From a consumer's standpoint, when we think about inventory the only real question is whether or not an item is in stock. If the answer is "no," then we want to know why.

From a retailer's standpoint, however, it is a much more complicated process. Not only do businesses need to pay attention to what items are being sold and replenish them quickly, but they also need to predict future trends to make sure they are able to have the right items on the shelves at all times. When this is done wrong, the results can be dramatic for businesses.

A recent article from The Motley Fool profiled the department store Dillard's. Back in November, the company reported a large year-over-year increase in inventory. While some experts were puzzled by the move, Dillard's executives were not concerned and predicted it would been needed to support increased sales.

Unfortunately for the business leaders, that did not happen as the holiday sales numbers did not live up to projections. Instead, "aging inventory" went out of season and the company was forced to have high markdowns to clear the merchandise that otherwise would have sat on the shelves or in the back or house. Overall, its gross margin dropped by 55 basis points in Q4.

According to the article, the general rule is that inventory should not increase faster than sales. Dillard's sales by quarter last year rose at 1 percent in each when compared to the year before. However, in Q3 the inventory rose 6 percent. That is a recipe for disaster.

Merchants need to make sure they have the right inventory management software in place at all times.