The performance of an inventory management system is conditioned by the rigorous application of inventory policies (e.g. FIFO, LIFO, FEFO, JIT), the consistency of traceability data and the integration of logistics processes with demand planning and operational execution. In the absence of a standardized procedural framework and a digital solution capable of supporting real-time data updating, deviations in inventory accuracy, discrepancies between written and actual stocks, as well as delays in replenishment with a direct impact on the service rate, frequently occur.
In this context, the adoption of an integrated information system – ERP with WMS (Warehouse Management System) modules – becomes essential for correlating stock data with purchase orders, customer orders, internal consumption and sales forecasts. Such an approach allows, on the one hand, the consolidation of interdepartmental flows and, on the other hand, supports managerial decision-making based on key indicators such as: stock turnover rate, average coverage in days, value of inactive stocks or total cost of ownership (TCO).
Continuing this material, we will detail the main inventory organization models, the criteria for evaluating logistics performance, and how process automation contributes to optimizing capital locked in inventory, while ensuring a coherent alignment between the organization’s operational and financial objectives.
What is inventory management?
Inventory management is the process of overseeing and controlling the flow of products within an organization, from procurement to storage and, eventually, distribution or sale. Thus, the organization monitors, regulates and optimizes the internal and external flow of goods – be they raw materials, semi-finished products, finished products or consumables. In functional terms, this activity has as its main objective the harmonization of the relationship between the physical availability of stocks and the real requirements of the production or distribution processes, in parallel with the minimization of the costs associated with the life cycle of each stored item.
It is important to remember that inventory management does not operate independently, but is deeply interdependent with supply planning, demand forecasting, service policy and the structure of logistics flows. Therefore, the performance of this function is determined by the system’s ability to support rapid and informed decisions regarding optimal stock levels, replenishment points, economic lots and replenishment intervals.
Operational dimensions of inventory management
Efficient inventory management requires the integrated coordination of several logistical and decision-making functions:
- Purchasing planning and stock replenishment , based on quantitative methods such as EOQ (Economic Order Quantity), ABC analysis or seasonal demand forecasting;
- Allocation and organization of storage spaces , respecting the principles of warehouse layout optimization (through methods such as slotting, cross-docking or wave picking);
- Real-time monitoring of inventory levels , through WMS (Warehouse Management Systems) or specialized modules in ERP systems;
- Management of customer orders and deliveries , with the integration of SLAs (Service Level Agreements) and fulfillment strategies (e.g. FIFO, FEFO);
- Evaluation and optimization of operational performance indicators , such as: inventory turnover rate, holding cost per SKU, average storage duration or availability rate.
Impact on organizational performance
The first and most important impact is on working capital . Inventories are current assets of an investment nature – which implies a direct link to the company’s liquidity. Excess inventory means tied up capital, increased storage costs and an increased risk of depreciation. On the other hand, under-inventory generates disruption of operational flow, production delays and sales losses – with a direct effect on turnover and commercial reputation.
Second, inventory management supports operational continuity , especially in industries characterized by extended lead times, high seasonality, or dependence on international suppliers. The ability to maintain an optimal level of availability for critical items becomes essential for avoiding disruptions in deliveries, respecting contracts, and maintaining a high degree of customer satisfaction.
Third, an efficient system significantly contributes to reducing logistics costs . By eliminating slow-moving inventory, optimizing orders, and automating picking and packing operations, significant savings are achieved in the total cost of ownership (TCO). In addition, reducing losses generated by expirations, damage, or obsolete products directly contributes to improving gross margins.
Technology as a differentiating factor
Nowadays, inventory management can no longer function without the support of technology. Modern ERP systems, with advanced logistics management functionalities, allow the integration of inventory data with sales, purchasing, accounting and planning processes. At the same time, WMS modules offer granular functionalities for batch tracking , picking route optimization, traceability and real-time updating of available stocks.
