How does inventory management work?

Inventory is the goods or materials a business intends to sell to customers for profit. Inventory management, a critical element of the supply chain, is the tracking of inventory from manufacturers to warehouses and from these facilities to a point of sale. The goal of inventory management is to have the right product in the right place at the right time. This requires inventory visibility — knowing when to order, how much to order and where to store stock. The basic steps of inventory management include:


  1. Purchasing inventory: Ready-to-sell goods are purchased and delivered to the warehouse or directly to the point of sale.
  2. Storing inventory: Inventory is stored until needed. Goods or materials are transferred across your fulfillment network until ready for shipment.
  3. Profiting from inventory: The amount of product for sale is controlled. Finished goods are pulled to fulfill orders. Products are shipped to customers.

What is inventory visibility?

Multichannel order fulfillment operations typically have inventory spread across many places throughout the supply chain. Inventory visibility is knowing what inventory you have and where it’s located. Businesses need an accurate view of inventory to guarantee fulfillment of customer orders, reduce shipment turnaround times, and minimize stockouts, oversells and markdowns.

Why is inventory management important?

Inventory can be a company’s most important asset. Inventory management is where all the elements of the supply chain converge. Too little inventory when and where it's needed can create unhappy customers. But a large inventory has its own liabilities — the cost to store and insure it, and the risk of spoilage, theft and damage. Companies with complex supply chains and manufacturing processes must find the right balance between having too much inventory on hand or not enough.

What are the types of inventory management?

Periodic inventory management

The periodic inventory system is a method of inventory valuation for financial reporting purposes in which a physical count of the inventory is performed at specific intervals. This accounting method takes inventory at the beginning of a period, adds new inventory purchases during the period and deducts ending inventory to derive the cost of goods sold (COGS).


Barcode inventory management

Businesses use barcode inventory management systems to assign a number to each product they sell. They can associate several data points to the number, including the supplier, product dimensions, weight, and even variable data, such as how many are in stock.


RFID inventory management

RFID or radio frequency identification is a system that wirelessly transmits the identity of a product in the form of a unique serial number to track items and provide detailed product information. The Warehouse Management System based on RFID can improve efficiency, inventory visibility, and ensure the rapid self-recording of receiving and delivery.

Key features of effective inventory management

Inventory tracking

Know exactly where inventory is across the supply chain

Order management

Customize pricing, send quotes, track orders and manage returns

Transfer management

Move product to where it's most valuable

Reporting and analytics

Evaluate patterns in processes to forecast future demand and sales


Create and manage purchase orders

Shipping capabilities

Automate shipping to reduce errors such as late deliveries or delivering incorrect packages

What is an inventory management system?

Spreadsheets, hand-counted stock levels and manual order placement have largely been replaced by advanced inventory tracking software. An inventory management system can simplify the process of ordering, storing and using inventory by automating end-to-end production, business management, demand forecasting and accounting.

The future of inventory management

Globalization, technology and empowered consumers are changing the way businesses manage inventory. Supply chain operators will use technologies that provide significant insights into how supply chain performance can be improved. They’ll anticipate anomalies in logistics costs and performance before they occur and have insights into where automation can deliver significant scale advantages.


In the future, these technologies will continue to transform inventory management:

Artificial intelligence

Intelligent, self-correcting AI will make inventory monitoring more accurate and reduce material waste.

Internet of Things

Data from IoT sensors will provide insight into inventory location and status.


Disparate parties will be connected through a unified and immutable record of all transactions.

Intelligent order management

Supply chains will master inventory visibility with improved demand forecasting and automation.

Quantum computing

Unprecedented computational power will solve previously unsolvable problems.

Read more about it

Three reasons why you need a better view of your inventory

Without an accurate view of inventory, you may be losing sales.

MRO Inventory Optimization

Introducing IBM MRO Inventory Optimization.

The ideal platform for real time visibility

Know what inventory you have and where it’s located.

IBM Supply Chain Community

Discover more about B2B integration, managed file transfer, and order management solutions from a community of users and experts.

Supply chain events

View all our upcoming events, such as THINK, webinars and more.

IBM solutions

IBM Sterling Inventory Visibility

Get inventory visibility that delivers on business goals and customer expectations.

IBM Sterling Order Management

Deliver the perfect order with an intelligent fulfillment platform.

IBM Sterling Fulfillment Optimizer with Watson

Get AI capabilities to optimize fulfillment plans at the lowest cost-to-serve.

IBM Sterling Store Engagement

Enable store associates to provide superior customer service and increase cart size.

Supply chain control towers

Break free from visibility challenges with a single view of processes and data from disparate sources, and get an AI-powered, personalized dashboard of KPIs and events.

MRO Inventory Optimization Services

Optimize MRO inventories to reduce cost and free up working capital.