How to Implement Inventory Tracking: Steps and Methods

Effective inventory tracking is a crucial aspect of managing any business, large or small. It ensures that products are always available when needed, reduces costs associated with overstocking or stockouts, and helps smooth operations. 

With businesses increasingly turning to digital solutions, implementing an efficient inventory tracking system can significantly enhance operational efficiency. 

In fact, according to a study, the global inventory management software market size is expected to reach $4.7 billion by 2030, driven by the growing need for automation in tracking and managing inventory. 

In this blog, we will guide you through the essential steps and methods for implementing effective inventory tracking, ensuring your business can meet customer demand while minimizing costs.

Key Elements Tracked in Inventory Management

Inventory tracking involves monitoring various aspects of your products to ensure proper stock levels and efficient management. Key elements include:

1. Stock Levels

This includes tracking the quantity of items on hand, reorder levels to avoid stockouts, and safety stock as a buffer for unforeseen demand.

2. Product Information

Essential details such as unique product IDs (SKUs), descriptions, and barcodes or QR codes are tracked for easy identification and management.

3. Inventory Turnover

The rate at which inventory is sold and replenished, which helps businesses understand how quickly their products are moving.

4. Suppliers and Purchase Orders

Supplier details, along with tracking purchase orders and expected delivery dates, help in maintaining a smooth supply chain.

5. Sales Data

Tracking sales orders, customer information, and sales velocity provides insights into demand and helps in managing stock accordingly.

6. Location Tracking

Warehouse locations and stock movements ensure items are stored and moved efficiently within the facility.

7. Cost Tracking

The cost of goods sold (COGS) and inventory-related expenses, such as storage and handling, are tracked to ensure financial accuracy.

8. Expiry Dates (for Perishable Goods)

Expiry dates are crucial for products like food or medicine, helping businesses manage stock freshness and avoid waste.

9. Returns and Damaged Goods

Monitoring returns and damaged goods ensures businesses can identify issues and manage unsellable stock properly.

10. Inventory Valuation

Methods like FIFO (First In, First Out) or LIFO (Last In, First Out) are used to assign value to inventory, impacting financial reporting and decision-making.

With a clear understanding of what needs to be tracked, let's now explore the key steps involved in effectively managing and tracking inventory.

Key Steps to Track Inventory

Tracking inventory is crucial for businesses to stay organized, manage stock levels efficiently, and ensure that products are available when customers need them. 

Step 1: Choose the Right Inventory Management System

Selecting the right inventory management system (IMS) is the foundation of successful inventory tracking. This system will enable you to monitor inventory levels in real-time, reduce errors, and streamline your operations. Whether you opt for manual methods or advanced software, it is essential to select a system that suits the size and complexity of your business.

Here are a few options to consider:

• Manual Methods: Suitable for small businesses, though prone to human error.
• Spreadsheets: A middle ground for moderate businesses, but time-consuming and error-prone.
• Automated Software: Real-time tracking and reporting for better accuracy, ideal for growing businesses.
• Cloud-Based Systems: Access data anywhere, integrate with other software, and automate inventory syncing.

The right system will enable better accuracy, prevent stockouts, and enhance operational efficiency.

Step 2: Set Up Inventory Categories

To effectively manage your inventory, it’s essential to organize your stock into categories. By classifying your inventory, you can easily track the status of different product types, monitor trends, and prioritize critical items. Categorization also helps when dealing with large amounts of stock, making it easier to locate items and track their movement.

Here’s how to set up your inventory categories:

• Product Types: Group your items by type (e.g., raw materials, finished goods, packaging materials).
• SKU Numbers: Assign unique identifiers to each product for better tracking.
• Product Location: Categorize by storage location (e.g., warehouse, store shelf, or in transit).
• Stock Level Classifications: Implement classifications such as "low stock," "reorder," and "excess inventory" to effectively manage stock levels.

Having clear categories will not only help you manage stock more efficiently but will also improve accuracy during audits and reduce confusion in inventory records.

Step 3: Choose Your Inventory Tracking Method

Once you have set up your categories, the next step is to choose an inventory tracking method. The method you choose should align with the size of your business, the volume of inventory, and the complexity of your operations. Here are some popular methods:

• Manual Tracking: Suitable for smaller businesses with minimal stock. You’ll record inventory levels using spreadsheets or paper logs. While low-cost, it’s time-consuming and prone to errors.
• Barcode Scanning: Ideal for medium-sized businesses, barcode scanning uses physical labels and scanners to automate data collection. It enhances accuracy and reduces human errors.
• RFID (Radio Frequency Identification): For larger operations, RFID allows real-time tracking of inventory using radio waves. This method offers high accuracy and efficiency, particularly when handling a large number of items.
• Inventory Management Software: This is the most effective method for businesses of all sizes. Software enables real-time inventory updates, data analysis, and integration with other systems, such as accounting and sales.

Selecting the right tracking method helps improve accuracy, speed, and overall inventory management. Choose wisely based on your business needs and growth projections.