Moreover, solutions such as E-Invoice and SAF-T , mandatory in Romania, must be interoperable with inventory management, as inventory changes have a direct impact on tax reporting.
Types of stocks and their classification
A coherent inventory management strategy starts with a clear understanding of inventory typologies and the functional characteristics of each category:
I. Classification according to the stage in the logistics chain
This approach reflects the positioning of inventories in relation to the integrated supply-production-distribution process:
- Raw material and material stocks
represent essential inputs for manufacturing cycles. In practice, efficient management involves correlating them with production plans (MRP – Material Requirements Planning), ensuring the continuity of the flow without generating surpluses that increase the cost of ownership. - Work in Progress (WIP)
refers to products in the process of transformation, between the initial and final stages of production. Monitoring them is critical for identifying process bottlenecks, calculating added value, and maintaining a competitive production lead time. - Finished goods inventory
Includes goods destined for delivery to customers. Effective management requires integration with sales forecasting and order management systems to avoid both overstocking and costly backorders.
II. Classification according to functional role in the logistics system
This perspective addresses the operational purpose of inventories and their contribution to the balance between availability and efficiency:
- Current inventories
Represent the minimum quantity required to support current activity, in accordance with the frequency of supply. Optimizing them involves the use of EOQ (Economic Order Quantity) models and maintaining a favorable ratio between the cost of acquisition and the cost of storage. - Buffer stocks
are intended to absorb unforeseen variations in demand or delays in the supply chain. Their sizing should take into account the standard deviation of demand and the accuracy of the forecast, in order to balance the additional cost with the desired service level (e.g. target of 95–98%). - Speculative stocks
are built based on analytical decisions, such as anticipating price increases or limited availability of a product. Although they can bring financial benefits, they involve risk of depreciation and require a clear mechanism for evaluating the return on investment in the stock. - Seasonal inventory
Aims to cover recurring seasonal demand, commonly found in industries such as fashion, food retail or promotional items. Effective planning involves synchronizing purchasing cycles, storage capacity and the timing of commercial campaigns.
III. Classification based on value analysis – ABC model
ABC analysis (derived from the Pareto principle) allows prioritizing control efforts based on the financial impact of inventories:
- Class A : items with low turnover in volume, but with a high share in the total value of the stock (≈80%). Requires strict control, detailed forecasting and frequent review.
- Class B : items of medium importance and value, managed through intermediate control methods (e.g. quarterly periodic review, moderate safety stock).
- Class C : numerous items, with low unit value (≈5–10% of the total value), managed through aggregate methods, with low frequency of analysis (e.g. automatic replenishment or kanban).
Methods of implementing inventory management
Implementing an efficient inventory management system requires adopting an inventory method aligned with the specifics of the activity, organizational structure and available technological infrastructure. The two most commonly used methodologies are perpetual inventory and periodic inventory, each having direct implications on the degree of accuracy, internal control and decision support.
1. Perpetual Inventory System
This method involves the continuous and automated updating of stock balances following each movement – reception, transfer, consumption or delivery. Typically, the system is supported by an ERP platform integrated with WMS (Warehouse Management System) modules, using technologies such as barcodes, RFID or IoT, which allow complete traceability of items in the logistics chain.
The advantages of the permanent system include:
- High operational accuracy : Information is available in real time, facilitating rapid reconciliation of deviations from scripted stock.
- Expanded decision-making visibility : Supply and logistics managers benefit from current data for forecasting, automatic replenishment, and optimal service level control.
- Reducing ownership costs : By optimizing the frequency and volume of orders, capital tied up in redundant inventory is reduced.
- Audit and reporting support : Ensures full traceability, electronic documentation, and compliance with internal and external audit requirements.
Critical Considerations : Implementation requires a robust IT infrastructure, standard operating procedures (SOPs) for recording movements, and strict operational discipline. Operational errors or missing scans can lead to significant discrepancies between physical and written inventory.
