Effective inventory management is a cornerstone of any successful store, regardless of size or industry. A well-managed inventory ensures optimal product availability, reduces costs related to excess inventory and improves the customer experience. However, there are so many proven inventory management techniques that it can be difficult to choose. How do you know which one is the most suitable for your store?

There are many techniques for managing inventory. Here are a few :

  1. Point of sale software
  2. ABC analysis
  3. Just-in-time (JIT) inventory
  4. Economic order quantity (EOQ)
  5. Safety stock
  6. Vendor managed inventory (VMI)
  7. Perpetual inventory management
  8. Periodic inventory system
  9. Batch tracking
  10. Demand forecasting
  11. Cross-docking
  12. Use of technology
  13. First in, first out (FIFO)
  14. Dropshipping
  15. Dead stock management
  16. Cycle counting
  17. Consignment inventory

Each of these inventory management techniques has its advantages. The selection of the method depends on the retailer’s personality, priorities and industry.

1. Point of Sale Software

A cloud-based point of sale software is very useful for inventory management, especially for multi-store managers. A POS software, like Alice POS, enables real-time inventory tracking across multiple locations, including both physical stores and online stores. Alice POS even gives a warning when stocks will soon run out. It allows you to have all the information related to sales and inventory in one place.

Find out why a POS software is the best way to manage inventory here.

Pros of a Point of Sale Software

  • Real-time inventory management
  • Easier inventory process
  • Saving time and money
  • The reliability of the software
  • Reduced risk of human mistakes
  • Better customer service
  • Overview of sales trends
  • Better demand forecasting
  • Inventory optimization
  • Better security and data protection
  • Centralization of all inventory-related information
  • The software generates reports on all aspects of your store
  • Faster sales
  • Integrations (accounting, e-commerce, loyalty programs, gift cards, etc.)
  • Efficient management of price changes and promotion changes
  • Visibility of all information across the entire network
  • Access management (protects confidential information better)
  • Reduced risk of data loss
  • Inventory synchronization

 A pos software is very useful to have on top of other inventory management techniques. A powerful POS software has many features that go beyond inventory management. It also simplifies life enormously. For example, Alice POS allows you to make sales, repairs, rentals and much more. Request your free demo of Alice POS here.

2. ABC Analysis

The ABC analysis method involves categorizing products into 3 groups: Group A, Group B and Group C. This classification is based on the value and importance of the products.

Group A: These are the most important and profitable products, the products that customers buy the most. These are your most valuable products, which you must take care of. It is a part of your inventory that generates a large part of your turnover. These products are your #1 priority in managing your inventory and they should never be out of stock. Control of these products must therefore be strict.

Group B: These are intermediate products with moderate importance. They generate a lesser part of your turnover than group A, but more than group C. Stocking these products costs less than for group A and the level of control is medium.

Group C: These are the products that sell the least and generate a small part of your turnover. These are products with the lowest value. They require a simple level of control and their storage is the least expensive.

Pros of ABC Analysis

  • Helps with prioritization 
  • More control over the products with the greatest value to your store
  • Allows you to set strategic prices
  • Allows you to know where to focus your inventory management
  • Optimizes inventory turnover
  • Improves cash flow
  • More efficient use of resources, allows resources to be allocated to the places that need them most
  • More accurate demand forecasting
  • Fewer stockouts
  • Having less B and C products in inventory means having more A products and increasing the safety stocks of the best-selling products
  • Improved customer satisfaction
  • Improved structuring of your product range

3. Just-In-Time (JIT) Inventory

The JIT inventory management technique consists of receiving products just in time for production or sale. Companies that use this method order just enough inventory to meet current demand. They reorder only to replace sold inventory, before inventory runs out. With this method, stores do not keep safety stocks.

This method is less reliable than other inventory management techniques, difficult to implement and maintain, and makes it difficult to manage contingencies. This method requires exceptional and very precise planning and close collaboration with suppliers.

Pros of JIT Inventory

  • Reduced storage costs
  • Increase store efficiency and profitability
  • Avoid excess inventory
  • Allows you to keep newer products
  • Less money spent on raw materials and products for sale

4. Economic Order Quantity (EOQ)

Economic order quantity (EOQ) is a model used to determine the optimal amount of inventory to order while minimizing inventory costs. It is designed to minimize expenses by purchasing the greatest number of multiple products and minimizing the need to reorder products individually.

