Inventory Tracking – An Essential Guide

Inventory tracking means monitoring stock movements to increase visibility in the company’s supply chain. This added transparency helps businesses improve their ordering and overall inventory management practices, ensure traceability, and make sure that items are exactly where you need them, when you need them.

What is inventory tracking?

Inventory tracking is the segment of overall inventory management that monitors the movement of materials and products within a company’s supply chain. 

Let’s take a wooden table manufacturer as an example. The tracking process starts from ordering lumber from a supplier and continues through all the production steps, ending with the finished table reaching the customer. A proper inventory tracking system records all events where the item or materials used to manufacture it are moved or processed. As a result, the table manufacturer has a clear overview of the location of their items, the status of their orders, and, importantly, which materials were used in which products and where those products were shipped. 

Types of inventory

While distributors, retailers, and e-commerce businesses only need to account for a single type of inventory, final products, manufacturers deal with various inventory types that all need to be meticulously tracked in order to ensure visibility and efficiency:

1. Raw materials. Every manufacturing company uses some form of raw material. Raw materials are the base components that are used to process into finished goods.
2. Work-in-process. WIP consists of partially processed materials and products that move between production stages. It may also encompass partially completed subassemblies at various stages of assembly.
3. Finished goods. Finished goods represent the final products that are shipped out to customers.

More sophisticated systems also track maintenance, repair, and operations inventories (MRO) such as nuts, bolts, belts, tape, glue, or other material used to maintain the physical plant or assist in manufacturing functions.

Benefits of inventory tracking

Inventory tracking is a vital function of inventory management. When done systematically, it can improve your business operations in many different ways. Here are some of its most important benefits:

1. Accurate inventory levels

Systematic inventory tracking helps businesses maintain accurate inventory levels by replacing guesswork with consistent counting and documentation. Regular stock updates, cycle counts, and periodic audits make inventory control more reliable, even when tracking is done manually. This inventory accuracy supports better forecasting and more informed reorder decisions.

2. Better location tracking

Even without automation, inventory tracking improves warehouse management by clearly documenting where materials and products are stored. Using labeled locations, stock cards, or simple location lists helps streamline picking and replenishment workflows. When items have defined storage locations, teams spend less time searching and more time moving orders forward.

3. Traceability and compliance

Inventory tracking supports traceability by recording where materials came from, which products they were used in, and where finished goods were shipped. This is especially important for quality issues, recalls, and audits. Clear records allow businesses to be prepared for regulatory audits and trace problems through the supply chain without disrupting the entire operation.

4. Improved order fulfillment

When inventory records are kept up to date, order fulfillment becomes more predictable. Sales and production teams can check available stock before committing to orders and provide accurate lead times, reducing delays and missed delivery dates. Reliable inventory tracking helps streamline fulfillment workflows and improves coordination between warehouse, production, and sales.

5. Reduced stockouts and overstocking

Tracking inventory usage over time supports better forecasting and more balanced stock replenishment. Businesses can identify low stock earlier and reorder before shortages occur, while also spotting and preventing the accumulation of excess inventory that ties up cash and storage space. This helps optimize inventory levels and reduces the operational impact of both stockouts and overstocking.

6. Prevents theft, loss, and shrinkage

Regular tracking, spot checks, and audits make discrepancies visible and discourage theft and careless handling. Even simple inventory records create accountability and highlight where losses occur. Consistent inventory control practices reduce shrinkage and limit the cumulative impact of small, recurring errors.

7. Increased profitability

Better inventory tracking improves profitability by reducing waste, preventing emergency purchases, and freeing up working capital. Fewer stockouts mean smoother production and sales, while less overstock reduces carrying costs. When inventory is tracked consistently, it becomes easier to optimize workflows and support healthier margins.

9 best practices of inventory tracking

Inventory tracking does not simply entail marking items down in a notebook or spreadsheet. A robust tracking system requires careful recording and thought-out processes. Here are some of the best practices of inventory tracking:

1. Create an SKU system

Assign a unique SKU code to every item you track, including raw materials, components, and finished goods. SKUs remove ambiguity and prevent mix-ups between similar items. A clear SKU system makes inventory control easier, reduces human error, and ensures that stock movements are recorded consistently across purchasing, production, and shipping.

2. Assign lot numbers

Use lot numbers to track when and where items came from, and how they move through production or sales. Lot tracking improves traceability, supports audits, and makes it easier to isolate quality issues without affecting all inventory. Even with manual tracking, lot numbers help maintain control over costs, expiry dates, and material usage.

3. Physically organize your storage space

Inventory tracking only works if the physical warehouse is well organized. Clearly label shelves, bins, and storage zones, and make sure items have fixed locations. Good warehouse management helps streamline picking, replenishment, and stock counts, reduces guesswork, and prevents inventory errors caused by misplaced items.

4. Immediately record every inventory movement

Make it a rule that no stock moves without being recorded. Purchases, production issues, completions, shipments, returns, and adjustments should all be logged as they happen. Delayed entries are a major source of inaccuracies, especially in manual systems, and they might end up undermining your planning and reorder decisions.

5. Use consistent units of measurement

Always record quantities in the same unit of measure for a given item. Mixing pieces, boxes, and kilograms without clear conversion rules leads to confusion and calculation errors. Consistent units make running totals reliable and keep inventory data aligned across your operation.