2. Periodic Inventory System
It refers to the determination of stock balances by physical inventory at regular intervals (weekly, monthly, quarterly), without recording intermediate movements in the system. It is a method generally applicable in organizations with limited infrastructure or low transaction volume.
Features and advantages of the periodic method:
- Low implementation costs : Does not require complex IT systems or real-time integration.
- Flexibility in resource management : Allows for organizing inventories according to the operational calendar.
- Feasible solution for SMEs : Offers an acceptable compromise between simplicity and control, where operational complexity is low.
Operational limitations:
- Low accuracy between intervals : In the absence of real-time recording, daily control over stock fluctuations is lost.
- Delayed loss detection : Discrepancies caused by theft, damage or errors cannot be identified immediately.
- Suboptimal replenishment decisions : Without access to up-to-date data, there is an increased risk of out-of-stock or excess inventory.
3. Decision-making factors in choosing the method
The choice of inventory management method must be based on a multi-criteria analysis, taking into account:
- Operational dimension : Organizations with high transaction volumes and distributed logistics networks require real-time control (perpetual inventory).
- Portfolio structure : Products with high value, demand volatility, or tight delivery times require continuous visibility.
- Technological capacity : The availability of IT infrastructure (ERP, WMS, mobile devices, RFID network) is a key criterion.
- Accounting regulations and audit requirements : In some industries (e.g. pharma, automotive), compliance standards require full traceability and perpetual inventory.
- Budget and human resources : The periodic method remains the preferred solution in companies with tight budgets and simplified processes.
4. Hybrid solutions and current trends
In practice, many organizations opt for hybrid systems, where perpetual inventory is applied to critical or Class A items (according to ABC), and the periodic method is reserved for slow-moving or low-value items. This approach allows for balancing costs with the desired level of control and operational efficiency.
At the same time, the development of inventory analytics applications and integration with machine learning algorithms paves the way for proactive management, based on dynamic demand estimates, automatic anomaly detection and multi-location inventory optimization.
The benefits of efficient inventory management
An efficient inventory management system directly supports organizational performance by optimizing processes, reducing costs, and improving decision-making capacity.
A first significant impact is on working capital. Reducing excess inventory frees up cash and reduces unnecessary assets, allowing resources to be redirected to strategic areas such as technology investments, product development, or expansion of operations.
On the operational side, the system contributes to streamlining logistics and production flows. Predictable availability of materials and products reduces the risk of disruptions, optimizes capacity utilization and supports compliance with delivery deadlines.
From a financial perspective, costs associated with storage, handling, and losses due to expiration or deterioration are significantly reduced. These savings are directly reflected in increased gross margins and enhanced competitiveness.
In the retail sector, proper inventory availability contributes to improving the customer experience – through shorter delivery times, order accuracy and responsiveness to demand. The result: increased loyalty, strengthened market position and expanded customer base.
In addition, modern management systems provide real-time visibility and relevant operational data, essential for forecasting, planning and making the right decisions regarding purchases, pricing policy and supply cycles.
Last but not least, improved inventory control allows for the reduction of operational risks and losses, through complete traceability, alerts on discrepancies and preventive measures against fraud or errors.
Challenges in inventory management
Although it represents an essential pillar in the operational architecture of any company, inventory management remains exposed to a complex set of challenges that can directly affect the efficiency, profitability and responsiveness of the organization.
Demand forecasting is one of the major challenges. Inaccurate estimates can lead to either under-stocking – with a negative impact on availability and customer satisfaction, or to excessive product accumulation – generating additional costs and obsolescence risks. Applying machine learning-based forecasting models, correlating with seasonality and integrating CRM and POS data can significantly increase the accuracy of decisions.
Another common challenge is managing the logistical costs associated with warehousing – including rent, energy, insurance, handling and security. Optimizing warehouse layout, consolidating inventory by geographic area and using a WMS system can reduce operational costs and increase product turnover.
Moreover, for industries with perishable or short-life products, the risks are amplified. Batch and expiration control requires strict application of FIFO or FEFO methods, along with automated expiration alerts. Dynamic discounting strategies, accelerated rotation, and shelf-life-based forecasting become essential in these cases.
