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Inventory Definition: What Is Inventory?

ByScottonMonday, January 11, 2021

Table of Contents

Inventory Meaning: What Does Inventory Mean?

How Do You Spell Inventory? How To Spell Inventory

Inventory Pronunciation

Inventory in a Sentence

Managing, analyzing, and optimizing inventory is a never-ending job and often defines the success of a
direct to consumer or B2B business. It’s arguably the most important thing to get right if you want your
business to grow.

That’s why there are so many concepts around inventory you should understand. There are a lot of ways
to look at inventory’s effects on operation and profitability. Let’s run through the big ones to flesh out
the ripple effect inventory has across your business.

Inventory Meaning: What Does Inventory Mean?

Inventory, in business, is all the goods that a company owns, produces, and uses in service of production
at any given time. It’s typically physical goods, though it can refer to services, like all work done prior to
the sale. It’s usually a company’s largest current asset, or an asset expected to sell within the year.

That’s the general definition. And there are many types of inventory to consider within that definition.

But beyond that inventory meaning, there are a host of other related concepts whose definition will
provide useful context to an understanding of inventory.

Let’s consider some.

Inventory Definition Accounting

Inventory is listed on a company’s balance sheet as an asset. That’s why the inventory definition from an
accounting perspective takes into account the specific phases of production. Because inventory’s value
is recorded and reconciled based on its place in the production pipeline.

Inventory, in that sense, is all the raw materials inventory, work in process inventory, and finished goods
inventory that a company acquires and produces. Each of those types of manufacturing inventory can be
recorded on the balance sheet separately. That’s why it’s a particularly apt inventory definition from an
accounting angle.

Inventory Definition Economics

From a general economics perspective, inventory is all assets held by a business with the intention of
selling in the market for profit.

Inventory levels and reactions to market consumption can have broad economic impact. If, for example,
consumption of inventory in the market declines, any investment in inventory results in an accumulation
of unsold goods.

Sitting inventory ties up cash and costs money to store. In large enough quantities—with enough decline
in demand—inventory issues can cause widespread and substantial issues to entire industries.

Inventory Management Definition

Inventory management is the process of buying, storing, using, packaging, and shipping inventory. It
covers the warehousing and processing of all goods that a business uses in production and produces.

A simple way to look at inventory management is as the balancing act between excess inventory and
having to wait on an order (read more on backorder meaning) profitable items. This can be achieved by
using the average inventory formula.

Shortages and excesses can indicate problems in inventory forecasting, production efficiency, and raw
material acquisition. And they can have a big impact on a business’s bottom line. To thread the needle of
optimal inventory operations, companies rely on inventory management to hit their inventory
management KPI.

Inventory Turnover Definition

Inventory turnover is the ratio at which a company can turn goods into cash. It’s also called inventory
turnover ratio, for obvious reasons. It’s an important factor when appraising a company’s financial
health.

Why is that?

Well, the inventory turnover definition can be put another way. It’s how many times a company has sold
and replaced their inventory over a specific period of time.

For most companies, this is their sole purpose. To create and sell a product. Inventory turnover, then, is
a convenient metric that indicates just how good a company is at doing that.

Let’s say a coffee company’s monthly inventory turnover rate is 6 for their decaf blend. That means that
over the course of a month, they sell and replace their entire decaf blend inventory 6 times.

Most companies end up with an inventory turnover rate of between 5 and 10. The higher the better.

Inventory turnover ratio is also called inventory turns. Any inventory turns definition will cover the same
information above.

Inventory Control Definition

Inventory control is the regulation of the inventory a company has on-hand to ensure optimal inventory
production. Tight inventory control means the right amount of safety stock to avoid overstock and
shortages.

It differs from inventory management with respect to scope. Inventory control focuses on maintaining
and adjusting inventory levels to ensure the most efficient production possible. Inventory management,
on the other hand, is higher-level management of inventory. It includes which suppliers to work with,
shipping routes, demand forecasting, etc. Inventory control is a part of inventory management.

Perpetual Inventory Definition

Perpetual inventory is a way to account for inventory that immediately records the purchase or sale of
inventory. It then immediately adjusts the total inventory numbers accordingly. This is done with
inventory management software that records all transactions and an inventory database that is adjusted
based on those transactions.

In other words, it’s an inventory accounting method that happens automatically because software
makes our lives easier.

As long as a company has inventory management software integrated into a POS system, every
movement of inventory is recorded and cataloged in the database. Nothing enters the inventory
pipeline without immediately being added to the database. And nothing exits without immediately
being removed.

That way your inventory database always accurately reflects your current inventory levels and is
adjusted in real time. And it can be done in your own facility or with vendor managed inventory.

A perpetual inventory system is opposed to a periodic inventory system. A periodic inventory system
maintains records of its inventory by regularly scheduled physical counts of inventory.

Perpetual Inventory System Definition

A perpetual inventory system is opposed to a periodic inventory system. In a periodic inventory system a
company tallies up their inventory stocks every once in a while. Or periodically. Then they compare a
current number against a previous number to determine inventory change over time.

But in a perpetual inventory system, inventory levels are monitored in real time. And all inventory
management and control decisions can be made at any time based on current, accurate numbers.
Because those numbers are all updated perpetually, after every purchase and every sale.

Inventory Synonym: Another Word for Inventory

There are some other ways to refer to the goods a company has on-hand. Here are some inventory
synonyms:

Stock

Supply
Reserve

Store

Cache

Stockpile

List

Record

Account

Catalog

Inventory vs Stock: Is Stock the Same as Inventory?

Stock is what’s sold by a business. The merchandise inventory, in other words. Stock doesn’t include the
goods and materials required to produce finished products. That’s what inventory is: all the materials
required to produce finished goods, along with the finished goods themselves.

Inventory vs Supplies

Supplies are a type of inventory. Supplies, or supply inventory, is usually another name for MRO
inventory. It’s composed of the consumable materials, equipment, and supplies that are used for
production but aren’t a part of the finished product.

Examples include personal protective equipment, cleaning supplies, office supplies, tooling and
industrial equipment, and more.

How Do You Spell Inventory? How To Spell Inventory

Here’s how to spell inventory:

INVENTORY.

That’s not to be confused with the plural inventories.

Remember, a y for singular, and ies for plural.

Inventory Pronunciation

The phonetic American pronunciation of inventory is IN-ven-taw-ree. The accent is on the first syllable.

The phonetic British and Australian pronunciation is IN-ven-tree. The accent is also on the first syllable.

Inventory in a Sentence

Here’s a few ways to use inventory in a sentence:

As a noun:

We counted the bar’s inventory using a bar inventory spreadsheet after last call.

The inventory was shockingly low after the sale.

Pipeline inventory refers to inventory currently in transit between two parts of the inventory pipeline.

As a verb:

We inventoried all the books in the library.

Thus ends our exploration of what is inventory and the definition of inventory. There are a lot of related
concepts and definitions. A solid grasp of them provides good context for a deeper understanding of
what inventory means.

And what makes us qualified to provide such a definition?

We created an industry-leading B2B eCommerce platform and digital storefront that helps businesses
manage their inventories smoothly.

Request a Demo
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Inventory Management: Inventory Management Techniques

February 16, 2021

Table of Contents

Kitting Process Inventory Model

Bulk Shipping

Dropshipping Model

Just in Time Inventory

Consignment Inventory

Backorder Definition

Cycle Inventory

ABC Inventory Analysis

Those Are the Best Inventory Management Techniques

Inventory Management for B2B

To many business owners, inventory management can seem like a complicated and tedious task. But it
doesn’t have to be!

There are many options for managing your inventory to limit costs and maximize profits. All you need
are the know-how and tools to get the job done.

