Knowledgebase
How to configure the system inventory options in Magento
To configure the system inventory settings, log in to the admin panel of your Magento and go to System>Configuration>Inventory button in the Catalog section on the left. There are two panels with inventory settings: Stock Options and Product Stock Options.
From the respective options in the Stock Options panel you can select whether the stock of a product should be decreased when that product is ordered (it's decreased by default), and you can choose whether the items of canceled orders should be returned to stock (by default, they are returned). With the option Display Out of Stock Products you can choose whether out of stock products should be visible on the frontend or not. The option Only X left Threshold is set to 0 which means it's disabled. If you put a number for that option, when the stock of a product drops as low as that number a message will be displayed on the product details page of that product informing the customer about the quantity that's left in stock.
In the Product Stock Options panel there are options for managing the stock, allowing backorders, setting a maximum and minimum allowed quantity, etc. By default, the Manage Stock option is enabled and so you can specify the number of units per product, the stock is decreased when orders are placed, etc. The Backorders option is disabled by default. You can enable backorders by setting it to either Allow Qty Below 0 or to Allow Qty Below 0 and Notify Customer. In both cases backorders will be allowed but with Allow Qty Below 0 and Notify Customer customers will also be notified on the shopping cart page that the product will be backordered. If a product can be backordered you have to make sure that when it's quantity reaches zero its Stock Availability option is set to In Stock; if it's set to Out of Stock customers will not be able to buy it even though it can be backordered.
From the option Maximum Quantity Allowed in Shopping Cart you can set the maximum number of units per product that customers can order. With the option Minimum Qty Allowed in Shopping Cart you can set the minimum number of units per product that customers are required to purchase; in this case, unlike the option for the maximum quantity, you can set a different minimum quantity for each customer group. By default, a product automatically becomes out of stock when it's quantity drops to 0; if you want to change that to a different number, you can do it from the option Qty for Item's Status to Become Out of Stock. If you want to be notified when the stock of products reaches a particular number, you can set that number with the option Notify for Quantity Below. In addition to this you also need to go to Catalog menu>Manage Products in the admin panel, and use the link Notify Low Stock RSS that's on the page to subscribe.
From the option Enable Qty Increments you can enable increments. If you enable that option, another field will appear in which you can type the number for the increments (for example, if you type 3, customers will only be allowed to purchase 3, 6, 9, etc., units of a product). If you want the items from orders that you refund to be returned to stock, set the option Automatically Return Credit Memo Item to Stock to Yes.
The options in the Product Stock Options panel affect all products, but from the inventory settings of each product you can set its own values for most of the system settings.
For screenshots and more details check out the tutorial on how to manage the system inventory settings in Magento.