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Step 4: Set Up Real-Time Tracking

Real-time tracking is an essential component of modern inventory management. By setting up real-time tracking, you ensure that your business has the most up-to-date information about stock levels, product locations, and any changes in inventory. 

Here’s how to set it up:

• Choose the Right Technology: Invest in inventory management software that supports real-time updates and data synchronization. Look for tools that integrate with your existing systems, such as point-of-sale (POS) or Enterprise Resource Planning (ERP) software.
• Utilize Barcode or RFID Technology: Implement barcode scanners or RFID tags to automatically update inventory levels in real-time. This reduces the chances of human error and ensures that data is always accurate.
• Integrate Across Channels: For businesses that sell both online and offline, make sure your inventory system is integrated across all sales channels. This ensures your stock levels are synchronized, preventing over-selling or stockouts.

Setting up real-time tracking allows you to monitor inventory at any given moment, providing a clear view of stock levels across different locations and preventing costly inventory mistakes.

Step 5: Perform Regular Audits

Inventory audits are essential to ensure the accuracy of your stock levels and help identify any discrepancies between the actual inventory and the recorded stock. Regular audits provide businesses with the opportunity to correct errors and optimize inventory management.

• Schedule Regular Audits: Set a fixed schedule for inventory audits—monthly, quarterly, or annually, depending on the size of your business and inventory. This ensures that your records remain up-to-date.
• Choose the Right Audit Method: There are several types of audits, including full-count audits, cycle counting, and spot checks. Choose the one that works best for your operations. Cycle counting, for example, can help you focus on specific inventory items while minimizing disruption.
• Involve the Right Team: Make sure to involve trained staff members during the audit process. This will help ensure that the audit is thorough and efficient, minimizing mistakes.

By regularly auditing your inventory, you can avoid stock discrepancies, improve forecasting accuracy, and reduce the likelihood of stockouts or excess inventory.

Step 6: Implement Inventory Management Software

Utilising the right inventory management software can streamline the entire inventory tracking process. These tools offer automation, real-time updates, and better reporting, helping businesses stay organized and efficient.

• Choose the Right Software: Select an inventory management system that suits your business needs, such as cloud-based solutions that allow for multi-location tracking or software that integrates with your existing platforms like POS or e-commerce systems.
• Automate Stock Level Monitoring: Inventory management software automatically updates stock levels with every sale or stock movement, ensuring real-time accuracy. It helps reduce human errors from manual tracking.
• Generate Reports: Many software solutions offer built-in analytics to generate reports that provide insights into sales trends, demand forecasting, and inventory turnover, making it easier to manage stock levels.

By implementing inventory management software, you can increase accuracy, improve decision-making, and save time on manual tasks. It simplifies tracking, reduces operational inefficiencies, and provides data-driven insights to support better business decisions.

Now that we've discussed the importance of implementing inventory management software, let’s explore the various methods of inventory tracking that can further enhance your ability to manage stock efficiently.

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Methods of Inventory Tracking

Choosing the right method for tracking inventory is essential to ensure that your stock levels remain accurate and your business runs smoothly. Depending on the complexity of your operations, you can opt for manual, automated, or a combination of tracking methods.

1. Manual Tracking

Manual tracking involves using a pen and paper or spreadsheets to record inventory levels, making it a very basic method. It is typically used by small businesses with limited stock and less complex inventory requirements. While this method is inexpensive, it is prone to human error, especially as the volume of inventory increases.

Key Features:

• Suitable for small businesses
• Cost-effective for minimal inventory management
• Prone to human errors and time-consuming

2. Barcode Scanning

Barcode scanning involves using barcode labels and scanners to track inventory. Each product is assigned a unique barcode, which is scanned when items are received or sold. This method helps automate the inventory process, reducing the chances of error and providing real-time data. It’s widely used in medium-sized businesses and is ideal for businesses with a higher volume of products.

Key Features:

• Increases efficiency by automating the tracking process
• Provides real-time data on stock levels
• Requires an initial investment in barcode labels and scanners

3. Radio Frequency Identification (RFID)

RFID technology uses radio waves to automatically track inventory items. RFID tags are attached to products, and readers detect the tags as items move throughout your system. This technology offers high accuracy and can read multiple tags simultaneously, making it a good fit for large businesses with complex inventory systems.

Key Features:

• High accuracy and automation
• Tracks multiple items simultaneously
• Requires significant upfront investment in RFID hardware and software

4. Perpetual Inventory System

A perpetual inventory system updates inventory levels in real-time with each sale or purchase. This system is automated and provides immediate updates on stock levels. It is ideal for businesses that need constant insight into their inventory to ensure accurate stock levels. It works well for companies that have high-volume sales or a large variety of products.

Key Features:

• Real-time tracking of inventory
• Helps businesses avoid stockouts and excess inventory
• Requires integrated software and real-time data updates

5. Periodic Inventory System

The periodic inventory system updates stock levels at regular intervals, such as monthly or annually. Businesses using this method physically count their inventory during each period, rather than continuously tracking sales and purchases. While this system is less resource-intensive and more straightforward, it does not offer real-time visibility, which can lead to stock discrepancies between counts.