From product kitting and bulk shipping to inventory analysis methods, we’ve compiled the best
inventory management techniques you can use to lower costs and increase profits. We’ll start with
some warehouse and shipping models and end with some analyses and measurements that can give you
insight into your inventory.

Kitting Process Inventory Model

Product kitting is an inventory management technique where individual, but related, products are
assembled and put into a single package for shipment. Kitting can save a company time and money
while streamlining their warehouse and shipping operations.
It is particularly popular with businesses like furniture manufacturers and large ecommerce sites like
Amazon. It is also used by subscription box services where underperforming products are bundled
together based on a theme.

Who Should Use It?

Kitting is used by a broad range of businesses throughout the entire supply chain. Manufacturers use it
to organize and assemble parts and reduce costs, streamline shipping, and track their inventory.
Warehouses use this model to lower overhead and make better use of their limited storage space.
Customer-facing retail businesses use it to bundle SKUs that they have an excess of or aren’t selling as
much as forecasted.

Ecommerce fulfillment companies are the biggest proponents of the model. These third-party
companies gather multiple goods ordered by a customer and combine them into as few shipments as
possible. This lowers fulfillment and shipments costs and gets products in the customers’ hands as
quickly as possible.

How to Use It

Product kitting is best implemented, tracked, and controlled by the use of a specialized program or
service. These programs can track individual SKUs as well as create and track new SKUs for kits. They
also monitor inventory levels and calculate the number of kits that can be assembled with the parts on-
hand. Optimizing workflows and the usage of warehouse space are all made simple with digital
applications.

There are many options for kitting software on the market, so you can easily find one that works for
your business.

Bulk Shipping

Bulk shipping is a form of mass shipping where large quantities of goods are transported via shipping
vessels. It’s responsible for the movement of millions of goods around the world every day.

What Kind of Goods Can I Ship?

Bulk shipping can be used for nearly any type of good with a decent shelf life. Manufacturers in
particular can benefit greatly from the use of this shipping method to move raw materials and finished
goods.
Bulk shipping goods are classified as either dry or liquid bulk goods. Dry goods are shipped in large,
corrugated steel containers and include items like electronics, plastics and minerals, and finished goods
like automobiles. Liquid goods are piped into specialized tanks and vats in a ship’s hold and include
anything from liquid chemicals to milk.

The Costs and Benefits

Bulk shipping rates are standardized across the industry with minor variations based on the shipping
company used. Weight, density, freight class, and shipping distance all affect the rate you pay for
shipping. Current shipping rates are tracked online, so you can stay up-to-date on any fluctuations in the
market.

How to Use It

There are many options when seeking to use bulk shipping. You can ship with a small private company, a
large conglomerate, or a federally-owned shipper. Find the company that offers the best rates, shipping
destinations, and additional services for your company. There’s no one-size-fits-all option.

Download our free Inventory Techniques eBook

Dropshipping Model

Dropshipping is an inventory management technique where the goods you sell are shipped directly from
the supplier to your consumer. Unlike the standard inventory model, you never come in contact with
these items or stock them in your warehouse. This technique eliminates costs associated with inventory
purchasing, storage, and warehouse staff salaries.

How to Dropship

The most important part of dropshipping is to partner with a reputable supplier. Stick to one that has all
the goods you need and can handle large orders quickly. This will limit the chances that you will leave
your customers waiting for too long if they place an order.

How Does the Model Work?

The dropshipping business model works by partnering with a supplier to fulfill orders you take through
your storefront. This model can cover your entire store’s offerings or only some of your product
selection. The suppliers have their own warehouses built specifically for packing and shipping these
orders, so the retailer only handles the marketing and sales portion.
It’s Very Common

Dropshipping is used by a wide variety of businesses across many industries. Most of the large online
ecommerce sites, many large brick-and-mortar businesses, and entrepreneurs use it to lower their
inventory costs. In fact, profits in the industry are routinely in the billions. The growth of ecommerce is
directly tied to the growth of dropshipping.

What About Cross Docking?

Cross docking is similar to dropshipping, but there are differences. It involves supplies that are shipped
to your warehouse, sorted, then put onto trucks for shipping to their final destination. This minimizes
the time they spent in the retailer’s warehouse and saves money.

It is also more popular because the retailers can inspect and handle the goods before delivering them to
the customer, adding a layer of quality control. However, it is more expensive than dropshipping and
requires at least some warehouse space and staff.

Just in Time Inventory

Just in time inventory is an inventory method where stock arrives in your inventory only as you need it
for production or sales. Standing stock is intentionally kept low. Instead, you have a much smaller
rotating stock and the inventory cycle is minimal. Stock is ordered to be used immediately upon arrival
and spends as little time as possible on your premises.

Origin of JIT

Just in time inventory has been around in some capacity since the 1960s. However, the major proponent
that made it popular was the Toyota Motor Corporation. Toyota used JIT to cut costs in their
warehouses greatly and streamlined the workflow skyrocketing them to become a leader in the auto
industry. To this day, many automobile manufacturers use this model.

How JIT Works

Just in time inventory management is built around agile ordering and manufacturing. It requires
planning and forethought to avoid supply shortages if demand increases.

Here are the main components of a just in time inventory model:

Small batches of goods delivered more often. Items are received from the supplier daily or even hourly
to ensure production continues at a regular pace.

Flexible worker roles and production areas. Employees are cross-trained to limit their downtime and
keep staff costs low. To make this possible, production areas are also utilized for multiple processes.

Quick shipping upon completion of goods. Products are shipped out as quickly as they are brought in,
minimizing the warehouse space needed for storing goods.

JIT Inventory Management Benefits

Just in time inventory management can offer many benefits to a business. Production runs are very
short since storage space is limited. This means you can focus on only your best products and avoid any
losses if demand suddenly shifts.

Warehouse spaces don’t need to be large or contain multiple rooms. All inventory moves through
quickly and workers can use the same space for multiple steps in the production process. Material costs
are also minimal since excess items are never ordered and very little is wasted.

Consignment Inventory

Consignment is an inventory model where a retailer (consignee) sells products on behalf of a supplier
(consignor). Consignment requires a contract between the consignee and consignor outlining the rights
and responsibilities of both parties.

The supplier in this model maintains ownership of the products until they are sold. Upon sale, the
retailer pays the supplier for the item and keeps the additional profit. This model allows retailers to sell
a wide range of products without taking on any excess costs related to inventory management.

How Does It Work?

Consigned inventory is stored in special warehouses owned by the supplier. These consignment
warehouses are built on or near the retailer’s property. This allows the retailer to quickly and easily
access the goods without taking up space in their own warehouse.

These goods are always considered the property of the supplier and appears on all their inventory and
accounting documents. The retailer never accounts for these items until they are sold. At this point,
money is received by the retailer, and they pay the supplier.

Inventory Benefits
Consignment inventory offers many benefits to both the retailers and suppliers. First, the relationship
between the two parties is much stronger than in other inventory methods. Both businesses have to
work in sync to sell the product and neither gets paid unless there is a sale to a customer. It also
minimizes certain costs on both sides.

Retailers minimize their inventory costs since they are not responsible for the warehouses nor any waste
or shrinkage. Suppliers save money on unsold goods since they keep an eye on all sales trends and can
react quickly to resupply the retailers.

Consignment or Vendor Managed Inventory

Vendor managed inventory (VMI) is a similar inventory management relationship between a retailer and
supplier but doesn’t offer the same benefits.

In a VMI relationship, the supplier controls the flow of goods and warehouse operations for the retailer,
but they do not own the product. This means the retailer has to pay for the goods up front, but does not
have control over the good at any point. If you’re looking to avoid the high costs associated with buying
stock, consignment is a better choice.

Backorder Definition

Backordering is when a customer places an order for a good, material, or service that can’t be filled at
the time of purchase. Backorders are a very common occurrence in the world of inventory management.

