What Is Inventory Tracking? (Plus Types and Helpful Tips)

By Indeed Editorial Team

Published June 17, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Retail businesses often monitor and oversee their stock to help ensure that they have the appropriate quantities to satisfy customers' needs. A company can determine how its raw materials and product move through the supply chain before getting to a customer by tracking inventory. Learning how to track inventory can help you effectively utilize a company's budget to meet customers' demands. In this article, we answer, "What is inventory tracking?", explain its importance, list the types of inventory, highlight the steps to track inventory, and provide helpful tips.

What is inventory tracking?

Knowing the answer to "What is inventory tracking?" can help companies optimize their production process. Inventory tracking refers to the process a company can use to monitor all its inventory items. It enables businesses to determine the stock they have in their storage and identify areas of shortage. Companies can track their inventory manually or use tracking software to automate the process.

Larger companies often use automated systems that include analytics, bar code scanners, and automatic relief systems to adjust their orders. When a business performs inventory tracking effectively, it can increase customer satisfaction, improve overhead expenses, and reduce overstocking.

Why is inventory tracking important?

Businesses that implement inventory tracking often have accurate data about their stock. Here's a list of reasons that inventory tracking is important:

Prevents shortage of goods

Inventory tracking enables companies to determine the stock they don't have and to replenish it immediately. By doing this, the company can help ensure its availability of raw materials to meet customers' demands. This tool can also reduce the excess costs a company may spend on purchasing items it already has in stock. An accurate inventory count usually enables a company to spend less on production and have more available resources.

Improves productivity

Inventory tracking can give a company insight into its product's performance in the industry. For example, if a business hardly has inventory in its storage at the end of a particular production period, it may mean that customers have purchased its products. This might allow a company to identify areas for improvement. Through inventory tracking, a company can prepare for unexpected surges in demand. This is because it usually creates an environment where a business's statistics and data are reliable.

Offers accurate inventory counts

A business can control its stock through inventory tracking by avoiding overselling and understocking. Understocking is when the products in a manufacturer's inventory are less than its customer's demands. With an inventory system, businesses can help ensure that their order management and stock count are accurate. Doing this can also reduce the risk of human error or accounting inefficiency when tracking a product.

Related: Top Product Management Skills

Improves customer satisfaction

Faster delivery can improve customer satisfaction and help a company increase its sales revenue. When companies track their inventory efficiently, delayed shipments and unforeseen backorders may not affect their delivery to customers because they have several items in stock. Backorders refer to items not currently in stock at a particular period. They're products the manufacturer has planned but hasn't yet produced. Through customer satisfaction, a company can build customer loyalty for its brand.

Improves location tracking

Companies that have multiple storage warehouses can accurately track their inventory together. Having more warehouses may mean more shelves to count and more places to coordinate shipping from during deliveries. They can monitor their goods in multiple locations on a single system with inventory tracking. This can help them reduce data complexity and receive feedback from various supply chain teams, such as suppliers and retailers.

Related: What Is Product Marketing? (Definition, Phases, and Tasks)

Types of inventory

Before choosing an inventory tracking method, identifying the items a company plans to track can help ensure efficiency. Here are the various types of inventory a company can track:

  • Raw materials: These are the base materials that a company may use to process its finished goods.

  • Work in progress (WIP): WIP refers to the unfinished item that's still in the production process. They may include packaging materials and labour.

  • Completed goods: Companies also call them finished goods. These are the items the company is selling.

  • Maintenance, repair, and operation (MRO): MRO refers to the equipment and tools a company uses for repair, maintenance, and production operation.

  • Safety and anticipated stock: Safety stock is the extra inventory a company buys and stores to prevent unexpected events. Meanwhile, anticipation stock often comprises the finished goods and raw materials that a company buys based on demand and sales trends.

  • Decoupling inventory: This is an inventory a company may put aside to meet purchase orders in situations where its production is slow.

  • Service inventory: It's a management accounting concept that refers to how much service a business can provide within a specific period. For example, a hotel with 20 rooms can have a service inventory of 140 for visitors who spend a night within one week.

How to track inventory

Follow these steps to track a company's inventory effectively:

1. Choose an inventory tracking method

Businesses can use various methods to track their inventory, ranging from barcodes to electronic tags. Some companies may prefer the manual inventory tracking method for counting their products. Using this method requires they calculate their inventory physically every week. Grocery stores, clothing stores, and retail stores usually use the manual tracking method because they have limited inventory levels. Inventory levels refer to the number of items a business has available throughout its distribution process. Companies may also use an automated inventory method to record each transaction immediately.

Some automated inventory methods a company may use include:

  • Barcodes: Many supermarkets and mobile stores use barcode scanners to determine the number of items they sell. Barcodes typically scan a product and retrieve all its information, such as price and description.

  • Radio frequency identification tag (RFID): Shipping and logistic companies often use RFID to track their goods. RFID tags are firm, making them resilient in adverse weather conditions.

2. Use data forecasting

Companies can use data forecasting to determine product fluctuations and selling patterns in the market. Product fluctuation is a frequent increase and decrease of an item's price due to seasonal changes, while selling pattern is how businesses predict sales using the product's performance. Data forecasting enables companies to change their supply using the current market trend and previous year's sales. By using it, a company can have proper inventory control by calculating the items it requires to fulfil future orders.

Related: Important Product Management Certification (With Tips)

3. Conduct inventory audits

Conducting frequent inventory audits can help a company ensure accuracy between its financial record and existing stock count. It typically provides detailed information about a business's stock-flow by allowing it to compare its profit and loss. Through audits, a company can determine whether it's misplaced specific stock-keeping units (SKUs). SKU is a scannable barcode that enables retailers to track inventory movement automatically. It comprises an alphanumeric combination, indicating the product details, price, and manufacturer's name.

4. Implement product life-cycle management

Product life-cycle management is an approach businesses can use to monitor goods as they move through development stages. It can help a company make informed decisions about product pricing and expansion. Companies that sell perishable goods, such as food and beverages, typically require this system to determine when they can dispose of raw materials. With product life-cycle management, a company can shorten its production process time to reduce wastage.

5. Use the FIFO system

It's essential that a company sells its items chronologically to prevent damage. The first-in-first-out (FIFO) system is a reliable way for companies to sell their products. Using FIFO often enables manufacturers to label their products with the dates they store them. They can organize their items to make the oldest ones more accessible by placing them in the front and the newer items at the back. It also helps a company rotate its stock quickly and avoid products expiring in storage.

Related: Difference between Product Orientation vs. Market Orientation

Tips for inventory tracking

Here are best practices you can follow to make inventory tracking easier for a business:

  • Improve packing efficiency: Packing products near a company's warehouse can ensure faster deliveries. This is because it helps businesses save time they may spend on choosing and transporting products to where they can pack them.

  • Establish key performance indicators (KPIs): Having specific goals for the inventory can help a business improve its productivity. For example, you can determine if the company wants to increase the rate that it sells and replaces stock to track its inventory efficiently.

  • Use ABC inventory analysis: This inventory analysis can help companies determine the value of inventory goods based on customer demand.

  • Keep safety stock: Safety stock usually enables businesses to meet orders when demand rises.

Explore more articles