17 Best Inventory Management Techniques

17 Best Inventory Management Techniques

Inventory management is the process of ordering, logging the inventory, storing it, and selling it throughout the supply chain. It is essential if you want the correct mix of goods that you can sell to your clients. There are many Inventory management techniques that will aid you in managing your inventory and running an efficient business. In this article, we’ll go over the top 17 techniques.

What is Inventory Management?

Inventory management is an important function of the supply chain which tracks inventory from manufacturer until the point of sale. This involves forecasting demand, sourcing raw materials or products and storing inventory, analyzing sales, and then reordering if the inventory level is at a low. The purpose of inventory management is to ensure that you have enough products to meet demands while also reducing the expenses associated with inventory.

Why is Inventory Management Essential?

An effective inventory management system is crucial since it will help boost profits, lower costs and enhance customer service. Particularly, the management of inventory is essential because of these reasons

  • Enhances Revenue: Good inventory management will ensure that you always have the appropriate items in stock at all times which allows you to satisfy the demands of customers. This will help you prevent supply shortages that can reduce revenues.
  • Reduces cost: In general, the longer you store inventory the higher it will cost because of the cost of holding as well as handling and other costs that result from obsolete or damaged inventory. An efficient inventory management strategy can reduce these expenses by reducing the amount of inventory you have.
  • Enhances Customer Service: Having the proper stock to satisfy customer demands will result in happier customers and fewer complaints.

The advantages of managing inventory are many. If you’re doing it correctly you’ll be able to improve sales, cut costs, and provide better service to your customers. With this in mind, let’s have some time to look at the top strategies for managing your inventory. These will aid you in learning how to organize your inventory more efficiently.

Also read: How to Improve Warehouse Sustainability

17 Essential Inventory Management Techniques

There are a variety of methods for managing inventory every one with its advantages and disadvantages. When deciding on the most effective method for your needs, you need to think about the type of product you sell what size your company and your budget overall, and the degree of accuracy required to manage a successful supply chain.

Here are the best 17 inventory management strategies and the reasons why they’re crucial:

1. Demand Forecasting

Demand forecasting refers to the process of accurately forecasting the potential demand in the near future for your goods and is something that every business should be doing. If you are able to forecast demand correctly then you can ensure that you have the proper amount of stocks available to meet the demands of customers.

Some of the most effective ways to forecast demand include the use of a moving average, exponential smoothing time series analysis, and forecasting based on judgment. The most effective method is dependent on the particulars of your company. No matter which method you decide to use, it’s important to remember that forecasting demand cannot be precise and could result in shortages or stockouts.

2. ABC Analysis

ABC analysis is a technique for managing inventory that ranks inventory items according to their importance to your company. This is especially useful when businesses need to determine the items they will order and keep, which allows for greater oversight of specific inventory items. When performing the ABC analysis, break down the inventory into three groups:

  • A-Items: The most significant items that makeup 20% of inventory items, but can make up to 80 percent of the value of inventory.
  • B-Items: Items of moderate importance to the company that make up 30% of inventory items and around 15 percent of the value of inventory.
  • C-Items: the least important items which account for 50 percent of inventory, but just 5 percent of the value of inventory.

3. Safety Stock

The term “safety stock” refers to the amount of inventory you keep in reserve to meet unexpected demands or delays with future deliveries. Safety stock is crucial for avoiding stockouts. The safety stock is determined according to the fluctuation in demand as well as the delivery lead time and the cost of stockouts, and the expense of keeping stocks.

4. Reorder Points

Reorder points are the levels of inventory that new orders must be placed. These points pertain to particular inventory items and are calculated based on the average daily use, the lead time for orders, and the amount of safe stocks you have available. Reorder points are an important element of inventory management and will help to avoid stock shortages.

5. PAR Levels

Automatic replenishment (PAR) levels are a way of tracking the minimum and maximum levels of inventory for each inventory item. When inventory reaches the minimum amount an order for a new one should be made. However, the inventory should not exceed the limit.

The PAR level technique for inventory management will prevent overstocking and stockouts. It is the best option for businesses with perishable goods, such as restaurants. The PAR levels are determined by the average daily demand for an item as well as the lead time and quantity of stock that is considered safe.

6. Just-in-Time (JIT) Inventory

JIT (JIT) inventory can be described as a method of management that helps reduce the amount of inventory that you have available by only placing orders and delivering items precisely when you require to use them. In order to achieve this it is necessary to monitor the level of inventory and coordinate with suppliers. While JIT may reduce costs for inventory but it also can lead to stockouts and isn’t a good choice for every business.