They can be either intentionally or unintentionally on the part of the retailer. These goods are not on-
hand at the time of sale, but are expected to arrive at some point in the future.

How Long Does It Last?

The length of time items are on backorder depends on many factors including changes in demand or
supply and problems with manufacturing or shipping.

This means the orders could be processed anywhere between a week from ordering and a few months.
If done intentionally, most will be fulfilled within a month from the date of purchase.
There is also the chance that a customer’s order is only partially on backorder. In this case you can fulfill
it as the goods come in or hold all items until the final product arrives. Both are viable options and can
keep a customer happy.

Backordered Item Benefits

When done intentionally, backordered items have many benefits to a business. These items can help a
business grow sales and satisfy customer needs.

These items are often of a higher value to a business than in-stock items. Scarcity affects product value
and a business can make many sales for a good that is not in stock if the demand is high enough.

Backordering also cuts storage costs since the goods sold aren’t in storage at all. They’ll also
immediately be sent to the customer upon arrival. Lastly, the sale of these goods provides data on
customer purchasing trends. This lets a business pivot their focus to products that are of a higher value.
Proper usage of this technique can be done easily using the BlueCart Digital Storefront.

Avoid Unplanned Backorders

Backordering that isn’t done intentionally is a signal that a business has done something wrong and
comes with drawbacks. Customers can get upset if items aren’t available in a timely manner and it can
impact sales of other goods.

To avoid this, focus on demand forecasting and safety stock. Demanding forecasting is taking data on
sales trends and ordering products specifically to meet projected demand. Safety stock is additional
goods purchased and stored in the warehouse in case demand surges.

Inventory Management for B2B

Cycle Inventory

Cycle inventory, or cycle stock inventory, is the part of a retailer’s inventory that they work through to
fulfill regular orders. This is a part of a business’s standing inventory and is used and replaced on a
regular basis.

Cycle inventory management can make or break warehouse operations. If inventory comes in or goes
out at an unacceptable pace, operations can become stalled or overwhelmed. This means sales are
missed and revenue takes a direct hit.
Inventory Cycle Time

Inventory cycle time is how quickly you have to replace, or turn over, your inventory. For retailers, this is
the amount of time it takes between when the goods arrive and you sell them. For manufacturers, it is
the length of time from the start of production to finalization.

This measurement determines how often reorders should happen and is directly impacted by shifts in
demand and consumer behaviors.

Inventory Cycle Count

Inventory cycle count is a type of inventory auditing where a sample of products are counted and
checked against the full inventory count.

Cycle counting is used on goods that have a high turnover rate or are of high value. This is done to
ensure inventory records are accurate and to catch any discrepancies as soon as possible. It is a useful
alternative to physical inventory counting for many reasons.

First, it takes far fewer hours and resources than inventorying your entire warehouse. This saves money
and lets you focus on making sales.

Second, it prevents large variances since you’re getting new inventory counts regularly rather than
waiting upwards of two to four weeks. Lastly, it allows businesses to remain open while doing physical
counts of inventory.

Physical counts take so many resources that all other operations cease, but cycle counting can be done
quickly and efficiently.

ABC Inventory Analysis

ABC inventory analysis is an inventory management tool where products are grouped by their dollar
value and importance to the business. ABC inventory analysis is easy to do if inventory is taken
consistently and provides insight into sales trends and product worth.
Like cycle counting, ABC analysis gives business owners insight into inventory value and sales. It also
highlights areas where too little or too much time is being spent.

How This Analysis Works

ABC inventory analysis requires three steps. First, calculating the value of each good you sell then
compiling that data to discover your total inventory value. Then, you find the percentage of that total
value that each item is worth. Lastly, you use the Pareto principle to establish buckets. This states that
80% of inventory cost comes from just 20% of inventory.

You can categorize use as many buckets as you’d like, but we recommend sticking to A, B, and C. The ‘A’
bucket will hold the items with the most value and accounts for about 80% of sales. The ‘B’ bucket will
consist of medium-value items that equal 15% of your sales. Lastly, the ‘C’ bucket will hold the majority
of your goods which only contribute 5% to your total sales volume.

Why to Do It

ABC analysis is used by businesses across all industries from retailers to wholesalers to manufacturers.
Data gathered in the process provides insight into inventory value. It also lets you direct the majority of
your focus on inventory items with high inventory cost.

These goods should be watched more closely than others so that you can always meet demand and
make the most profit. Reordering and backordering plans can be made by watching sales trends on
these items. Workloads can also be adjusted to optimize these goods and save money.

Those Are the Best Inventory Management Techniques

Whether you choose to use a new inventory model or analyze and optimize your current operation,
BlueCart can help. Just request a BlueCart demo and we’ll get you on top of your inventory
management. Warehouse inventory management techniques can benefit any kind of business and let
you put more time and energy into making sales and increasing profits.

Request a Demo

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Inventory Management Process Guide

ByJoshuaonThursday, November 12, 2020

Table of Contents

What Is Inventory Management?

Process of Inventory Management

Inventory Management Methods

Internal Audit of Inventory Management Process

Can You Manage That?

What methods do you use for inventory management? Do you have an inventory management and
inventory control system?

If you don’t have answers to these questions, you’re not making the most informed decisions for your
inventory. This means you’re spending more on storage and making less profit.

Adopting new inventory management methods can help you eliminate waste and focus on growing your
business.

We can help you understand how to manage your inventory, some of the best tools to use, and the
benefits you can expect. It’s an important part of our inventory control guide.

What Is Inventory Management?

Inventory management is the process of reducing inventory management costs and optimizing your
ability to meet customer demand. This can be done using a variety of inventory management methods
like reducing dead stock or calculating an optimal reorder point.

This most important part of inventory management is that it requires a dedicated focus on inventory
tracking. You can take inventory manually or you can invest in an inventory management system.

Inventory Management System Definition

An inventory management system is a system that manages every aspect of a company’s inventory. This
includes buying, shipping, tracking, storage, inventory turnover, and reordering. This type of all-in-one
inventory management software can be integrated into your POS system to provide a perpetual
inventory count.
Process of Inventory Management

Inventory management requires creating and following a simple set of processes. Once established,
these processes limit the chance of improperly managing your inventory. Before building your plan, you
must first understand the steps that inventory goes through.

Steps in Inventory Management Process

There are eight inventory management process steps that all inventory plans are built around. Here are
those steps.

Product is delivered to your facility. This is the point at which goods first enter your inventory.

Product is inspected, sorted, and stored. You may choose to use cross docking or another strategy for
this, whatever works best for your storage space.

Inventory levels are monitored. This can be through physical inventory, inventory cycle count, or a
perpetual inventory software.

Customer orders are placed. Customers may make a purchase in person or through your digital
storefront.

Customer orders are approved. This is likely an automated process in your POS system. If you participate
in dropshipping, this would be the point where you pass the order along to your supplier.

Products are taken from stock. These goods are found by SKU number, packaged, and shipped or
delivered directly to the customer.

Inventory levels are updated. A perpetual inventory program will automatically change your stock levels
automatically. You can also manually record each sale or discover changes when you take a physical
inventory.

Stock levels trigger reordering. Calculating your reorder point for each product you sell can optimize this
step and get you the goods you need to meet demand. This is a major component of the just in time
inventory model.

Determine Inventory Management Process Flow

These eight steps can be done more efficiently with a properly managed inventory process flow. Each
step can be optimized by tracking and reviewing each step. You can eliminate waste, discover flaws, and
reallocate resources to any step that needs it to increase your profit and limit your costs.

