Inventory Management 101: Here are the Basics

Every good business is supposed to have their inventory in check. The best one, of course, can anticipate what his or her business’s inventory would be needing for even though no one can foresee it yet.

Such is the case with inventory management, a strategy that is so useful to businesses and new businesses everywhere that it needs to be taught beyond the confines of the business school. 

Inventory management, as defined by Investopedia, is a “process of ordering, storing, and using a company’s inventory. These include the management of raw materials, components, and finished products, as well as warehousing and processing such items.” If this is how many see inventory management, then it won’t come as any surprise why some can’t quite get this right in the first place. 

As anyone would likely tell you by now, the “science” of inventory remains a reactionary process: if we see something that’s lacking, that becomes the impetus for us to order new stuff. Inventory management, more than anything, is a break from the usual way we do things.

So, how do we begin managing our inventories more proactively? Well, here are a few tried-and trusted ideas we think can help you get started in the right direction. But first, we need to get cleared up on why inventory matters in the first place! 

 Why inventory matters?


Inventory, by all intents and purposes, is very straightforward. However, the reason why many businesses buy and hold more than is needed at any given period of time is that it gives them leeway in case something unexpected might be happening. Are customers suddenly buying more of a product? Are suppliers delivering their materials later than usual? Those are just some of the real-world problems that businesses might be forced to deal with in terms of stocking up on inventory. 

What makes inventory management even trickier is how there’s no middle ground in quantifying what constitutes as a “right” inventory. Carry too much stock, and you might run out of funds to spend on other things. On the other hand, carry too little, and you might find yourself scrambling for orders once you run out of things to sell.

Get inventory management right, however, and you not only get consistent sales, you can also enjoy reduced operational costs!

So, now that we’ve figured out how inventory matters a lot, how do you go about managing one for your business? Well, here are some classics tips, as well as new-school ones, to help you on your road to inventory management.

1. Setting a par level

If this is the first time you’ve encountered “par level” as a term, the word usage makes sense: because a par level is the minimum quantity of stocks that must be on hand in your inventory at all times, having it “on par” means you get to continue selling without fear of letting said stocks be over- or under-filled.  

The par level is probably the easiest to figure out, since it simply requires you to track product movement and note the best-selling ones in your inventory. However, because no one ever said business is a stable industry, you have to constantly review your par levels throughout a certain quarter or anytime within the year. The last thing you would want here is to be thrown off-guard, after all.

2. Recording sales

Back then, businesspeople only needed simple pen-and-paper ledgers to track inventory and sales. While there’s nothing wrong with that system, don’t you think there are easier ways to keep track of things? And before you say it, no, we’re not even talking about Excel spreadsheets here!

Both ledgers and spreadsheets, despite the nature of how they’re encoded, are still defined by this one element: they still need to be updated by human beings. It’s not just a poor way of practicing business efficiency, but it can also be a costly endeavor because of how it’s still using people to encode what are, for all intents and purposes, data that can be filled up automatically.

This is where a Point Of Sale (POS) system might work best in your favor. Basically, a POS is where a sale takes place: a customer buys from you, you issue a receipt, and then voila! (You can read more about it in our feature on automation techniques for food & beverage businesses here.)

Of course, not all POS systems work the same for all businesses. While many eCommerce platforms have already incorporated easy POS systems for their users, there might be cases when you need to have one tailored for your business. 

If you want a better idea of what a “modern” POS system looks like, you can see it in how some companies publish mobile apps which you can tailor to accept payments and to upload proof of delivery. Besides, you can even use an app to publicize deals, so at least one arm of your marketing is covered through that!

3. Systematizing orders

If you’re like most entrepreneurs we know, they started buying for their inventories using the same method: you order something from your supplier, send them payment, and wait for your order to arrive. Now, imagine if you do the same for about 10-20 product types. It sounds tiring, right?

Creating a Purchase Order (or “PO”, for short) system for your business should help you keep things in order. Think it sounds too much? Well, think about this then: as you keep on stocking for more and more product types, who’s to say you can keep track of them in one view?

A PO is essentially like a receipt to your supplier: by encoding the materials you will be asking from said supplier, you can ensure that both of you will be legally bound to abide by the terms of the order because it’s put in writing.

Besides, using a PO system can also mean one thing: it will help you in budgeting for inventories because you now have a record of the stuff that you’ve been ordering for your business. Trust us when we say that it will get easier once you get used to sending out POs.

Ready to have your own inventory system? Let us know, we might just have the right system that your business needs.