Also read: 5 Best eCommerce Platforms for Dropshipping

7. Dropshipping

Dropshipping is a technique for managing inventory that doesn’t require sellers in order to maintain inventory on hand. In this case, the vendor contracts with a supplier that will deliver the product directly to the purchaser at the time a purchase is made.

It is popular with online companies and is ideal for reducing expenses for inventory and early expenditures, but also sellers have less control. It can also cause lower profits based on dropshipping fees.

8. Cross-Docking

Cross-docking involves receiving products from suppliers and immediately shipping the products to the customer without having to wait in warehouses. This can help reduce the cost of handling and storage while increasing fulfillment times. It is typically used for perishable goods. However, it requires coordination with suppliers and isn’t the best choice for businesses selling non-perishable goods or products that have little turnover.

9. Inventory Management Software

The inventory management program is an effective software for the management of supply chains that allows you to track the level of inventory, forecast demand, and make orders based on the current level. The most effective inventory management software will depend on your individual requirements, but it is something everyone should be making use of since it can help improve efficiency and decrease expenses.

10. FIFO and LIFO

First in first out (FIFO) and last in first out (LIFO) are two different methods for managing inventory that decide which inventory will be sold first and when. With FIFO you sell your oldest inventory first. On the other hand, using LIFO you sell the latest inventory first.

This FIFO method is the most popular when selling perishable items that are likely to spoil rapidly. It is the LIFO method is typically employed in sectors that have inventory costs that grow over time because it is able to better align costs with revenue and help delay taxes.

11. Consignment Inventory

Consignment inventory refers to a process by which a seller, also known as the consignor, gives items to a retailer–known as a consignee. However, the latter retains ownership of the items until they are actually sold. The advantage of this is the fact that the consignor does not actually pay for the merchandise until they’re sold, and the consignor is accountable for the cost of shipping.

However, the consignee must pay any cost associated with holding and is accountable for the sale of the items, meaning they may be liable for losses if they fail to sell.

12. Economic Order Quantity (EOQ)

Economic order quantity (EOQ) is an inventory management strategy that assists in determining the best quantity of an order that reduces overall inventory costs. The EOQ calculation considers the annual demand, the ordering cost, and the cost of holding the particular product to determine the best quantity. This method reduces costs while ensuring that the stock is available to meet customers’ demands.

13. Perpetual Inventory Management

The term “perpetual” refers to the practice of constantly updating inventory levels when products are purchased or delivered. Continuous inventory management gives the most precise view of inventory levels. It also improves the turnover of inventory and prevents stockouts of inventory.

However, it is more costly, time-consuming, and complicated than other techniques for managing inventory including regular inventory control. In the case of periodic methods, the levels of stock are only regularly updated, rather than constantly.

14. Minimum Order Quantity (MOQ)

Minimum Order Quantity (MOQ) is the minimum quantity of inventory to be purchased from a supplier at the same time. MOQs are generally determined by the supplier, so they are able to reduce the cost of shipping inventory. While they benefit the supplier, they limit the flexibility of ordering for sellers and may increase the cost when you have to purchase more than what you need.

Also read: Order Management: What It is, Process and Importance

15. Six Sigma and Lean Six Sigma

Six Sigma is an inventory management method that is focused on reducing the number of errors and variations in the process of managing inventory. In Six Sigma, you use techniques that are based on data, like statistical analysis to pinpoint and eliminate issues within your process. For instance, you could make use of it to better manage and track the levels of inventory.

Lean Six Sigma combines the Six Sigma methodology with lean manufacturing to improve the efficiency of the process of managing inventory. You can, for instance, employ it to improve the efficiency of your processes by removing unnecessary steps.

16. Bulk Shipping

Bulk shipping is the practice of buying and shipping inventory in huge quantities. This reduces the shipping cost and may bring reductions from vendors. However, the bulk shipping process can lead to overstocking and could be harmful in the case of selling perishable goods.

17. Batch Tracking

Batch tracking is an inventory management technique that helps companies track groups of items that are similar throughout their supply chains. The most common use of batch tracking is employed for inventory items that are perishable and items that are able to be remembered.

Companies that use batch tracking usually utilize RFID tags or barcodes to track products. This can be particularly beneficial for compliance and quality control for products with expiration dates.


An efficient inventory management strategy is vital for any company that purchases and sells items. There are a variety of methods for managing inventory that could aid in increasing revenue, reducing costs, and increasing customer satisfaction. In the end, the most effective methods will depend on the specifics of your business. It is important to try different strategies to find the right combination for your needs.

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