Create an Inventory Management Process Map

Inventory Management Process Map

An inventory process map is a flowchart that shows every step in your inventory program. Though the
eight steps are fairly standard, there are many variables that are specific to your businesses. By mapping
out all steps and options, you can always be prepared for any changes in supply or demand.

For example, if an order comes in and you’re out of stock, you need to know what to do. Your inventory
process map should include your business’s preferred method of dealing with this situation. It may be
placing a backorder (what is backorder?) or refunding the customer. You can even include on your map
that you do both depending on the item’s value.

Inventory Management Methods

Inventory management methods, or inventory management techniques, are tools you can use to better
track your inventory. These run the gamut from ordering products to shipping methods and each offer
unique benefits if done correctly. Managing your inventory levels is paramount in achieving the most
profit and ensuring you can fulfill your customers’s orders.

Explain the Various Techniques of Inventory Management

The four major devices of inventory management are ABC inventory analysis, economic order quantity
(EOQ), safety stock, and reorder points. These devices are ways of ensuring your supply of goods is
sufficient for meeting customer demand. They offer their own benefits based on the business you
operate. Here’s a brief guide on each of them.

ABC analysis evaluates the value of all goods in your inventory. This allows you to reallocate resources
and put your effort behind your best items. EOQ is an inventory model that determines the ideal order
quantities to minimize storage costs. Buffer stock is an additional supply of goods that you keep on hand
in the event that demand increases quickly. Reorder points are the precise point that you should reorder
products to meet demand without holding more goods than necessary.

Kanban Method of Inventory Management

The kanban method of inventory management is an inventory scheduling system that keeps inventory
levels minimal. It is built around “bins” which separate the materials used in production. This is a major
component of the just in time, or lean manufacturing, model. It only allows you to keep just enough
supplies on hand to fulfill active orders. Each time a new order is placed, you then receive a delivery of
the components needed to fill it.

Here’s an example of how the kanban method works. Let’s say you operate a meat packing plant. Under
the kanban method, you only want to keep enough meat and packaging materials on hand to fulfill the
orders you already have. So, when a new order for 500 lbs of beef comes in, you use the meat and
supplies on hand first. Once this “bin” of materials are used, you place an order with your supplier to
finish filling the order. This is repeated as needed every time an order is received.

Internal Audit of Inventory Management Process

Managing inventory requires conducting an inventory audit of management processes regularly.

Whether monthly or weekly, you need to keep a close eye on your inventory processes. Any anomalies
or wasted efforts can be caught quickly and any losses can be mitigated. This can be achieved by doing
an inventory management assessment.

Inventory Management Assessment

An inventory management assessment is an evaluation of the efficiency and practices in your inventory
process flow. There are tools on the market you can use for this and some inventory management
software have one built in. If not, you can evaluate your processes by using your physical inventory
counts to discover stock level issues. You should also review your process map to ensure all variables are
accounted for and processes are followed.

How to Improve Inventory Management Process

There are many ways you can improve your inventory management and get the most out of your
inventory.

Here are a few options:

Coordinate with suppliers. The better relationship you have with your suppliers, the better your
inventory management. If you communicate demand changes and product needs regularly, they can
ensure you’re always supplied.

Hire an inventory control manager. A dedicated person to manage inventory will always be better than
someone with multiple responsibilities. This person can stay on top of supply issues and react more
quickly than you may be able to. Inventory management is the primary role in an inventory control
manager job description.

Track product lead time. Product reordering can best be timed if you know the lead time to expect (see
lead time definition). This will also help you avoid running into issues with meeting customer demand.

Purchase inventory management software. The larger your inventory gets, the harder it will be to
manually track. Inventory management software is a great option for lowering your workloads and
increasing profits.
Can You Manage That?

Inventory management can make or break a business. Losses can quickly pile up and your inventory can
cost more than it’s worth. If you don’t spend a proper amount of time reviewing your inventory levels
and processes, your business can suffer.

Follow our guide above and try out new management methods to find the best method for your
business. Your hard work can optimize your inventory flow, lower costs, and increase profits. Inventory
forecasting is also important so you can purchase the optimal economic order quantity.

Request a Demo

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The 9 Types of Inventory: Inventory Management in 2021

February 16, 2021

Table of Contents

Manufacturing

Raw Materials Inventory

Work In Process

Finished Goods

Merchandise

Pipeline

Safety Stock

MRO

VMI

So, Those Are the Types of Inventory, Eh?

Types of inventory

Inventory is usually a business’s most valuable asset.

Can you imagine any successful business not doing everything possible to successfully manage their
most valuable asset?
A wildly profitable hedge fund that’s okay with mediocre money management? A michelin-starred
restaurant that’s satisfied with stale ingredients?

It doesn’t compute.

The inventory management process is the key to not only determining the quality of your company’s
output, but to the financial health of your entire business. It’s how you form a clear picture of your
organizational liquidity, cash flow, and value.

Successful inventory management begins with understanding the different types of inventory. So here
they are. And while each section is an adequate introduction, they all link out to more detailed
information.

You have the key. The magical key of inventory. Open the door and enter.

Manufacturing

Manufacturing inventory is all the items kept on hand to produce products. And these supplies and
materials are usually broken up into three groups based on the stage of production. Raw materials,
works in process, and finished goods.

The Three Types

Raw materials. These are the base components or totally raw materials used at the very first stage of
production.

Work-in-process. After raw materials are combined with human labor, the result is work-in-process
inventory.

Finished goods. The culmination of everyone’s hard work. When the product is ready to move up the
supply chain or be sold, it’s finished goods inventory.

Managing Inventory: Manufacturing Edition

Like all inventory pipelines, manufacturing inventory must be smartly managed to maximize revenue.
Some tips to profitably manage raw materials, WIP, and finished goods inventory are:
Choose the inventory process that’s right for you. Look into and test perpetual, just-in-time, and ABC
inventorying.

Enlist help. It could be that a VMI or consignment inventory setup is optimal for your business model.

Set and stick to reorder points. Don’t reorder on gut feelings. Set a minimum and play the numbers.

Use automated demand forecasting when setting your safety stock.

Wait a minute, automated demand forecasting? Yeah! You’ll need manufacturing inventory software.
Look for manufacturing inventory software that allows you to:

Work In Multiples

Get software that lets you add multiple production stages to bills of materials and include numerous
work orders in a manufacturing order. Then you can add the right bill of materials or work orders to
specific orders.

Tighten Up Ordering

Any good inventory software allows manufacturers to convert sales orders to manufacture orders
automatically. Along with being able to create purchase orders for raw materials that are out of stock
and work orders for repair and maintenance.

Make Pricing and Accounting Easy

The platform you choose should also give accurate estimates on the final cost of finished goods so
pricing strategies are most effective. And those finished goods should all be accompanied with invoices
and packing slips generated automatically from your platform’s accounting functionality.

Let’s look into the different types of manufacturing inventory a little deeper.

Raw Materials Inventory

Raw materials inventory is inventory that has not yet been used in the manufacturing process. Once a
raw material is used in any way during production, it’s no longer a raw material. There are two kinds of
raw material inventory.

Direct

These are the raw materials that make up the thing being manufactured. Think of the wax in a candle or
the coffee beans in ground coffee.
Indirect

These are the raw materials that are used during production but aren’t a part of the finished product.
Think of cleaning supplies, batteries, lubricants, etc.

Why is this all important? Because calculating raw materials inventory not only gives you an accurate
picture of your current assets. It also allows you to calculate your raw materials turnover rate. That’s a
ratio which represents how quickly raw inventory is used and replaced. It’s an indicator of how accurate
the current demand forecasting and resulting purchasing strategies are.

Managing Inventory: Raw Materials Edition

Wanna get the most out of your raw materials?

