have not yet completed the process
- Finished goods, which are items that have completed the manufacturing process, such as processed food, clothing or appliances
Finished goods are also referred to as “stock,” which leads to the terms “stock” and “inventory” often being used interchangeably. However, technically, stock refers to finished goods.
Inventory includes all these categories of items. When tracking inventory, counts of inventory levels should include all these categories.
Manual, electronic and automated tracking
Some companies still rely on manual, ‘pen and paper’ inventory tracking, while others use electronic methods such as scanning barcodes to track inventory.
Both manual inventory tracking and electronic inventory tracking typically are aided by automation. Some inventory tracking software syncs inventory counts with data from supply chain management software and point-of-sale technology to reduce the labor involved in inventory counting and maintain inventory accuracy.
What is the importance of tracking inventory?
Tracking inventory is vital for a number of reasons, ranging from meeting retail fulfillment volumes to tax requirements.
First: you can’t sell items you don’t have. This can become a particular problem if your business (or, if you’re a third party logistics provider, your shipper) has seasonal peaks and you make most of your sales at certain times of the year. A good inventory management system helps you ensure that customer demand levels aren’t outstripping your inventory levels.
The other problem with not tracking your stock levels carefully is that certain locations will have excess inventory that expires or is no longer sellable before it can be moved. This excess stock not only contributes to the carrying costs; it also takes up space that could be used to stock more relevant products, and (when thrown out) contributes to ecological waste.
The need for accurate inventory tracking has grown more acute with the rise of on demand delivery. Today’s customers have grown accustomed to the fast shipping policies of eCommerce marketplaces, grocery stores, and other retail industries. The need to offer competitive shipping has led many companies to adopt expedited next-day and even same-day delivery. But you can’t promise to deliver something the next day without inventory management systems with tracking software which lets you know how many items you have in stock or where they are.
By the same token, if you store items in multiple locations, you need an inventory management or ‘stock control’ system which tells you which warehouse an item is stored in. Effectively managing inventory is also crucial for managing the last mile component of the logistics supply chain.
On the flip side, failing to track inventory can create warehousing bottlenecks which threaten your entire supply chain. The growth of eCommerce consumer demand in the wake of COVID will create a need for an additional 1 billion square feet of warehouse space in the U.S. by 2025. To meet the surge in consumer demand, inventory needs to be located at the right place, at the right time – and retailers need the data to match inventory with consumer demand. That’s why 61% of retail decision-makers plan to introduce automation to their warehouse management systems (WMS) by 2024.
Benefits of using automation software to manage your inventory:
- identify which items are selling best, where, and when
- Identify where and when you’re overstocking certain items which aren’t selling
- note any missing items, which may indicate a problem with shrinkage
- maintain accurate data
- keep track of inventory to value your assets for taxes
What is the best way to keep track of inventory?
There are a number of popular inventory tracking methods that can be distinguished by their methods, how often they count inventory and the technology they use.
Methods of inventory tracking
There are a number of traditional inventory tracking methods. These include:
- Full inventory counting: Staff is assigned to count your inventory at one time. This process is one of the most accurate, but it also consumes your staff’s time and usually requires you to pause your operations temporarily while you track the inventory.
- Cycle counting: Inventory is divided up into sections, either randomly or based on considerations such as location or price, and assign staff to count only specific sections at a time, gradually cycling through the entire inventory over a period of time. This way of keeping track of inventory uses less of your staff’s time and does not require you to shut down your store to do inventory counts, but it does require you to plan cycles carefully so you don’t count some sections too frequently or infrequently.
Another way to distinguish inventory management systems is by how often they track inventory. Full inventory counts can be done annually, semi-annually or more frequently. Cycle counting should work through all items in your store no less frequently than once a quarter, but many companies do more frequent inventory audits for greater accuracy.
Inventory management: manual vs. digitized
Inventory tracking methods generally use one of two approaches:
Manual inventory tracking
This inventory tracking method uses count cards placed at stock locations or count sheets distributed to team members to manually tally inventory with pen or pencil, or in some cases with an inventory tracking spreadsheet. This method is cheap, but it can be time-consuming and allows space for human error.
Electronic and digitized counting
This method of tracking inventory relies on technology such as barcodes, radio-frequency identification (RFID) tags, scanners, tablets or smartphones. This way of tracking inventory reduces errors and, when combined with automated tracking software, can increase efficiency of inventory management processes for store and warehouse inventory teams.
How do you automate inventory tracking?
Can inventory be tracked more efficiently than it is today? For most supply chains, the answer is a definite yes.
Inventory tracking systems which use electronic tagging tools such as barcodes and RFID tags can be linked to inventory management platforms. Additionally, inventory data should sync with your logistics software, eCommerce software and point-of-sale software so that your inventory database gets updated automatically whenever an item is received or sold and shipped.
How can I keep track of my inventory for free?
Some inventory tracking software is available for free for companies with small-scale needs, such as handling up to 50 orders a month. However these inventory apps won’t be suitable for most ecommerce businesses. Higher-priced tiers are available for companies which need to manage stock and products on a larger scale.
Best practices for tracking inventory
No matter which technology you use to track your inventory, following these best practices will help guarantee accuracy and efficiency in the tracking process:
- Use inventory management KPIs
- Know the inventory quantities you need
- Optimize your inventory turnover rate
- Integrate your inventory management, financial planning and logistics planning
- Use the right inventory tracking method for your business model
- Plan your inventory counts
- Use smart tech for tracking data across inventory
- Plan your floor space using smart warehouse planning procedures
- Label your products
- Optimize your picking and packing processes
- Automate inventory restocking
- Carry safety stock
Here’s what each of these inventory management system optimization strategies involves.
