How to do inventory management step-by-step?
Managing inventory can seem easy when you start a business and manage a few items. But over time, it becomes increasingly tricky and costly. If you hold too much stock, you tie up the cash-in items that may sit in a warehouse for months, and you can’t use them to buy the items you need. If you don’t stock enough, you risk losing customers and sales. So, you must find the balance between too much and too little. But the good news is that with the right approach, you can build an inventory management system that works for your business and makes your life easier.
Before you start calculating stock levels or analyzing data, ask yourself what you want to achieve with your inventory management. This step is often overlooked, but it’s important due to success. Without clear goals, it’s easy to get stuck in a circle, constantly firefighting rather than building a proactive stock management system.
For example, do you want to reduce stockouts and improve customer satisfaction levels? Or is your priority to cut down excess inventory and free up cash flow? Maybe both? Write down your goals and get specific. For instance, instead of saying, “I want fewer stockouts,” aim for something measurable like “I want to maintain a 98% service level for high-priority items.”
When your goals are clear, they’ll provide your guidelines for every decision you make about inventory management.
Step 1: define your goals
Understanding demand doesn’t mean trying to guess the demand or, even worse, forecast it. It’s a mistake number 1, which most often leads to trouble. You need to deeply analyze what your customers want, when they want it, and how much they’ll need — and you can’t figure that out by winging it.
Start by looking at your historical sales data. Are there seasonal trends? Do certain products consistently sell faster than others? Are there times of the year when demand drops off completely, and if you have stocks on hand at that time? Numbers tell part of the story, but don’t stop there — talk to your sales team or customers directly. They often have insights that spreadsheets can’t capture.
And remember: demand isn’t static. Market conditions change, competitors adjust their strategies, and customer preferences evolve. Be ready to update your stock levels regularly to stay relevant and accurate, and do it according to the current demand; do not guess.
Step 2: understand demand
Step 3: segment your inventory
Not all products have the same demand and importance to your business. So, not all products deserve the same level of attention. One mistake often businesses make is treating every item in their inventory the same way. But the reality is different. Have you heard of Pareto? 20% of items generate 80% of revenue. How do we differentiate the items into different categories?
Use a simple method like ABC classification to segment your inventory:
A-items
These are your high-value products that generate most of your revenue but may sell less frequently (think premium items).
B-items
These are mid-range products with steady sales but a moderate impact on profits.
These are low-value items that sell quickly but contribute less to overall revenue (like consumables).
C-items
Focus most of your energy on managing A-items — they’re the ones that move the needle for your business. For B- and C-items, implement simpler systems that keep them in check without overcomplicating things.
Buffer or stock level — you need to set buffers for those items that you stock in the warehouse regularly, and customers expect to find these items whenever they need them. Setting a buffer is simple – evaluate supplier lead time, order frequency, and how much you sell during this item. The buffer should cover that time until the next order arrives. Of course, you want to hold some extra if something unexpected happens or supplier delays, but holding too much can tie up cash unnecessarily. The trick is finding the right balance.
Here’s how we recommend calculating safety stock levels:
Look at demand variability: are customer orders predictable or erratic?
Consider lead times: How long does it take for suppliers to deliver once you place an order?
Evaluate supplier reliability: are they consistent or prone to delays?
Use these factors to determine how much buffer stock you need for each product - and don’t be afraid to adjust as conditions change.
Step 4: set stock levels
Replenishment is where many businesses struggle — they either reorder too late and face stockouts or reorder too much and end up with excess inventory gathering dust. The key is precision and timing.
Instead of guessing when to reorder, use the regular order schedule. The ideal timing would be how quickly you sell the minimum order quantity of the item. Usually, every item has its own. But more often, it is a condition that dictates the supplier. But if you sell much more than one minimum order quantity, reorder as often as you can, evaluating transportation and labor costs.
Work closely with suppliers to synchronize delivery schedules and reduce lead times wherever possible.
Think of replenishment as a pull system rather than a push system — let demand drive decisions instead of relying on forecasts.
Step 5: replenish smarter
Step 6: track inventory flow
Inventory management is a living process that requires regular monitoring and adjustment. Monitor how inventory moves through your supply chain — from production (if you have the ability to change the production process) to delivery or sale.
Look for bottlenecks or inefficiencies that slow things down. It can be delays in receiving shipments or inaccurate stock levels in different locations. Pick only one struggle and deal with it. When you’re done, pick another one that hurts your inventory and flow the most.
Step 7: refine your policies over time
No matter how well-designed your initial setup is, there’s always room for improvement. Regularly review your inventory policies based on performance data—are stock levels too high? Are buffers aligned with current demand? Are lead times causing unnecessary delays?
Use this feedback to make adjustments where needed. For example, if certain items consistently run out faster than expected, increase their buffer levels. If lead times improve thanks to better supplier relationships, reduce buffers accordingly.
Continuous improvement is how successful businesses stay ahead of their competitors.
Inventory management isn’t as hard as you might think at first, but it also isn’t that easy, especially when the business grows. So, the initial success depends on how well you prepare for inventory management. Start with clear goals and take small steps toward improvement every day. Focus on just one area, like setting better buffer management for A-category items.
And the sooner you start refining your processes, the sooner you’ll see results like fewer stockouts, lower overstock, and happier customers.
If you want to start your inventory management with the proper automated inventory management system, get in touch.
We’ve created FluentStock for small businesses to free up your time from time-consuming daily tasks. Moreover, it offers dynamic buffer management that aligns stock levels automatically to the current demand, so you can pay attention to business growth. ABC analysis and implementation are also available.
If you have any questions about the Fluentstock tool, please feel free to contact us.