Automate as much strategy as possible. Use a material resource planning (MRP) platform. They analyze
historical data of all sorts—like consumption, lead time, production, stock levels, and purchasing
cadence. And they suggest optimal management strategies. Get software that forecasts demand and
includes costing and supply chain tracking features.

Pay special attention to understock and overstock. The consistent presence of one or the other is a
signal that your raw materials management isn’t ideal.

Don’t cut costs on raw materials. More often than not, the extra labor and production stoppages are far
more expensive than any savings.

Leave WIP analysis for the more advanced levels of your inventory control operation, for now. You’ll get
a better feel for your raw materials management if you focus your analysis on raw and finished goods
inventory.

You don’t have to account for every little thing. Some high-volume, low-cost raw materials can’t be
reasonably tracked and accounted for. Things like screws or nails, for example. Cost those when they’re
acquired so you don’t have to worry about them during production.

Work In Process

Next up, work in process inventory. Otherwise known as WIP inventory. It’s all the goods in between
raw materials and finished goods. The unfinished goods currently in the manufacturing process that
have yet to be completed. Work in process goods also usually include overhead costs and labor
associated with manufacturing. Work in process inventory is generally described as a company’s
unfinished goods waiting to be completed and sold.
Any raw material that has been manipulated by human labor but is not yet a finished product is a work
in process.

Figuring Out Work In Process

Most of the time, WIP goods are basically raw materials added to the production labor and overhead.
You can click into the above post about WIP inventory to get the formula and some more details about
calculating it.

Suffice it to say, using a formula to calculate WIP goods produces an estimate. There are a lot of things it
can’t consider, like expired products, scrap, waste, spoilage, and production slow-downs or stoppage.

The Importance of WIP

Getting a handle on WIP is important for monitoring and optimizing manufacturing capacity and
inventory control. It’s not great to let WIP inventory grow over time, unless of course it’s part of a larger
safety stock or buffer inventory strategy. In general, it should be kept streamlined and consistent.

Why? Because reliable WIP numbers are an important valuation signal for businesses. They affect
investments, loan approval, and future strategy. WIP isn’t liquid like raw materials or finished goods.
Companies with bloated works in progress have lots of cash tied up in inventory that few people are
willing to consider collateral.

Finished Goods

And, finally, finished goods inventory. These are all the items that manufacturers sell to upstream
vendors or to retail businesses. Keep in mind that “finished” is relative, though. One company’s finished
product may be another company’s base manufacturing component. It all depends on where the
finished product goes after its completion.

End-Period Finished Goods

Using finished goods numbers from the end of an accounting period is how businesses tally up their
finished inventory. Click the post above to learn how to do all the necessary calculations to sort out your
finished product inventory.
Ultimately, finished goods are reported as a current asset on the balance sheet. That balance sheet is
how leadership and investors gauge cash flow and inventory liquidity. Both important signals of a
business’s financial wellbeing.

Another benefit of knowing finished goods numbers is calculating turnover rate. That measures how
quickly a business’s finished products are sold and replaced (turned over) over a specified time period.

Why Is Knowing Finished Goods Inventory Numbers Important?

Three primary reasons:

It shines a light on current assets and gross profit. Inventory is often a production company’s biggest
driver of profits. Its accuracy has ripple effects on the accuracy of all sorts of other accounting your
business does. Accurately representing it on your balance sheet makes operating budgets and financial
budgets far more accurate.

It minimizes waste. Any business that knows precisely what they’re able to produce makes better raw
material purchases and safety stock calculations. That frees up cash and lowers storage cost.

It makes production more efficient. Finished product numbers let you analyze different stages of the
production pipeline. This analysis helps you iterate on processes, roll out automated solutions where
needed, and generally build toward smarter inventory management.

What’s the Right Inventory Level for Finished Goods?

It varies, to be honest. In general it should be minimized to keep storage costs down. But “minimal” is
different for every business. The important part is being familiar with your process and balance sheet.
Then you draw meaningful conclusions from your finished product numbers. And you can tweak your
inventory control strategy because of it.

After inventory goes through the manufacturing stage, often it’s merchandised and sold.

Merchandise

Merchandise inventory is everything acquired from a manufacturer that’s intended for sale. Usually
retailers and resellers like wholesalers are the companies with merchandise inventory. And that’s
because merchandise inventory is intended to be resold at a higher price than for which they were
purchased. That includes the goods in storage facilities, on displays, and in consignment.

Reporting Merchandise Inventory

It’s considered a current asset because it can reasonably be expected to be sold within the next
accounting cycle or fiscal year.

On the balance sheet, it reflects the amount paid for all products yet to be sold. It’s essentially a holding
account for inventory that’s ready for sale. And it’s always the ending inventory numbers for that
accounting period reflected on the balance sheet.

The revenue from merchandise sold during an accounting period is an expenditure on an income
statement for the period during which it was sold. Any merchandise not sold in that accounting period is
counted as a current asset, as stated above.

Inventory Management: Merchandising Edition

There are two main ways to handle merchandising inventory:

Perpetual inventory. This is an ongoing count of merchandise value. Every time a sale is made or product
added, the inventory numbers change. Beverage inventory software platforms like BinWise do this, for
example. They deplete items sold as they’re sold to maintain an ongoing count of inventory.

Periodic inventory. This is inventory taken at specified intervals. It doesn’t provide real-time insights and
it tends to be error-prone.

B2B wholesale fulfillment platform

Pipeline

This is inventory that consists of every item in the supply chain that’s in-transit. Think of manufacturing
companies with complex overseas shipment or retailers that have numerous warehouses shipping them
items. In both cases, there’s always a fair amount of items in no one’s physical possession—being
transported—that need to be tracked.

And that’s just what pipeline inventory does.

Depending on the agreement between buyer and seller, who owns pipeline inventory changes.

If the legal possession transfers to the buyer when the inventory is packed into the transport vessel, it’s
called freight-on-board shipping point. And if that ownership begins
Pipeline Stock: By the Numbers

Optimizing inventory depends on accurate calculations. This type of inventory is no different.

When your in transit inventory is represented accurately on your balance sheet, it further clarifies how
much cash you have tied up in inventory. Along with overhead costs like transport and storage. It’s a
particularly impactful number for businesses in complex

You can learn how to calculate your pipeline stock by clicking the above link to our detailed post on the
topic. And once you do, it’ll allow you to start optimizing inventory management.

Inventory Management: Pipeline Edition

Here’s how to get the most out of your goods in transit:

Make solid contingency plans. When something goes wrong in transit, the buyer or seller are sometimes
helpless. Usually a third party must be contracted to solve the problem. That can take time and cost
money. In the unfortunate event that your stock is lost, late, of low quality, or prohibitive for whatever
reason, make a contingency plan. Decide when it’s worth it to cut your losses and discount or liquidate
stock.

Also decide how much decoupling inventory you should put away in the case of a supply chain hiccup.

Calculate EOQ. Economic order quantity is a measure of the optimal purchasing levels based on demand,
ordering costs, and carrying costs. Again, the post above will walk you through calculating it.

Speaking of inventory hiccups, it’s time to talk about safety stock.

It’s not easy to predict supply and demand. That’s why anyone managing inventory builds in their own
little insurance.

Safety Stock

Safety stock is additional inventory kept in stock in the case of unexpected delays from suppliers. It
protects against stockouts or delays in raw material, finished foods, or packaging inventory. Stockouts
are a direct sales loss. They also hurt brand engagement by degrading the customer experience. Safety
stock is the solution to that.
There are a few other similar types of inventory, though.

Cycle Stock

This is the inventory a business must have on-hand to meet regular, foreseen supply and demand. That’s
opposed to safety stock hedging against unforeseen fluctuation.

Buffer Stock

Buffer stock is the inventory needed to protect against spikes in demand from buyers. It’s meant to
protect businesses from lost revenue and customers from poor experiences.

