Inventory management is the systematic process of ordering, storing, tracking, and controlling a company’s stock of goods. For Pakistani businesses—whether retail shops in Saddar, distributors in Faisalabad, or manufacturers in Sialkot—effective inventory management directly impacts profitability, cash flow, and customer satisfaction.
What is Inventory Management?
Inventory management encompasses all activities involved in maintaining optimal stock levels—enough to meet customer demand without tying up excessive capital in unsold goods. It answers critical questions: What to order? How much? When? Where to store it?
For Pakistani SMEs, where cash flow is often tight and storage space limited, inventory management is not just about tracking stock—it’s about business survival.
Why Inventory Management Matters for Pakistani Businesses
Cash Flow Impact
Inventory is money sitting on shelves. A typical Pakistani trader has 30-60% of their capital locked in stock. Poor inventory management means either stockouts (lost sales) or overstocking (trapped capital). Both hurt your cash flow.
Customer Satisfaction
Nothing frustrates customers more than hearing “یہ آئٹم ابھی نہیں ہے” (this item is out of stock). In competitive markets, customers simply go to your competitor next door.
Storage Costs
Rent in Pakistani commercial areas is expensive. Every square foot of godown space has a cost. Excess inventory means paying rent for goods that aren’t selling.
Expiry and Obsolescence
Especially critical for FMCG, pharmaceuticals, and fashion. Dead stock means direct losses.
Inventory Management Methods
FIFO (First In, First Out)
Oldest stock is sold first. Essential for perishables, pharmaceuticals, and any product with expiry dates. Most Pakistani retailers dealing in FMCG products should use FIFO. Learn more about FIFO vs LIFO methods.
LIFO (Last In, First Out)
Newest stock is sold first. Rarely used in Pakistan except in specific scenarios. Note: LIFO is not accepted under IFRS accounting standards.
Weighted Average
Calculates average cost of all units. Useful when dealing with commodities or items with fluctuating purchase prices—common in Pakistani trading businesses dealing with imported goods where USD rates change frequently.
ABC Analysis
Categorize inventory by value:
- A Items: 20% of products generating 80% of revenue (focus maximum attention)
- B Items: 30% of products generating 15% of revenue (moderate attention)
- C Items: 50% of products generating 5% of revenue (minimal attention)
Key Inventory Metrics to Track
Inventory Turnover Ratio
Formula: Cost of Goods Sold ÷ Average Inventory
This tells you how many times you sell and replace inventory annually. A ratio of 4 means you’re turning over stock every 3 months. Higher is generally better—it means less capital locked in stock.
Days of Inventory (DOI)
Formula: (Average Inventory ÷ COGS) × 365
How many days would current stock last at average sales rate? For most Pakistani retailers, 30-45 days is healthy. More means overstocking; less risks stockouts.
Stock-Out Rate
Percentage of time items are unavailable when customers want them. Track this carefully—each stockout is a potential lost customer.
Dead Stock Percentage
Items with no sales in 6-12 months. This is trapped capital. Aim to keep dead stock below 5% of total inventory value.
Setting Up an Inventory System
Step 1: Categorize Your Products
Group items logically—by category, supplier, location, or any system that makes sense for your business. Assign unique SKU codes to each item.
Step 2: Calculate Reorder Points
For each item, determine when to reorder based on lead time and average sales. Learn the formula in our reorder point calculation guide.
Step 3: Set Safety Stock Levels
Buffer stock to cover unexpected demand or supply delays. Critical for items with long supplier lead times or unpredictable demand.
Step 4: Choose Your Tracking Method
Options range from manual registers to Excel spreadsheets to dedicated inventory software. For businesses with 100+ SKUs, software becomes essential.
Step 5: Establish Audit Procedures
Regular physical stock counts catch discrepancies between records and reality. Monthly cycle counts are better than annual marathons.
Manual vs Software-Based Inventory Management
| Aspect | Manual/Excel | Inventory Software |
|---|---|---|
| Cost | Low/Free | Rs. 2,000-15,000/month |
| Accuracy | Error-prone | High accuracy |
| Real-time Updates | No | Yes |
| Multi-user Access | Limited | Yes |
| Reporting | Manual | Automated |
| Scalability | Poor | Excellent |
| Best For | <50 SKUs | 50+ SKUs |
For detailed comparison, see our guide on Excel vs dedicated inventory software.
Multi-Location Inventory Management
Pakistani businesses often operate from multiple locations—a shop in Main Market, warehouse in Industrial Area, and maybe a second outlet. Multi-location inventory management requires:
- Central visibility of stock across all locations
- Inter-branch transfer tracking
- Location-wise profitability analysis
- Optimized stock distribution based on location demand
Industry-Specific Considerations
Retail Stores
Focus on fast-moving items, manage display vs backroom stock, and integrate with POS for automatic updates. See our retail software guide.
Distribution Businesses
Handle larger volumes, multiple warehouses, and complex pricing (different rates for different customers). Distribution software is essential.
Manufacturing
Track raw materials, work-in-progress, and finished goods. Bill of Materials (BOM) integration is crucial. Explore manufacturing ERP options.
FMCG
Expiry date tracking is critical. Batch management helps trace products. FMCG distribution software addresses these needs.
Common Inventory Mistakes in Pakistani Businesses
- Ordering Based on Gut Feel: Use data, not intuition, for reorder decisions
- Ignoring Slow-Moving Stock: Dead stock doesn’t disappear—actively manage it
- Poor Organization: Messy warehouses lead to lost items and inefficiency
- No Regular Audits: Records diverge from reality without physical verification
- Mixing Personal and Business Stock: Keep clear separation for accurate tracking
- Not Training Staff: Everyone handling stock should understand the system
Inventory Management Software Features
When evaluating inventory software for your Pakistani business, look for:
- Real-Time Stock Updates: Know current levels instantly
- Low Stock Alerts: Automatic notifications before stockouts
- Barcode/QR Support: Speed up receiving and dispatching
- Purchase Order Management: Track orders from creation to receiving
- Inventory Reports: Stock valuation, movement analysis, aging reports
- Integration with Accounting: Automatic cost of goods sold calculations
- Multi-Location Support: For businesses with multiple godowns/shops
Frequently Asked Questions
What is the best inventory management method for small businesses?
How often should I do physical stock counts?
What is safety stock and how do I calculate it?
How do I calculate inventory turnover ratio?
When should I switch from Excel to inventory software?
What is ABC analysis in inventory?
Conclusion
Effective inventory management is the difference between a struggling business and a thriving one. For Pakistani SMEs operating in competitive markets with thin margins, getting inventory right isn’t optional—it’s essential.
Start by understanding your current situation: What’s your turnover? Where’s dead stock hiding? What’s causing stockouts? Then implement systematic improvements—proper categorization, calculated reorder points, regular audits, and eventually, proper software.
The businesses that master inventory management free up capital, satisfy more customers, and ultimately, earn more profit. Ready to optimize your inventory? Try HysabOne’s inventory management features designed for Pakistani businesses.