Supply chain consistency is also critical. Price volatility, delivery delays, or quality non-conformities affect inventory planning and availability. To mitigate risks, companies can resort to supplier diversification, contracts with clear delivery terms, and the integration of digital SRM (Supplier Relationship Management) platforms.
In the context of the acceleration of e-commerce, additional challenges arise: real-time visibility of multi-channel inventory, optimization of the return process and ensuring fast delivery. Integration between ERP, WMS and e-commerce platforms, along with the implementation of agile fulfillment centers, are increasingly necessary solutions for efficient scaling of operations.
Software used for inventory management
Depending on the complexity of operations and business model, companies choose different software solutions for inventory management:
- ERP systems (e.g. SAP S/4HANA, Oracle NetSuite, Microsoft Dynamics 365) integrate inventory management with financial functions, production planning, purchasing and distribution. The major advantage: end-to-end visibility over the supply chain and cross-departmental coordination. They are recommended for organizations with multi-site structures, complex flows and high reporting requirements.
- WMS systems (e.g. Blue Yonder, Manhattan Associates, HighJump) are designed exclusively for managing warehouse operations. They optimize the reception, location, picking, shipping and traceability of batches. Integration with automation (scanners, RFID, sorters) and the ability to support high order volumes make them indispensable in distribution, e-commerce and modern retail.
- Inventory applications (e.g. Zoho Inventory, Cin7, Fishbowl) offer dedicated functionality for inventory tracking, order management, forecasting, and reporting. They are suitable for SMEs or companies that do not require advanced integration with other operational modules.
At the same time, for industries with specific requirements (e.g. food & beverage, pharmaceutical, fashion), there are vertical solutions with adapted functionalities: expiration date management, FEFO, serialization, POS synchronization and seasonality management.
These are the essential selection criteria:
- Functional capabilities : must fully cover specific processes (multi-location, batch control, automatic reservations, etc.).
- Scalability : the solution must allow expansion without requiring technological migration.
- Integration capacity : compatibility with ERP, e-commerce, CRM and accounting platforms.
- Usability and training : intuitive interface, short onboarding times and dedicated support.
- Total cost of ownership (TCO) : both initial and recurring costs (licenses, maintenance, further developments) must be analyzed.
Correct implementation brings visible results: inventory accuracy, reduced logistics costs, speed of delivery and, implicitly, improved customer experience.
Optimizing inventory management for business success
In today’s world, effective inventory control is no longer a simple logistical responsibility, but a decision-making tool that directly influences profitability and competitive positioning. More specifically, by implementing specialized IT systems and integrating predictive analytics, companies can more accurately anticipate demand, adjust replenishment frequency, and optimize inventory turnover.
This data-driven approach reduces inventory volatility, limits capital constraints, and enables better cash flow planning. At the same time, logistics costs associated with emergency transportation, excess inventory, or lack thereof decrease. At the same time, operational reliability increases, and the level of customer service is maintained constant, regardless of demand fluctuations.
To remain relevant in the marketplace, organizations must treat their inventory management strategy as a dynamic process, subject to continuous reassessment. Periodic inventory audits, refining sourcing policies, and investing in operational team training are essential actions to support agility and accuracy of processes.
Last but not least, the real-time connection of management data with sales, supply and production data, correlated with the development of internal skills, ensures an expanded response capacity and increased resilience in the face of market volatility.
Ultimately, only by focusing on continuous improvement and adopting emerging technologies can interested businesses transform their inventory management into a vector of sustainable growth.
References:
- Jonsson, P. (2008). Logistics and Supply Chain Management. McGraw-Hill;
- Waters, D. (2003). Inventory Control and Management. John Wiley & Sons;
- Silver, EA, Pyke, DF, & Peterson, R. (1998). Inventory Management and Production Planning and Scheduling. John Wiley & Sons.
