How to Overhaul Your Inventory Management System
Oct 1, 2025
Discover essential strategies for overhauling inventory management systems to boost efficiency, reduce costs, and streamline operations.
Effective inventory management is crucial for e-commerce, retail, and supply chain professionals. For many decision-makers, inventory may seem like a mundane administrative task. However, the reality is that poor inventory practices can bottleneck cash flow, disrupt workflows, and damage customer relationships. Whether you are an e-commerce entrepreneur, a supply chain manager, or a retail decision-maker, optimising your inventory systems can significantly enhance profitability and operational efficiency.
This article explores transformative strategies for overhauling your inventory management system, blending insights from operational experts with actionable advice tailored to professionals seeking innovative solutions.
Why Inventory Management is More Important Than You Think
Inventory management is often underestimated, particularly by businesses that don’t deal with massive stockpiles of raw materials. However, whether you operate a small e-commerce store or a manufacturing shop, inventory problems can sneak up on you.
Key challenges include:
Financial Strain: Excess inventory ties up capital that could be used elsewhere, while stockouts can interrupt cash flow and erode customer trust.
Operational Inefficiency: Mislabelling, losing track of stock, or inefficient storage practices can lead to wasted time and resources.
Customer Satisfaction Risks: If you can’t fulfil orders due to inventory mismanagement, you risk damaging your reputation.
Managing inventory isn’t just about keeping shelves neat - it’s about leveraging it as an integrated part of your business strategy.
Build a Strong Foundation: Categorise and Evaluate Inventory Needs
1. Break Your Inventory Into Manageable Categories
Start by identifying your inventory categories. This could include:
Raw Materials: Metals, plastics, or other raw goods for manufacturing.
Finished Goods: Ready-to-sell stock stored for e-commerce customers or retail partners.
Consumables: Items like tools, cutting fluids, and packaging materials that are critical to operations but often overlooked.
By recognising the different categories, you can better plan how much to stock, where to store it, and how to track it effectively.
2. Prioritise Frequently Used Items
For materials or products you use regularly, consider these strategies:
Consolidation: Stock universal sizes or raw materials that can work across multiple products. For example, instead of stocking three variations of a material, use one that can serve multiple purposes.
Vendor Relationships: Negotiate with suppliers to stock and release materials as needed, reducing your upfront costs and freeing up physical space.
Digital Inventory Management: Tools and Techniques to Streamline Operations
1. Embrace Automated Inventory Tracking
Digital systems, such as enterprise resource planning (ERP) software, can track materials, finished goods, and even tools in real-time. These systems offer:
Traceability: Link inventory to purchase orders, certifications, and lot numbers.
Forecasting: Predict when you’ll need to reorder based on historical data.
Accessibility: Allow your team to view inventory levels and locations from any connected device.
2. Implement Cycle Counting
Instead of shutting down operations to conduct a full inventory count once a year, implement cycle counting. This method involves counting a small percentage of inventory regularly. Key benefits include:
Improved inventory accuracy.
Reduced operational disruption.
Immediate identification of discrepancies.
For example, count items that haven’t been accessed in over six months to ensure accuracy and identify dead stock.
Physical Inventory Management: Best Practices for Efficiency
1. Optimise Storage Systems
A randomised storage system, where each item has a unique location regardless of type, prevents confusion and ensures you can locate items quickly. Instead of grouping similar items together, assign a unique identifier (e.g., "A-12") to each storage spot.
2. Label and Track Materials
Mark raw materials and finished goods with vendor purchase order numbers, work order IDs, or other identifiers. Ensure every item is traceable back to its origin. For long-term efficiency:
Use paint pens or stickers for immediate labelling.
Store certifications digitally, linked to inventory records.
3. Eliminate Dead Inventory
Regularly review inventory for obsolete items. Reach out to customers whose orders may have lapsed and offer discounts on leftover stock. If no orders are forthcoming, sell excess items to recover costs or recycle them to free up valuable space.
The Role of Cutting Tools in Inventory Management
Cutting tools are the lifeblood of manufacturing and machining operations. Without the right tools available at the right time, production halts, leading to costly downtime.
1. Adopt Predictive Stock Practices
Predict tool needs by tracking tool usage in your ERP system. For example, if you expect three jobs next week that require the same specialised endmill:
Verify stock levels in advance.
Order additional tools proactively to avoid delays.
2. Partner with Tool Vendors
Many tool suppliers offer consignment options, stocking tools on-site while billing only when used. This ensures you always have critical tools available without tying up cash in excess stock.
3. Avoid Tool Mismanagement
Randomised storage applies to cutting tools as well. Use a centralised database to:
Track every tool by a unique ID.
Ensure tools are stored in assigned locations to prevent mix-ups.
Make it easy for machinists to know what’s available, preventing duplication or errors.
Financial Implications: Understand Value and Risk in Inventory
Inventory affects your financial statements and tax obligations. For example:
LIFO vs FIFO Accounting: First-In, First-Out (FIFO) and Last-In, First-Out (LIFO) are accounting methods that determine how inventory costs are attributed. Consulting a tax professional can help businesses reduce tax liabilities and improve cash flow.
Obsolete Stock Write-Offs: Regularly review and write off dead inventory to prevent overpaying taxes on unsellable items.
By aligning physical and digital inventory management with financial goals, you ensure inventory supports your profitability rather than dragging it down.
Key Takeaways
Categorise Inventory: Identify raw materials, consumables, and finished goods for better planning.
Leverage Digital Tools: Use ERP systems for real-time tracking and forecasting.
Consolidate Stock: Stock universal materials to save money and reduce complexity.
Automate Traceability: Label materials and link them to purchase orders or work orders.
Adopt Cycle Counting: Conduct regular inventory checks to improve accuracy without disrupting operations.
Optimise Cutting Tool Management: Store tools randomly but track them digitally for easy access.
Build Vendor Partnerships: Negotiate consignment agreements to maintain stock without tying up capital.
Eliminate Obsolete Inventory: Sell or recycle dead stock to free up space and reduce tax burdens.
Plan for the Future: Track work-in-progress inventory to monitor cash flow and productivity.
Conclusion
Efficient inventory management is about more than just counting stock - it’s about creating a system that supports your business goals. By categorising inventory, leveraging digital tools, and building strong vendor relationships, you can transform inventory from a stress point into a competitive advantage. Whether you’re managing raw materials, finished goods, or cutting tools, these strategies will help you reduce waste, improve accuracy, and maximise profitability. Start small, focus on critical inventory categories, and build a system that evolves with your business needs.
Source: "Overhaul Your Inventory Management System Following This Process" - MakingChips, YouTube, Aug 18, 2025 - https://www.youtube.com/watch?v=T6S2mdgswpA
Use: Embedded for reference. Brief quotes used for commentary/review.