Anticipation Inventory

Unlike its brothers and sisters, anticipation inventory trafficks in the foreseen, the … anticipated! It
refers to extra inventory kept on hand periodically or seasonally to account for known fluctuations in
demand. The holidays are a great example of this, as many businesses factor in holiday shopping into
extra inventory.

BlueCart, for example, provides historical sales data from all your buyers. That allows you to gauge how
demand varies over the long term and put in place accurate anticipation stock.

Everything In Moderation

All of these types of inventory provide protection, but they’re not free. It costs money to hold stock
because you’re not selling it and there are holding costs to store it. You also risk any held stock
becoming expired or obsolete. Then you can kiss it goodbye.

So what’s worse, loss from inventory-related mismanagement or costs from holding or losing inventory?

That’s the million dollar question. And the answer depends on your business and the tools you use to
drive your inventory management strategy. The key is being consistent and having a foundational
understanding of your inventory. Then you’ll know what success looks like and how to chase it.

Types of inventory

MRO
MRO inventory refers to all the inventory needed for maintenance, repair, and operation. It’s all the
materials, equipment, and supplies used for manufacturing that don’t end up as part of the finished
good.

What type of stuff makes up MRO inventory?

PPE like masks, hardhats, and respirators

Cleaning and disinfecting supplies

Office supplies

Lighting fixtures and furniture

Computers

Industrial equipment

Laboratory equipment

Inventory Management: MRO Edition

Strangely, as crucial as MRO items are, their inventory management is often neglected. They’re not the
most exciting items. And they’re not tied directly to revenue. So they’re not subjected to the same
rigorous analysis as other types of inventory. Why is this?

Mostly because the turnover rate is slow. And there’s a tradition of obtaining MRO goods on an as-
needed basis. Also, businesses don’t want to distract maintenance employees with inventory
management tasks. But also because lots of teams have hidden private inventories of MRO items.

It’s not uncommon for one team to put in a request for safety or repair equipment while another team
has their own stockpile. It shouldn’t be ignored, though. And those who don’t ignore it do so in two
primary ways:

Internal management is when the manufacturing company monitors, replenishes, and optimizes their
MRO inventory in-house. They do it all on their own.

Hybrid management is when the management of some MRO goods is outsourced to a third party. This
often takes the shape of a VMI agreement and brings many of the same benefits to the manufacturer.

Best Practices

Looking to sharpen up your MRO practices, here’s a condensed version of the tips in the article we
linked to above:
Define all MRO items that are business critical

Have a company-wide purchasing strategy to avoid redundancy

Embrace VMI agreements

Depend on analytics and demand forecasting

Store all MRO in a central location (helps discourage that private inventory nonsense we mentioned)

Educate staff on supply chain best practices

Audit your MRO inventory regularly; stop neglecting it

We’ve mentioned VMI inventory a few times. Now’s as good a time as any to go a little deeper.

VMI

VMI, or vendor managed inventory, is an agreement between a buyer and a seller where the seller
manages the buyer’s inventory for them. While it’s in possession of the buyer.

If you’re a buyer, sounds like a pretty sweet deal, huh? Why would a supplier do such a thing? To answer
that question, let’s take a brief look at how VMI agreements work.

How Does It Work?

VMI inventory is owned by the vendor but stored at the buyer’s premises. In that sense, it’s a type of
consignment inventory. The vendor and buyer then agree on the specifics and goals of the agreement.
Then the vendor ships the inventory to the buyer and monitors inventory levels. The vendor then makes
all the replenishing purchase orders based on their own forecasting.

This system obviously requires buyers openly sharing a lot of data with vendors so the latter can
accurately forecast.

Inventory Management: VMI Edition

Here’s how buyers can get the most out of their VMI agreements:

Be generous with your data, but protect it. Make sure you have a confidentiality agreement before that
data is shared.
Do research and choose the right vendor for you. Don’t rush into anything. It’s a pain to dissolve an
established VMI relationship.

Create a very detailed contract that specifies what items are being managed, min and max inventory
levels, and how returns will be handled.

Choose small-to-medium size vendors. Often huge national vendors that offer VMI services don’t have
the incentive to provide stellar service.

Make sure you share with your vendor anything that might affect buying behavior, like opening up a
new sales channel. That’ll help them keep their finger on the pulse of demand forecasting.

And here’s how vendors can have a positive experience:

Get creative with your buyers, and ask for value beyond storage. What can they do for you in terms of
displays, staff education, demos, and upselling? Can they include your branding on their website or
somewhere in their store? There are a lot of ways to integrate your product into your buyer’s sales
strategy beyond consigning your product to them.

Abide rigidly in any confidentiality agreement and you’ll find your buyers are quite forthcoming with
their data. The more data, the better you can manage inventory, and the longer you’ll keep your clients.

Get some boots on the ground. Send representatives to retail locations to oversee branding, display, and
salesperson education.

Pros & Cons

Pros of using VMI for buyers:

Reduced risk because buyers need not invest in the inventory up front

Higher cash flow because money isn’t tied up in sitting inventory

Inventory levels tend to be more optimized because vendors don’t want to lose clients.

With lower inventory comes lower carrying costs and less shrinkage

Stockouts are rare or non-existent on account of fluid, informed, and contractually-obligated inventory
replenishment.

Less bandwidth spent on inventory management, more bandwidth spent on core business
responsibilities

Sales and brand engagement increase because sales staff are educated by vendor representatives

Pros of using VMI for vendors:

There is more control over product displays, branding, and in-store organization

Just as salespeople get better with vendor expertise, vendors can count on more sales because of
salespeople’s expertise
Carrying costs go down for you, too, because you’ll have a better understanding of your product’s
demand. That’ll make it possible to purchase more strategically and streamline your own inventory.

So, Those Are the Types of Inventory, Eh?

Sure as heck are! What’s important to note about all these types of inventory is that they’re not
mutually exclusive. Many businesses have almost all of these types of inventory simultaneously. And
good inventory management is able to handle it all smoothly.

That’s because smooth inventory management is all about consistent tracking and iterative decision
making. If you establish a baseline in any type of inventory, you’re able to start measuring against it.
That’s how businesses tweak their way to success.

One way to get a head start is using an ecommerce platform that streamlines all your communication
with suppliers and vendors. While also easily tracking inventory and smoothing out purchasing and
invoicing. BlueCart does that for thousands of wholesalers across the country. Book a demo and we’ll
show you exactly how we can help.

Request a Demo

Back To Resources

ABC Inventory Analysis: ABC Analysis Inventory Management

ByJoshuaonFriday, October 30, 2020

Table of Contents

Let’s Discuss ABC Analysis in Inventory Management

Purpose of ABC Analysis in Inventory Management

Inventory ABC Analysis in Excel

ABC What We Mean?

“ABC, Easy as 123!”

That’s not just a catchy tune from the 70s, ABC inventory analysis really is that simple. It’s also a great
tool that helps businesses take control of their inventory management and make informed decisions
(see what is inventory). Done properly, ABC analysis can lower costs and increase your bottom line.
Inventory Management for B2B

If you don’t already use ABC inventory analysis, you should. Here’s what it is, how to do it, and the
benefits it will bring to your business.

Let’s Discuss ABC Analysis in Inventory Management

ABC analysis is a valuable inventory management technique that helps businesses determine which
products are worth keeping in their inventory. Using ABC analysis gives insight into your sales trends and
each item’s individual product value. It is used across all industries and requires little additional work. It
also highlights areas where too much time and money are being spent on underperforming goods.

ABC Inventory Analysis Definition

ABC inventory analysis is a product categorization method where you bucket your products by their
value and importance. This is done using the Pareto principle which states that 80% of inventory cost
comes from just 20% of inventory.