1. Use KPIs with your inventory tracking system
Key performance indicators help form the foundation of efficient inventory tracking by providing you with quantifiable metrics you can use for monitoring stock levels and location, and guide your performance. Example of important KPIs include:
- Demand forecasting: how close are your projections to your actual performance?
- Stock to sales ratio: what is the proportion of your finished goods available to units sold?
- Turnover rate: how often do you sell and replace your stock over a given period?
- Perfect order performance: how often do you deliver goods to customers on time and undamaged with no customer service issues?
- Carrying cost: how much of your working capital is going toward inventory management?
The best thing you can do is to review your own supply chain needs in order to identify the KPIs best suited for keeping track of your inventory.
2. Know the inventory quantities you need
One value of KPIs is that they enable you to predict how much inventory you will need to restock over a given time frame, which is necessary to manage inventory effectively. The best way to predict this is to combine your KPIs with automated inventory tracking systems which use your historic sales data to extrapolate future sales projections.
3. Optimize your turnover rate
Intelligent application of inventory location will allow you to optimize your inventory turnover rate, which is the number of times you sell and replace your entire inventory over a given time frame. Turning over inventory frequently is important for keeping sales strong and reducing cases of surplus inventory that goes to waste.
As you keep track of inventory, if you notice your turnover rate is low, you can take steps such as forecasting demand levels, and looking to fulfillment models such as ship from store to remove inventory locally before it becomes outdated. This has the added advantage of supporting fast, same day delivery to local customers.
4. Integrate your inventory management systems with other supply chain systems
To be effective as part of supply chain optimization processes, inventory management systems need to be integrated with other parts of your business – including accounting, financial planning, supply chain management, WMS and logistics management software.- in order to provide real time data on inventory across the supply chain. Any software you use to manage your inventory should be integrated with apps you use for these other business functions.
5. Use the right inventory tracking method for your business model
Make sure to match your tracking method and technology to your company’s needs. Consider factors such as the size of your inventory, how often you can afford to deploy staff to count inventory, and whether it’s the right time to move to automate the tracking process.
6. Plan your inventory counts
Whether you manage inventory using cycles or full counts, it’s critical to plan your counts carefully. Decide in advance how often you will conduct counts, what will be counted, what order it will be counted in and who will conduct the counts. A best practice is to designate an individual staff member to organize your inventory management.
7. Use smart software for tracking data
Using the right inventory management app will make it much easier for you to track inventory. The best inventory management software for you will depend on factors such as the size of your inventory and your budget. Look for software which enables real time tracking and syncs with other relevant business apps you’re already using, such as your accounting software.
8. Plan your floor space using smart warehouse planning procedures
Good warehouse planning makes it easier to store, find and retrieve inventory efficiently, which in turn makes it easier to count and track inventory.
- Create an organized floor plan to optimize how you store inventory in your warehouse.
- Decide what type of storage is most suitable for different items, and calculate how much storage space will be needed.
- Identify which items need to be picked most frequently, and place these in locations where they will be easily accessible.
- Map out picking paths and develop picking procedures to optimize your warehouse inventory management.
9, Label your products
One key to good warehouse management is having clear labels on inventory items, along with visible signs indicating sections of items. This makes inventory easier to store and retrieve. Consider whether using labeling technology such as RFID tags or barcode scanning would improve your inventory management.
10. Optimize your picking and packing processes
The less time you spend picking and packing items, the more efficient your inventory management will be. Analyze the routines your staff uses to retrieve items from your warehouse and pack them for shipping. Identify any repeated motions which could be simplified, eliminated or automated. For example, are your staff members making two trips to do something which could be done in one trip?
11. Automate your inventory restocking using predictive AI tech
If there is a lag between customer sales demand and the arrival of inventory from your supply chain, you’re going to have trouble meeting last mile shipping schedules, and you’re going to lose sales. The best way to avoid this is to automate your inventory restocking process. Use your inventory data to set an inventory level for each item which triggers an automated reorder. To use this strategy, you will need an inventory software management solution which supports automated restocking.
Machine learning and AI technology can take inventory planning to a more accurate level of predictions by enabling smart forecasting that takes past demand into consideration in order to automatically predict where and when inventory will be needed.
12 Carry safety stock
Another key to avoid falling too low on stock is to carry safety stock. This is extra stock kept on hand to sustain sales while you’re waiting for restocking orders to come in. You can calculate how much safety stock you should keep by multiplying the maximum amount of daily sales you make for an item times the maximum restocking lead time for that item and subtracting the product of your average daily sales times your average lead time. This will give you a buffer to keep sufficient stock on hand when sales surge or restocking is slow.
The future of inventory tracking
Inventory visibility and accurate tracking is a key part of inventory management, which also involves planning how to maintain inventory levels to meet customer demand and how to coordinate inventory counts with related functions such as logistics and accounting. Accurate tracking of inventory is what keeps supplies available to meet last mile delivery schedules, and ensure that you have the exact inventory levels where you need them to meet retail fulfillment demands.
As companies move their offline processes into the digital world, inventory forecasting will become commonplace. Today the more advanced ecommerce brands and 3pl logistics companies use cloud based software for inventory control and tracking. Artificial intelligence, including machine learning to predict inventory demand, will become more prevalent as supply chain managers and other leaders look to reduce operational costs and avoid supply chain disruptions..
Inventory tracking should never be siloed. Your inventory tracking system should be integrated with your financial planning and logistics management software to ensure supply chain management continuity between your inventory orders and shipments.
Following the best practices above will help you optimize your inventory tracking, improve inventory control, and minimize supply chain issues so you can deliver customer orders on time, consistently.