What Is the Importance of Inventory Management in Retail?

Inventory management is vital for retailers because the practice helps them increase profits. They are more likely to have enough inventory to capture every possible sale while avoiding overstock and minimizing expenses.

From a strategic point of view, retail inventory management increases efficiency. The practice:

Decreases Inventory Costs: When you know how much stock you have and how much you need, you can pinpoint inventory levels more accurately, thereby reducing storage and carrying costs for excess merchandise. Other savings include shipping, logistics, depreciation and the opportunity cost that comes from not having an alternative product that might sell better.

Minimizes Out-of-Stocks: To avoid disappointing customers and missing sales, retailers want to avoid running out of inventory. Retailers can use inventory management tools to determine how much stock is “just right” to have on hand, neither too much nor too little. This amount will be larger for bestsellers than for unpopular products. Also, with real-time information on sales and stock, retailers can react quickly by reordering, transferring stock from another location or dropping shipping to the customer.

Improves Profit Margins: With lower inventory costs and enough supply to fill every order, retailers improve profitability.

Prevents Spoilage and Obsolescence: Inventory management helps retailers address another costly inefficiency that happens when products expire or become obsolete. This phenomenon can apply to perishables that have a limited shelf life, such as milk and meat, or non-perishable that become obsolete because consumer tastes and technology change. For example, season collections or holiday-specific packaging. Or when a piece of consumer technology adds a popular new feature, the old models may face plummeting demand: Consider how the rise of smart televisions sunk demand for models that weren’t capable of streaming content.

Improves Multi-Channel and Omnichannel Performance and Order Fulfilment: If you are selling via physical stores, your website and third-party merchants, it can be difficult to keep correct inventory counts across all channels. Having accurate inventory data across selling channels lets you use your inventory more efficiently, ultimately getting the product to consumers faster.

Simplifies Processes and Facilitates Growth: Strong inventory management also reduces friction in your systems as sales grow. Shipping, receiving and order fulfilment run more smoothly, and you minimize errors, customer complaints and staff stress.

Reduces Shrinkage: Shrinkage is inventory loss due to shoplifting, product damage, vendor mistakes or fraud, employee theft and administrative errors. Data suggests that most losses stem from incorrectly recording inventory on intake, miscounting it or misplacing it. Stronger retail inventory management could reduce shrinkage by at least half.