Inventory Management: Definition, Process, and Common Methods
Inventory management is controlling stock from receiving to shipping. Learn the process step by step and the EOQ, ABC, JIT, MRP, and FIFO/FEFO methods.
By Tim Advotics · · Updated · 3 min read
Key takeaways
- Inventory management is controlling stock — from receiving, storage, and monitoring to picking and replenishment — so there is always enough without overstocking.
- The process runs as a cycle: goods arrive, are received and stored, monitored, ordered, picked and shipped, recorded, then replenished.
- Common methods: EOQ for the optimal order size, ABC analysis for priorities, JIT, MRP for raw materials, periodic review, and FIFO/FEFO for issue order.
- Real-time stock data and automatic recording of every inbound and outbound movement are the foundation of all these methods.
Inventory management is controlling stock — from receiving, storage, and monitoring to picking and replenishment — so there is always enough to meet demand without overstocking. Inventory can be raw materials for production, work in progress, or finished goods for resale.
Too little stock means orders go unfilled; too much ties up capital and raises the risk of damage or expiry. Inventory management keeps the two in balance.
What is the inventory management process?
Inventory management runs as a cycle:
- Goods arrive at the warehouse — raw materials for factories, finished goods for distributors, or production supplies.
- Receiving and storage — goods are inspected, matched to documents, identified (SKU, barcode, or QR code), and put away in assigned locations.
- Stock monitoring — quantities and locations are tracked continuously, backed by periodic counts such as stock taking.
- Orders come in — the buyer sends a purchase order and the seller issues a sales order.
- Order verification — orders and their paperwork are checked before processing.
- Picking and shipping — goods are retrieved from storage (order picking), packed, and shipped.
- Data update — every inbound and outbound movement is recorded so system stock stays accurate.
- Replenishment — reordering based on the chosen method.
What are the common inventory management methods?
Economic Order Quantity (EOQ)
EOQ calculates the most economical order size — the one that minimizes combined ordering and holding costs.
EOQ = √(2 × D × S ÷ H)
- D = annual demand (units)
- S = cost per order
- H = cost of holding one unit for a year
ABC analysis
Items are grouped by their contribution to value:
- Class A — a small number of items making up most of the inventory value; tightest control and most frequent counts.
- Class B — mid-value items.
- Class C — many low-value items; looser control.
Just In Time (JIT)
Inventory is kept to a minimum; goods are ordered or produced only when needed. It saves holding costs but demands very reliable suppliers.
Material Requirement Planning (MRP)
Used mainly in manufacturing: raw material needs are calculated from the production schedule, so materials arrive exactly when required.
Periodic review
Stock is checked and reordered at fixed intervals (for example every two weeks). Administration is simple because purchasing is on a routine schedule.
FIFO and FEFO
These set the order in which stock leaves: FIFO issues the oldest stock first, while FEFO issues the stock closest to expiry first — essential for food, beverages, and medicines.
| Method | Answers | Best for |
|---|---|---|
| EOQ | How much to order each time? | Fairly stable demand |
| ABC | Which items to prioritize? | Warehouses with many SKUs |
| JIT | When should goods arrive? | Reliable suppliers, scheduled production |
| MRP | Which materials does production need? | Manufacturing |
| Periodic review | When to check and reorder? | Routine purchasing |
| FIFO/FEFO | Which stock leaves first? | Products with a shelf life |
How do you measure inventory management performance?
Track indicators such as inventory turnover, days sales of inventory, stock accuracy, and fill rate. Each is explained in Supply Chain KPIs.
How do digital systems help inventory management?
All of these methods depend on accurate, real-time stock data. With Advotics Warehouse, every receipt, transfer, and pick is recorded by scanning in the app, locations are tracked down to the bin, and stock per SKU across warehouses is visible from one dashboard. For distributors who only need stock per warehouse, the Inventory module in Advotics Distribution books stock automatically when an order is approved and reduces it when goods ship.
Want tighter control of your inventory? Contact the Advotics team.
Frequently asked questions
What is inventory management?
Inventory management is planning, storing, monitoring, and controlling stock so it is available in the right quantity, at the right time, at the lowest possible cost.
What is EOQ?
Economic Order Quantity (EOQ) is the order size that minimizes total ordering and holding costs. The basic formula is EOQ = √(2 × D × S ÷ H), where D is annual demand, S is the cost per order, and H is the annual holding cost per unit.
What is ABC analysis in inventory?
ABC analysis groups items by their share of value. Class A is a small number of items making up most of the inventory value and needs the tightest control; class C is many low-value items.
What is the difference between FIFO and FEFO?
FIFO (first in, first out) issues the oldest stock first. FEFO (first expired, first out) issues the stock closest to expiry first, which suits food, beverages, medicines, and other products with a shelf life.