ABC Inventory Analysis Chart

You can categorize your inventory into as many groups as you’d like, but most businesses use three
buckets. These three buckets are: A, B, and C.

A items are the most important. This inventory should get the most focus due to its high price, quick
cycle inventory, or both. These items make up a smaller portion of your inventory, about 20%, but
account for most of your consumption and you sell through it more quickly.

B items are less important than As. These mid-tier products have lower prices than A items, but are
more valuable than C items.

C items are the least valuable. These products are also likely to be the most common in your warehouse,
usually making up about 70% of inventory. They have long life cycles and offer little in the way of sales.

Purpose of ABC Analysis in Inventory Management

The main purpose of ABC analysis of inventory control is to identify products with high cost of inventory
so that management can concentrate on inventory items with high inventory cost. It gives business
owners insight into inventory value and highlights areas where too little or too much time and energy is
being used.

ABC inventory analysis is used to allocate time and energy toward managing goods in the following way:
A items’ sales and inventory fluctuations should be closely watched so that they can be optimized for
sales.

B items can normally be left alone until you perform your regular physical counts of inventory. They
should be managed using normal inventory methods.

C items need very little attention paid to them since they offer such little value to the business.

It is also useful in determining what products to reorder and how often you need to reorder each
product. This is imperative if you use a fast-paced just in time inventory model or a slow-paced bulk
shipping inventory model.

How ABC Analysis Is Useful in Inventory Management

ABC inventory analysis is very useful in inventory management as it identifies the keys areas worthy of
your focus. Once your goods are separated into three buckets, you can determine workloads and
inventory reordering plans.

For example, after performing an ABC analysis, you discover that you haven’t been putting much effort
behind marketing some of your ‘A’ products. You can now give them the attention they deserve and
even intentionally backorder (what is backorder?) some to increase your revenue. The same goes for
underperforming ‘C’ products, as you can stop wasting time and money on them.

Inventory Management Techniques

How to Use ABC Analysis in Inventory Management

Using ABC analysis in inventory management is very simple and can easily be done with the aid of any
spreadsheet software. You can do an ABC analysis at any time as long as you have a full and accurate
inventory count.

Here’s how to perform an ABC inventory analysis:

Calculate inventory value of a given item. To do this, you must use a formula to multiply the price of the
item by the consumption value.

That formula is:

Item cost x annual consumption = inventory value

Repeat step 1 for full inventory. Add all of these numbers together to discover your total inventory
value.

Sort items from high to low value. This can be done easily via an Excel spreadsheet like the one linked
below.

Calculate the percentage of total inventory value for each good. Again, this is done using a simple
formula.

The formula is:

Item inventory value / sum of all inventory values = item % of total inventory value

Add these goods to buckets A, B, and C. Do this by adding the highest 80% to group A, the next 15% to B,
and the final 5% to C.

If you participate in kitting, ABC analysis can be done for both the kits themselves and the individual
components. This will let you know if you have excess inventory of any part or are not investing enough
in your best-performing kits.

Who Should Use ABC Inventory Analysis?

ABC Inventory analysis is useful across all industries and is commonly used by many retailers,
wholesalers, and manufacturers. Raw materials inventory, merchandise inventory, and manufacturing
inventory all have associated value to their respective businesses. This means that ABC inventory
analysis can help these industries uncover their best and worst items and invest accordingly.

ABC inventory analysis can even be used on consignment inventory. It lets manufacturers determine
what goods are worth keeping a buffer stock of in their consignment warehouses.

Inventory ABC Analysis in Excel

Since ABC inventory analysis is so helpful for inventory management, we’ve put together a free ABC
analysis excel spreadsheet for you. It comes with some sample data to illustrate how to use the
spreadsheet. Feel free to make a copy and begin using it to calculate inventory values and bucket your
goods.

Inventory Management for B2B

ABC What We Mean?

ABC inventory analysis is a valuable tool for any business. It provides deeper insight into your inventory
value and lets you make informed decisions to increase profits, lower costs, and hit your target
inventory KPI. If you manage an inventory, there really is no good reason not to perform ABC inventory
analysis!

If you don’t want to manage your inventory or use ABC inventory analysis, dropshipping might be the
right choice for you. Have no fear, we can help you with that too!

Request a Demo

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Inventory KPI: What Is KPI In Inventory Management?

February 16, 2021

Table of Contents

Sales Inventory KPIs

Operational Inventory KPIs

Inventory Costing Methods

Inventory KPIs: Learn to Love ‘Em

Bluecart b2b ecommerce demo

How good is your inventory management?

Tough to say, sometimes. And that’s a big problem. Because your inventory is one of your most valuable
assets. If you’re not treating it with care, what are you treating with care?

A lot of people will ask that question about your business if your inventory KPIs are lackluster.

KPI stands for “key performance indicator.”

An inventory management KPI is a number or metric companies track to gauge the efficiency of their
inventory management. They give you visibility into performance and a measuring stick to track success.
Here we’ll look at six crucial inventory management KPIs and exactly what they mean. In each section
you can click to a post with much more detailed information about each inventory KPI.

Sales Inventory KPIs

Inventory Turnover Ratio

Inventory turnover ratio measures how many times a company has sold and replaced its inventory over
a specific time frame. You’ll need to calculate your cost of goods sold and average inventory formula to
calculate your inventory turnover.

Take, for example, a company with a turnover for a specific SKU number at 3. That means that product is
sold and replaced 3 times over the period analyzed. Accepted industry standards are that inventory
turnover rates below 5 aren’t ideal. Most high-performing businesses tend to have inventory turnover
from 5 to 10.

High inventory turnover means a company is purchasing and selling inventory optimally. It speaks to
their ability to turn raw materials inventory into finished goods inventory and offload them. Which is,
ultimately, the point of any manufacturing and supply business.

Alternatively, low inventory turnover signals poor purchasing, sales, and marketing strategies. If you’re
not getting rid of inventory, it’s taking up space and tying up cash.

But “good” means different things in different industries. That’s why it’s always important to benchmark
your turnover rate. Hold yourself to your own historical numbers and you’ll be able to make progress.

Days Sales in Inventory

Another useful sales-focused inventory KPI is days sales in inventory (DSI).

It’s also known as:

Days Inventory Outstanding (DIO)

Inventory Days On Hand (DOH)

Inventory Turnover Days

Inventory Days

It’s a ratio that shows how many days, on average, it takes a company to sell its inventory. The lower
this number is, the better. That means inventory is on hand for less time. That results in lower carrying
costs and less cash tied up in inventory.

It sounds similar to turnover ratio, right?

Well, here’s the difference:

Inventory turnover ratio is a measure of how fast a company turns raw materials into sold finished
goods. Inventory days measures the actual number of days it takes that inventory to sell.

So, why does DSI matter?

Simple:

The lower the number, the less cash is tied up in sitting inventory. And the lower the risk of that
inventory becoming obsolete and worthless.

It’s also an important measuring stick for stockholders, board members, and leadership. It shows that
management is succeeding at their primary duty: turning inventory into sales. A company like that
inspires confidence.

Sell Through Rate

Next up is sell through rate. It’s a percentage that indicates how much of your received inventory was
sold over a specific period of time.

Businesses use sell through to estimate how much finished goods inventory or merchandise inventory
will be sold—based on raw inventory numbers. That shows how confidently one can expect an
investment in inventory to become revenue.

Here’s how that’s different from the above inventory KPIs:

It doesn’t measure the time (inventory days) or speed (turnover ratio) of inventory movement. It
measures the total percentage of what you sell or what you receive.

Like turnover, it’s a good way to measure the efficiency of your supply chain, demand forecasting, and
purchasing and pricing strategies.

When it’s high, that means you’re purchasing the appropriate amount of inventory for demand. And it
means that inventory is moving through your manufacturing process smoothly.