Key Features:

• Ideal for small businesses with low inventory turnover
• Less complex and lower cost than perpetual systems
• Lacks real-time tracking and may result in stockouts or overstocking

Now that we've covered the periodic inventory system, let's move on to understanding the challenges businesses face in inventory tracking and how to effectively manage them.

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Managing Challenges in Inventory Tracking

Inventory tracking can be a challenging task, especially as businesses grow and their inventory needs become more complex. Whether it's maintaining accurate stock levels, managing different product categories, or dealing with supply chain disruptions, there are several obstacles to overcome. Below are some common challenges businesses face in inventory tracking and strategies for managing them effectively.

1. Stockouts and Overstocking

One of the biggest challenges in inventory tracking is ensuring that you never run out of stock while also avoiding excess inventory. Stockouts can lead to lost sales and dissatisfied customers, while overstocking ties up capital and increases storage costs.

Solution: Use inventory forecasting and demand planning tools to predict fluctuations in demand and maintain optimal stock levels. A good inventory management system can help monitor sales trends and adjust stock levels accordingly.

2. Inaccurate Data Entry

Manual inventory tracking methods like spreadsheets are prone to human error, which can lead to inaccurate inventory counts. This can result in stock discrepancies, making it difficult to manage inventory effectively and leading to poor decision-making.

Solution: Implement automated inventory tracking methods such as barcode scanning or RFID, which reduce the reliance on manual data entry. Real-time tracking ensures data accuracy and minimizes errors.

3. Supply Chain Disruptions

External factors like supplier delays, shipping issues, or natural disasters can disrupt the flow of inventory, leading to stock shortages or delays. These disruptions can be hard to predict and manage, affecting inventory levels and business operations.

Solution: Build strong relationships with multiple suppliers to mitigate risks and ensure continuity. Additionally, adopting a just-in-case inventory strategy by holding safety stock can help manage potential disruptions.

4. Lack of Visibility Across Multiple Locations

For businesses with inventory stored in multiple warehouses or retail locations, maintaining visibility across all locations can be a significant challenge. Without real-time tracking, it's difficult to know where stock is located and how much is available.

Solution: Use centralized inventory management software that integrates all your locations into one system. This allows for better tracking, reporting, and coordination across different sites, ensuring accurate stock visibility at all times.

5. Handling Returns and Damaged Goods

Managing returns and damaged goods is a crucial part of inventory tracking. Returns can disrupt your stock levels, and damaged goods add additional costs. Failing to account for these factors can result in stock discrepancies and loss of revenue.

Solution: Implement a clear return management process that includes inspecting returned items and updating inventory records accordingly. Use your inventory management system to track returns and incorporate them into your stock levels automatically.

6. Poor Inventory Forecasting

Inaccurate forecasting can lead to both stockouts and overstocking. Without a good understanding of future demand, businesses can either run out of popular items or waste money on unsold products.

Solution: Use historical data, sales trends, and predictive analytics to improve inventory forecasting. Software with integrated forecasting capabilities can provide insights and allow businesses to plan more accurately.

Having explored the impact of poor inventory forecasting, let's now look at how Pazago can help tackle these challenges and optimize inventory management for your business.

How Pazago Helps in Managing Inventory Tracking Challenges

Pazago offers a comprehensive solution to simplify the complexities of inventory tracking. Here's how it helps businesses overcome common challenges:

1. Cost-Effective Logistics: Pazago optimizes shipping routes for affordable cross-border logistics, reducing delays and ensuring timely deliveries to keep shipping costs in check.
2. Centralized Document Management: Pazago consolidates all export documents, including invoices and certificates, in one place, making it easier to create, store, and share essential files.
3. Collaborative Platform: Pazago enables seamless communication between businesses, suppliers, and partners for smooth inventory management and shipping.
4. Secure Payments and Transactions: Pazago simplifies payments, currency conversion, and financing, ensuring quicker, safer, and transparent transactions.
5. Quality Control and Inspections: Pazago simplifies quality inspections, ensuring your products meet international standards and reducing delays at customs or destination points.

Pazago’s integrated platform enables businesses to manage their inventory with ease, ensuring smoother operations and better control over stock levels. 

Conclusion

Effective inventory tracking is key to maintaining smooth operations and meeting customer demands. By adopting the right strategies and tools, businesses can enhance their accuracy, streamline their processes, and minimize errors. 

Real-time tracking, automated updates, and effective forecasting help prevent stockouts, overstocking, and other inventory-related challenges. As businesses continue to grow, an efficient and reliable inventory management system becomes more critical. 

Pazago offers a powerful platform that integrates real-time tracking, centralized inventory management, and automated updates, ensuring complete control and visibility over your stock.

Ready to optimize your inventory management and boost efficiency? Get in touch with Pazago today to discover how we can help you streamline your operations and reduce costs!

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