How to Create an Effective Inventory Management Process for SMBs

For small and medium-sized businesses dealing with physical product inventory, having an effective inventory management process is necessary for long term success. Inventory ties up significant capital, and mismanaging it can lead to stockouts, overstocking, and a hit to your bottom line. Not sure how to create better processes for your inventory? Then this article is made just for you.

Essential Steps for Building an Inventory Process

At the core of any good inventory management system are accurate records, as you need to know exactly what products you have on hand, where they are located, and in what condition. Implementing a robust record-keeping system with unique product identifiers and descriptive data is step one. While some businesses may start this process with spreadsheets, the sooner your business can transition into an Inventory Management Software, the more accurate your records will be, and the more technological solutions will become available to your business.

Next, you need to incorporate Cycle counting, where you regularly count a subset of inventory and reconcile records. Cycle counting is essential for maintaining accuracy over time, while also providing the ability to count different locations or item groupings as needed.

Forecasting future demand is another important component. By anticipating sales patterns and customer orders, you can ensure you have enough stock to meet needs without overbuying. Look at historical data, market trends, and any planned promotions that could impact demand.

With good data, you can then optimize stock levels by categorizing products based on importance, cost, and sales velocity. Fast-moving A items may need higher stock levels, while slow C items can be reduced. The goal is to hold just enough inventory to meet demands without excessive overstocking.

Finally, integrate your inventory data with accounting, sales, purchasing, and production systems. Having a single centralized view of all operations streamlines decision-making and allows for a holistic perspective of your organization.

Streamlining Warehouse Operations  

For businesses with a warehouse component, you’ll want processes that maximize efficiency for receiving, putaway, picking, packing, and shipping. Having defined workflows with checkpoints, whether physical or digital, helps maintain inventory accuracy and order fulfillment rates.

Implementing barcode scanning is a worthwhile investment. Barcoding products, locations, and handling units makes everything scannable for faster, error-free transactions. It integrates seamlessly with most inventory management software.

Optimize your layout and pick paths with techniques like zone picking, where pickers are assigned to specific areas to minimize travel time. Slotting products based on velocity aids in dense but logical positioning. Space utilization, organization, and orderly put away/picking flows keep things running smoothly.

Inventory Valuation and Cost Management

How you value inventory on your books significantly impacts profitability and taxes. Most businesses use FIFO (first-in, first-out) or weighted average cost methods, which account for newer higher costs. LIFO (last-in, first-out) is another option that assumes your oldest costs first – often preferable when costs are rising over time.

Choose a method that reflects your specific circumstances regarding purchase prices and aligns with your goals for cost of goods sold and tax strategies. Inventory valuation is complex, so consulting your accountant is highly recommended.

Knowing your true inventory carrying costs is also critical. In addition to purchasing costs, factor in storage, labor, spoilage/shrinkage, insurance, taxes, and money tied up that can’t be invested elsewhere. Having a handle on these numbers allows you to make smart decisions around pricing, turnover, and open to buy.

Inventory Management Software Solutions

We’ve already touched on the value of a software solution, but the benefits are too good to ignore. Using dedicated inventory management software provides a centralized system to implement all of the above processes and best practices. Solutions today offer a wide array of features – inventory control, order management, barcoding/scanning, warehouse management, manufacturing support, reporting/analytics, and integration with accounting and ecommerce platforms.

When evaluating software, map out your current and desired capabilities – locations, users, sales channels, manufacturing needs, barcoding requirements, integration with accounting or backend systems, etc. Prioritize your must-haves versus nice-to-haves. And explore each solution’s costing structure, whether based on users, orders, inventory records, or revenue bands.

With so many choices, finding the right inventory software fit takes some due diligence. But it’s well worth the investment for the efficiency gains, inventory visibility, and data-driven decision-making it enables.

Best Practices and Tips  

No matter what processes and tools you put in place, a continuous improvement mindset is required, which includes regularly reviewing and optimizing your inventory management approach as your business needs change and new techniques emerge.

A significant factor in this improvement relies on properly training and updating your team on best practices, procedures, and software usage. This training should include Inventory Training to help standardize processes and expectations across the team. Your staff need to understand the rationale behind changes and how to properly follow updated procedures.

Additionally, establish key performance indicators (KPIs) to measure inventory performance over time – turnover rates, carrying costs, stockouts, days inventory outstanding, and more. Use this data to identify areas for further process improvement. BUT, make sure the KPIs have rationale behind their implementation to prevent unrealistic goals or unnecessary metric tracking.


For product-based SMBs, having the right systems and processes in place to manage inventory is a business-critical necessity. An optimized inventory management approach saves you money, improves operational efficiency, and enhances customer service.  

Start by ensuring accurate inventory records, demand forecasting, stock level optimization, and system integration. Streamline warehousing flows and leverage smart technologies. Understand your inventory valuation and carrying costs. And invest in dedicated inventory management software tailored to your evolving business needs.

With some upfront effort, you can create an inventory process that delivers powerful insight into your stock status and provides the agility to make adjustments that maximize sales and profitability over time. Well-managed inventory frees up working capital and gives you a competitive advantage.

For those businesses that need to take their inventory management to the next level, but don’t know where to start… start right here.