An efficient, effective inventory management process is key to making sure your business remains profitable. To walk you through how to put together your own internal system for managing inventory, here are a few steps you’ll need to take.

How to Design Your Inventory Management Process in 5 Steps

1. Determine Customer Needs & Forecast Demand

This can be a difficult first step, but it’s absolutely necessary to a solid inventory management process. Take a look at your past sales, inventory records, and seasonal selling patterns, and be sure to forecast future demand.

If you’re a new business who doesn’t have this kind of data, concentrate on market research and overall revenue predictions. This will allow you to make sure that you have the optimal amount of inventory on hand at any one time––while avoiding both stock-outs and excess carrying costs.

2. Categorize Your Inventory

Categorizing your inventory can help you run your warehouse more smoothly and optimize the use of your warehouse space. Organize your inventory by which items experience the highest sell-through, those items that sell at a more moderate pace, and items that are slower to move.

3. Decide on a Method

Take a look at which inventory management techniques work best for your business. For instance, you may choose to maintain minimum stock levels in your warehouse and replace inventory only when it reaches that minimum threshold.

If you’re worried about demand uncertainty, on the other hand, you may choose to keep safety stock. Or if you need to concentrate on reducing carrying costs, a “just-in-time” inventory strategy may be the best method. For more detail on these inventory management techniques, check out this post.

4. Figure Out How You’ll Track Incoming/Outgoing Inventory

It’s important to know the exact number and cost of all the items you have in your warehouse, as well as how inventory is moving in and out of that warehouse.

Some smaller businesses often start by doing this manually on paper or Excel spreadsheets, but there are also many software options out there for both SMBs and large businesses to help automate the process. These solutions help businesses develop forecasts, track inventory across multiple warehouses, and generate reports.

5. Conduct Inventory Counts to Ensure Accuracy

Even if you have inventory management software in place, it is important to also figure out how (and how often) you’re going to check the accuracy of your system. This can be done by conducting physical inventory counts, and one of the most common methods is cycle counting. This involves specifying a certain set of inventory to physically count each day, and comparing those numbers with the records in your inventory management system.

This allows you to catch potential problems and inaccuracies without having to do the overwhelming job of conducting a complete physical count.

Questions about how to design an effective inventory management process? Let us know in the comments below.