This ideal quantity is most often calculated with the Wilson formula, but there are also other formulas more suited to retail.

Pros of the EOQ Method

  • Minimizes costs of ordering, receiving and inventory keeping
  • Helps prevent excess inventory and stockouts
  • Efficient if demand, unit purchase price, lead times and ordering costs are fixed and consistent throughout the year

Minimum Order Quantity (MOQ)

The minimum order quantity is the smallest number of units a company is willing to sell. This has an impact on retailers, because if the latter is unable to buy the MOQ from one supplier, he will have to find another one. Suppliers have a minimum order quantity to increase their profits and get rid of inventory quickly.

5. Safety Stock

Safety stock is the additional inventory that businesses order beyond projected demand. It is not recommended to order too much stock, but a safety stock is very useful in case of an emergency. For example, if demand increases, an item sells even better than expected, merchandise is damaged or there is a disruption in the supply chain, you will not be caught off guard.

Pros of Safety Stock

  • Helps avoid stock shortages
  • Protects against seasonal changes and fluctuating demand
  • Gives you more confidence in having the capabilities to process customer orders at any volume
  • Allows you to be prepared for any turn of events

6. Vendor Managed Inventory (VMI)

The VMI method is a collaborative approach where the supplier takes care of the inventory levels of its customers, at the store’s location. The supplier has access to real-time inventory data and takes responsibility for replenishment when the inventory levels reach a predetermined threshold.

Pros of VMI

  • Reduced warehousing costs
  • Relieves the retailer of the responsibility of managing inventory, allowing them to put their energy and resources elsewhere
  • Streamlined inventory processes
  • Fosters better communication between supplier and retailer
  • Better visibility of inventory data for retailer and supplier
  • Less risk of stockouts

7. Perpetual Inventory Management

The perpetual inventory method involves implementing a system to track inventory in real time. This system may include a point of sale software. This kind of system updates inventory levels as products are bought and sold.

This inventory management technique is particularly useful for businesses with multiple physical stores and an online presence. Indeed, it updates the inventory in real time, capturing sales from both online and in-store transactions.

How to calculate physical inventory? Check it out here!

Pros of a Perpetual Inventory System

  • Full stock control
  • Complete product traceability
  • Reduces the risk of errors
  • Reduces the risk of stockout and overstock
  • Helps tremendously with inventory management for retailers with an omnichannel commerce strategy who have more than one store

8. Periodic Inventory System

With the periodic inventory method, the retailer counts physical inventory at regular intervals. After this count, stores update inventory records and calculate the cost of goods sold. To find out how often companies take inventory, click here.

Small businesses are the main users of this inventory management technique since it is well suited for small businesses with a small range of products. Most businesses use the perpetual inventory method.

Pros of the Periodic Inventory Method

  • Easy and inexpensive implementation
  • Requires few human and financial resources
  • Less technically complex

9. Batch Tracking

Batch tracking makes it possible to trace products belonging to specific batches. A batch is a group of products from the same production run. Products from the same batch have been manufactured with the same raw materials and under the same conditions and have similar characteristics.

Batch tracking is particularly useful in the food and pharmaceutical industries. This method makes it possible to know where the products come from, where they go, the quantity shipped and the expiration date.

Pros of Batch Tracking

  • Better quality control
  • Product traceability
  • Helps to manage a product recall

10. Demand Forecasting

Accurate demand forecasting helps maintain optimal inventory levels. By analyzing several factors (sales history, market trends), the store can anticipate fluctuations in demand and adjust their inventory accordingly.

Pros of Sales Forecasting

  • Helps determine the minimum quantity of a product you should have at all times
  • Allows you to optimize inventory
  • Allows you to keep a decent level of inventory
  • Avoid unnecessary storage and transportation costs

11. Cross-Docking

Cross-docking is a logistics technique that involves promptly dispatching newly arrived goods. Products do not go into long-term storage.

Pros of Cross-Docking

  • Reduces handling and storage costs and time
  • Fast deliveries
  • Fewer errors (because fewer manipulations)
  • Better responsiveness to changes in demand

12. Use of Technology

We have already mentioned the need for a point of sale software with inventory management, but other technologies are very useful for managing inventory as well.

Click here to learn more about inventory management systems.