6. Perform regular inventory counts

Don’t wait for a full annual stocktake to catch problems. Regular cycle counts help identify discrepancies early, reduce the impact of errors, and make audits less disruptive. Frequent counting strengthens inventory control and builds confidence in your stock data over time.

7. Define clear reorder points

By setting simple reorder points for critical items, you reduce low stock surprises and improve replenishment without constant manual checking. Clear reorder rules support better material planning and keep production moving even when demand fluctuates. 

8. Create SOPs and provide training to employees

Write down how inventory should be tracked and make sure everyone follows the same process. Clear documentation reduces dependency on individual knowledge, prevents inconsistent practices, and keeps inventory tracking reliable as your team grows.

9. Implement dedicated software

Manual inventory tracking works if your operation is small and you’re dealing with a small number of stock-keeping units. As order volumes, SKUs, and workflows grow, spreadsheets become harder to maintain and more prone to human error. Implementing inventory management software helps streamline inventory tracking processes, improve traceability, support audits, and reduce the effort required to manage operations at scale.

Using inventory management software to track inventory

When you expect to grow beyond the microbusiness stage, you should already be considering implementing dedicated inventory tracking software. Here’s what to keep in mind:

1. Match the software to your business needs

Not all inventory management software is built for the same use cases. Start by defining your business needs: number of SKUs, order volume, warehouse complexity, and whether you need purchasing, manufacturing, or sales features. Choosing an inventory management solution that fits your current operations and gives you room to grow helps avoid unnecessary complexity and pricing surprises later.

2. Implement sooner rather than later

Spreadsheets work early on, but as inventory data grows, Excel becomes harder to maintain and easier to break. Manual formulas, version conflicts, and copy-paste errors slow teams down and increase risk. Inventory tracking software centralizes inventory data, reduces manual effort, and replaces fragile spreadsheets with structured workflows. Modern cloud-based solutions are very affordable, and the sooner you implement, the easier the process is.

3. Look for real-time visibility and updates

A modern inventory management system provides real-time updates as inventory moves through purchasing, production, and shipping. This improves decision-making, reduces stock uncertainty, and supports more efficient supply chain management. Real-time visibility also helps teams respond faster to low stock situations without waiting for manual updates.

4. Use barcode scanning and QR codes

Barcode scanning and QR codes significantly reduce manual data entry and human error. Scanning items during receiving, picking, and shipping speeds up warehouse workflows and ensures inventory data stays accurate. Even basic scanning functionality can dramatically improve inventory accuracy compared to manual entry alone.

5. Choose cloud-based over on-premise

Cloud-based inventory tracking software offers easier access, automatic updates, and lower upfront costs compared to on-premise systems. Teams can access inventory data from anywhere, which is especially useful for multi-location warehouses or remote work. Cloud-based software solutions also tend to be more scalable as the business grows.

6. Ensure strong purchasing and order management features

Inventory software should handle purchase orders, supplier performance management, and stock replenishment in one place. Tight integration between inventory levels and purchasing helps prevent stockouts, improves planning, and supports more efficient workflows across procurement, warehouse, and manufacturing operations.

7. Check reporting and inventory analytics

Inventory reports turn raw inventory data into actionable insight. Look for software that provides clear stock summaries, movement history, inventory valuation, and other reports. These reports support audits, improve forecasting accuracy, and help identify slow-moving or excess inventory early.

8. Plan for advanced inventory needs

As operations mature, advanced inventory features such as lot tracking, serial numbers, multi-location warehouses, and reorder notifications become essential. Choosing an inventory management solution that supports advanced inventory from the start helps avoid painful migrations later.

9. Compare pricing and scalability carefully

Inventory tracking software pricing varies widely, from simple entry-level tools to full ERP systems. Look beyond the monthly fee and consider user limits, feature restrictions, and growth costs. A scalable solution should support increased volume, user base, and complexity without requiring a full system replacement.

10. Inventory management software or ERP?

Inventory management is often part of a broader ERP system. For example, manufacturing ERP software such as MRPeasy provides end-to-end traceability while connecting inventory with purchasing, production, sales, and finance, providing a single source of truth for the whole operation. 

Although the ‘ERP’ tag may discourage small manufacturers, many modern cloud-based systems are built specifically for their needs and budgets. MRPeasy provides everything small manufacturers need and starts at just $49/month.

Key takeaways

• Inventory tracking ensures you always know what you have, where it is, and how it moves through your supply chain.
• Unlike retailers, manufacturers need to track raw materials, work-in-process, and finished goods (and, sometimes, MRO) to maintain control, traceability, and production efficiency.
• Consistent inventory tracking reduces guesswork, prevents stockouts and overstocking, improves order fulfillment, and directly supports healthier margins.
• Clear SKUs, lot numbers, organized storage, immediate recording of movements, and defined reorder points are essential foundations of inventory tracking, whether manual or digital.
• Spreadsheets and manual logs are effective for very small operations, but they become time-consuming and error-prone as SKUs, order volumes, and process complexity increase.
• Modern, cloud-based inventory management and ERP systems provide real-time visibility, better reporting, automation, and scalability—making them a natural next step as the business grows.

Frequently asked questions (FAQ)

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