Inventory Tracking: What Is It & Why Do It?

3 drawings of a red location pin: inventory tracking


If someone asked you how many products you have on hand right now, would you be able to give them an accurate figure? Inventory tracking is a critical part of running a retail business, and as your operations develop, you may find that you need more than a spreadsheet to keep an eye on your stock levels.

Learn about the benefits and challenges of inventory tracking, as well as how to track your inventory.

What is inventory tracking?

Inventory tracking is the process of monitoring your stock—both how much you have and where it’s located. Many small businesses start out by manually tracking inventory using spreadsheets. As companies grow in size and complexity, they typically transition to using inventory management software and perpetual inventory systems that track inventory in real time. Accurately tracking your inventory can significantly increase your efficiency and help you keep up with customer demand. 

Why invest in inventory tracking?

There are a few reasons why inventory tracking can help your business:

Avoid wasting money on storing excess stock

Storing inventory costs money. If you track your inventory levels and have tight stock control operations, you’ll be able to determine how much stock you should keep on hand to meet demand at any given time and avoid overspending on storage for surplus inventory

Monitor damage, theft, and loss

By keeping a close eye on your inventory levels and locations, you’ll be able to identify damage, losses, and thefts as they occur. 

Streamline the sales process

By keeping track of your products’ locations, you’re able to find and deliver them as quickly as possible when fulfilling sales orders—and fast turnaround time means higher customer satisfaction. 

Understand sales patterns

Monitoring inventory levels and locations will give you insight into seasonal and location-based trends, which in turn will support effective demand forecasting. 

What are some challenges in inventory tracking?

There are a few challenges that commonly come up in inventory tracking: 


For your inventory system to be beneficial, it has to be accurate. While small discrepancies are natural, you may sometimes find huge differences between the numbers in your system and the actual count in storage. Whether due to inaccurate counting or issues like loss, damage, or theft, it’s critical to identify and minimize discrepancies between your inventory counts and financial records. 


If you’re selling a wide array of customizable products, storing inventory in multiple warehouses, or shipping stock to retail locations and customers, you may quickly find that your inventory tracking is too complicated for a simple spreadsheet. Assume from the beginning that a spreadsheet won’t be a robust-enough tracking system for the long term so that you’ll be able to adapt quickly. 


While some inventory management software can be relatively inexpensive to implement, physical additions to your operations (like bar codes) will require a higher upfront investment and more training for employees. 

4 inventory tracking methods

  1. Two-bin rotation
  2. Inventory management software
  3. Bar code systems
  4. Radio frequency identification chips (RFID) systems

Many small businesses with only a handful of products use manual inventory tracking methods—like inputting their products into spreadsheets—to monitor their inventory levels. In these cases, manual tracking is cheap and doesn’t require extensive training to implement. However, as businesses grow, they often transition to more robust automated systems. 

Consider some common approaches: 

1. Two-bin rotation

In the two-bin rotation system (also called the two-bay system or reserve stock inventory system), stores have two different locations where they keep stock: on the shelves and in storage. When the products on the shelf get sold, the shop brings the products from storage to restock the shelf—and then they order more to replenish their storage supply. 

Since it doesn’t require any technology or trained labor, the two-bin system is one of the cheapest ways to manage inventory, and it helps prevent your store from ordering too much of a given product, since you won’t order more until your oldest supply is used up. However, the two-bin system doesn’t track how much of a particular product you have at any given time, and it can struggle to accommodate major swings in demand according to seasons or other trends. 

2. Inventory management software

There are a number of digital services that you can use to manage inventory. Many inventory software systems have free plans for businesses with just a few products or locations, making them a popular option for small businesses and beginners. Some of these services—including Shopify—have built-in inventory tracking tools. This can help you with inventory control, or the process of managing the products you already have in stock.

If you use Shopify for your business, you can navigate to your Inventory page to view your inventory, adjust your inventory levels, and set up inventory tracking.

Manage inventory from one back office

Shopify POS comes with tools to help you manage warehouse and store inventory in one place. Forecast demand, set low stock alerts, create purchase orders, know which items are selling or sitting on shelves, count inventory, and more.

3. Bar code systems

With the bar code system, stores use computer software to scan every product for real-time tracking. The bar code system gives your shop much more insight into inventory figures and sales trends since employees need to spend time individually scanning each product two separate times: once upon delivery, and once when the product is sold. This can help you understand if you are carrying the right number of products at any given time. One potential drawback of bar codes is that they can be damaged or removed, rendering them useless. 

4. Radio frequency identification chip (RFID) systems

Radio frequency identification chips (or RFIDs) are individual microchips that you embed into each product, allowing you to track inventory data in real time. RFIDs save businesses time as the most efficient tech for inventory control, since they go into products during manufacturing. They’re also much more durable than bar codes. However, RFID technology requires the most expensive inventory tracking software to implement and is often impractical for small businesses. 

How to track inventory

While all inventory tracking systems are a little different, there are a few common steps to follow to make the most of your stock management:

1. Choose a method and a point person

Before you start tracking your inventory, it’s important to get organized. Determine what method you’ll be using to keep track of your stock—whether that’s a mobile app or RFIDs—and who will be responsible for critical tasks like implementing and auditing the system. 

2. Get an initial count

To begin tracking and managing inventory, you’ll need to get an official count of your current stock. You can use any method you want to get this number—for instance, taking a physical inventory count, a bar code scanner, or RFIDs. Record this number in your tracking system as the foundation for your data. 

3. Recount periodically

As your system operates, you’ll want to audit it periodically to make sure it’s giving you accurate tracking data. In the beginning, consider running monthly or even weekly audits to check the current inventory levels against your system’s number. If the two numbers are off by a wide margin, you may need to dig deeper to find out exactly where the discrepancy is coming from. 

Inventory tracking FAQ

What is the difference between inventory management and warehouse inventory management?

Warehouse inventory management (or just warehouse management) is a subset of inventory management, in which the inventory being tracked is stored in a warehouse rather than in a back room or on a sales floor. Warehouse management comes with additional considerations, including managing employees, organizing products, managing shipments between warehouses, and fulfilling customer orders.

How often should you track inventory?

The best inventory management system is perpetual rather than periodic—meaning that you always know how much stock you have at any given moment. Most inventory tracking systems allow you to track your stock continuously. With these systems, you should still audit your count regularly—monthly if your inventory turnover is high, or quarterly if your sales cycle is slower.

How can businesses ensure the accuracy of their inventory tracking?

The best way to ensure inventory accuracy is to perform regular audits—either by manually counting your stock or matching sales figures to outgoing inventory. If you find that your system’s count is very close to your actual count, then you can feel confident your inventory tracking is efficient and detailed. If, however, you continue to find wide discrepancies in the figures, evaluate your processes for potential points of counting inaccuracy, damage, loss, or theft.

What are the consequences of poor inventory tracking?

If you track your inventory poorly, you run the risk of a stockout, or running out of high-demand products. Stockouts can result in lost revenue, additional operational expenses, and damage to your brand’s reputation. Other potential consequences of poor inventory tracking include paying high costs to store extra stock or being unaware of regular damage, loss, or theft.