A good inventory management software facilitates all processes related to inventory management. If the software can integrate with your other business tools (POS, accounting software, vendor ordering platforms) and into your omnichannel strategy, even better!

Pros of Inventory Management Software and Other Technologies to Automate Processes

  • Makes inventory management easier
  • Saves time
  • Saves money
  • Reduces the risk of overselling (especially with multistores and an online store)
  • Better accessibility to information
  • Reduced risk of human errors
  • Improves inventory accuracy
  • Helps avoid surpluses and stock shortages

13. First in, First out (FIFO)

The first-in, first-out method (FIFO) is based on the principle that the oldest inventory should be sold, used or discarded first. The products are therefore sold in the order in which the store got them.

This method is used by many stores to maintain a constant stock rotation. This inventory management technique is also very practical for a store that sells perishable products.

Pros of the FIFO Method

  • Helps maintain stock movement
  • Reduces the risk of obsolescence or expired products
  • Keeps inventory as new as possible
  • Better reflects current inventory value
  • Provides a true picture of inventory costs
  • Reduces the impact of inflation (assuming that the costs of products purchased more recently are higher than the costs of products purchased longer ago)

Last in, First out (LIFO) Method

The last-in, first-out method involves using, selling, or discarding the newest products first. This method is more useful from a financial point of view. It does not work in practice. Although this method theoretically allows you to pay less taxes, this method causes the oldest products to expire and become unsaleable. This is not a good way to manage inventory, as older products eventually become worthless if they are constantly being discarded in favor of newer ones.

14. Dropshipping

Dropshipping is a business model that involves taking orders from customers, but it is the supplier who ships the products directly to them. The product therefore never arrives at the store that sells it. For the retailer, this eliminates the need to store inventory.

Pros of Dropshipping

  • No storage costs
  • Very useful for products that are rarely ordered or that you cannot store in your warehouse
  • Allows you to offer a greater variety of products
  • Helps reduce start-up costs, especially for entrepreneurs who are initially focused on online sales.

15. Dead Stock Management

This technique involves identifying and dealing with obsolete or slow-moving inventory. Strategies such as discounts, promotions, or clearance can be used to eliminate dead stock and free up storage space.

How do you maintain a dead stock register in retail? Find out here.

Pros of Dead Stock Management

  • Cost reduction
  • Increases the cash flow
  • Greater inventory control
  • Optimization of storage space
  • Make better decisions about sourcing and marketing

16. Cycle Counting

Cycle counting involves taking inventory of specific products or locations on a periodic basis. With this method, a retailer takes inventory of a different part of the stock each month, for example. This ensures that at the end of a cycle, all the inventory will have been done.

With this method, companies confirm that the physical inventory matches the accounts in the books or the system.

Pros of Cycle Counting

  • Avoids having to do a complete inventory at once
  • Helps keep inventory records up to date
  • More accurate inventory
  • Disruptions to store operations minimized (avoids closing the store for inventory)
  • Less money and time needed

17. Consignment Inventory

Consignment is a business model where a retailer (consignee) contracts with a seller or shipper (consignor) to sell the latter’s merchandise while keeping a portion of the profit made. In this scenario, the seller or shipper remains the owner of the goods. The retailer only pays when the products are sold.

Learn more about the differences between traditional inventory and consignment inventory.

Pros of Consignment Inventory

  • Reduced inventory costs
  • Diversification of the product offer without having to invest in advance in the purchase of the goods
  • Reduced risk (risk is shared between seller and retailer)

Which Method to Choose?

It’s good to know all of these inventory management techniques, but which one should a retailer choose? It depends on their priorities!

For example, in the food industry, it is essential to track batches and use the first-in, first-out method. A more anxious store owner might make the decision to have safety stock. If someone wants to establish a prioritization scale when it comes to inventory management, ABC analysis is the way to go. A more daring retailer who wants to make sure they never have overstocks can choose the just-in-time method. Dropshipping or consignment inventory are methods to consider if the priority is to reduce inventory costs. If a retailer does not want to have to manage inventory on top of everything else, VMI is the solution.

Regardless of your personality and industry, it is a great idea to have good POS software with inventory management, integrate technology into your inventory management, forecast demand and make your inventory frequently.

With the 17 inventory management techniques we’ve explored, you now have a diverse range of approaches to optimize your operations. Whichever method you choose, you will have to experiment and adjust to achieve excellence and better satisfy your customers.

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