A low sell through, on the other hand, indicates:

You’re ordering too much inventory

There’s not enough demand

Your price is too high

It varies by company and industry, but accepted wisdom is that a sell through rate above 80% is good.
Average sell through is about 40% to 80%.

Keep in mind, though, that sell through rate increases over time. The longer a product is on a shelf,
actively being sold, the more likely it is to eventually sell.

Operational Inventory KPIs

These next three inventory KPIs focus more on the operational efficiency of your inventory
management. They are average inventory, shrinkage, and carrying cost.

Average Inventory

Price changes are constant when purchasing from wholesalers. And that makes inventory costing tricky.
That’s where average inventory helps.

Average inventory is the mean value of a business’s inventory over a set time period. The calculation is
simple: add beginning inventory to ending inventory and divide by two.
Here’s why knowing the average value of inventory is a useful inventory KPI:

It provides a window into how much money is typically tied up in inventory at any given moment in time

It indicates your average inventory level, or the number of units you have at any given time.

Both of those are useful measures of how lean your inventory management process is. And using
averages smoothes the numbers, removing noisy outliers.

If average inventory is too high, there may be other symptoms, too. Like low turnover rate, high DSI, or
low sell through rate. That causes high inventory carrying cost and the risk of inventory obsolescence.
It’s another number to look at to confirm a suspected diagnosis of stagnant, inefficient inventory
management.

Or confirm a clean bill of inventory health.

Average inventory isn’t typically reported on a balance sheet. It’s usually used to calculate inventory
turnover ratio and provide context around other inventory KPIs.

Inventory Shrinkage

Shrinkage is recorded when you have less inventory than your records indicate you should. That’s
because something is causing items to disappear before they’re sold. It’s also commonly referred to as
variance in the hospitality industry.

It’s a problem that haunts every stage of the supply chain and every type of business.

And it’s unavoidable. The median shrinkage for 2018 was 1%. Therefore, common wisdom states that an
acceptable level of shrinkage is less than 1%.

In 2019, inventory shrinkage accounted for 1.38% of all retail “sales.” That’s about 48 billion dollars.

Every single business has some level of shrinkage. It’s not possible to eradicate it. But it is possible to
monitor and lower it. That’s a big part of successful inventory management and that’s why it’s an
inventory KPI worth talking about.
Because most businesses know shrinkage can’t be eliminated, they adjust their prices to make up for it.
That may mean lowering prices to sell more product or raising prices for higher margins. The method
chosen depends on the mathematical reality of how gross profit margin is best optimized for that
business.

Common Shrinkage Causes

Let’s look at the six main causes of variance.

Theft. This can be external theft (shoplifting) or internal employee theft. In 2017, external theft or
shoplifting was responsible for 37.5% of retail shrinkage. And 33.2% of retail shrinkage was caused by
internal theft.

Spoilage and waste. Perishable products not used by expiration or non-perishable products that become
obsolete.

Damage. Any product that’s damaged past the point of resale is considered shrinkage.

Human error. In hospitality, this can be overpouring a glass of wine. In retail, ringing up the wrong item.
And in manufacturing, using too much raw material or overloading a pallet.

Administrative errors. Any mistakes made during the accounting process, if identified, can be recorded
as shrinkage. This even includes clerical errors like premature ordering, which might result in sitting
inventory that ends up expiring.

Supplier fraud. Wholesale orders can be so large that it’s effectively impossible to quality-control all of
them. Some unscrupulous vendors take advantage of that and skim off the top. Imagine receiving
10,000 units. There may only be 9,700, and the only way for you to know is to count ‘em up.

Last but not least of the operationally-focused inventory KPIs is carrying cost.

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Inventory Carrying Cost

Inventory carrying cost is all the expenses related to holding and storing inventory waiting to be sold.
Carrying costs are represented as a percentage of total inventory value over a set time period.

Carrying cost is composed of:

Capital costs. The money invested in the inventory and inventory management.
Warehousing costs like rent, security, utilities, labor, etc.

Inventory costs like shrinkage and insurance

The opportunity cost of holding inventory, devoting labor to handling, and generally being unable to
invest the money tied up in inventory elsewhere

So why do businesses hold onto inventory and incur carrying costs? Because they have to. It’s the cost of
doing business.

Here’s why:

They need buffer stock and anticipation inventory. This is product kept on hand for unforeseen and
foreseen demand fluctuations in supply and demand.

They have decoupling inventory. Inventory that’s moving from one part of the supply chain to the next.

They have dead stock. Any stock that’s lapsed and has become sitting inventory.

They keep cycle inventory. Inventory kept on hand to fulfill regular sales orders.

What’s a Good Carrying Cost?

A 2018 APICS study cited an accepted ideal carrying cost of 15–25%. But, again, it depends on industry
and company, and can shoot up to 75%.

Want to reduce carrying costs?

Here’s how:

Pay extra attention to demand forecasting

Make your warehouse layout easier to navigate (this helps find and ship products faster, decreasing DSI,
and decreasing carrying costs)

Look into long-term vendor contracts

Use all the historical data you can

Inventory Costing Methods

Inventory costing methods are related to inventory KPIs. Though they measure the value of your
inventory. Not the performance of your inventory management or health of your supply chain.
Nevertheless, there are many valuable conclusions to draw from accurate inventory costing. And every
successful inventory management operation monitors both value and performance.

Here’s how they do it.

FIFO Method

The first-in first-out method, or FIFO, assumes that the goods you acquire first are the goods you sell
first.

It’s useful for companies with inventory that’s perishable or has short demand cycles.

LIFO Method

The last-in first-out method, or LIFO, assumes that a business’s most recently acquired inventory is sold
first. That makes COGS and the cost of goods available for sale a reflection of the most recent product
valuations.

This is a popular method for industries with frequent price increases. That way the more expensive
goods are used and recorded first.

HIFO Method

Highest in, first out, or HIFO, assumes that the inventory with the highest purchase price is used and sold
first. That makes the COGS as high as possible. It’s not a commonly used costing method. It decreases
taxable income for a short period of time, and it’s generally not considered a best practice.

Weighted Average Method

This method assigns value to items by taking the total COGS and dividing it by the total number of
inventory items.

Then businesses can multiply the ending inventory count by the average cost and get an accurate
estimation of the cost of goods available for sale.

Moving Average Method

The moving average method recalculates the average inventory cost with each inventory purchase. That
puts it between FIFO and LIFO, in a risk-averse goldilocks zone.

That also means it changed with every purchase. Companies that depend on perpetual inventory
typically use this costing method. Because it requires real-time updating and that’s the primary feature
of perpetual inventory.

Inventory Replacement Cost Method

You can also cost inventory by assigning value based on the cost to replace that inventory item after it’s
sold.

The value then changed over time based on vendor pricing at the time of replacement. Along with any
other discounts, like bulk shipping discounts, you may get on your order. On supplier pricing at the time
of replacement.

Lower of Cost or Market Rule

Lower of cost or market assigns value to inventory at the inventory’s purchase price or the inventory’s
current market value. Whichever is lower.

Inventory value changed over time. And sometimes the market value of inventory is less than the cost
paid for it. It allows businesses to experience value loss while mitigating the size of the loss.

It’s typically used for businesses that hold onto inventory for a long time, where market conditions can
evolve substantially.

Inventory KPIs: Learn to Love ‘Em

Your inventory management KPIs are the best way to isolate and improve your business’s inventory
management.

They’re also important for any outside party judging your business. Your business may be profitable,
sure, but is it sustainable? Do you have a winning formula that won’t crash and burn?

Solid inventory KPIs answer that question.

If you want to attract top talent, investors, and partnerships, these are the sorts of things your business
needs to track and master.

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