15 Inventory Management Techniques & How They Enable Effective Inventory Management
Inventory management is the foundation of a successful retail business, though selecting the right inventory management techniques for your brand can feel like a tall order. With that said, inventory management is only as powerful as the way you use it. That’s why it’s so important to choose the tools and processes that best suit your needs, and that address whatever operational issues you might be facing. Using a combination of inventory management techniques, your ecommerce company can gain better control over its stock levels, minimize its holding costs, and prioritize its most valuable SKUs for greater profitability.
What are inventory management techniques?
Simply put, inventory management is the process of tracking inventory throughout the supply chain, from manufacturing all the way to fulfillment. Inventory management techniques, then, are the tools that help automate and streamline this process to enhance the effectiveness of your management as a whole. Leveraging different techniques allows business owners to make sure they always have the right amount of inventory available, and provides useful insights into safety stock, product replenishment, quality control, and more.
15 inventory management techniques & their business impact
1. ABC analysis to help with prioritization
ABC analysis is an inventory categorization technique that divides items into three groups, so you can prioritize products based on their annual consumption value and impact on inventory costs. These groups include: (1) A-inventory: the most valuable products, with the largest contribution to profits; (2) B-inventory: falling between the most valuable and least valuable products; (3) C-inventory: account for the small transactions that are vital to collective profits.
Using ABC analysis, you can gain better inventory control over high-value items, implement strategic pricing, optimize inventory turnover, and improve cashflow at the same time.
2. Minimum order quantity (MOQ) to increase cost efficiency
Minimum order quantity (MOQ) is the smallest amount of set stock a given supplier is willing to sell. If your store is unable to purchase the MOQ of a product, it’s rather unlikely the supplier will sell it to you. Inventory that costs more to produce typically has a smaller MOQ, in comparison to cheaper items that are easier (and more cost-effective) to make. Minimum order quantities allow suppliers to increase their profits while also getting rid of inventory at a faster rate.
3. Economic order quantity (EOQ) to optimize inventory unit cost
Economic order quantity (EOQ) is the optimal order quantity a company should purchase to meet demand and minimize expenses. This ideal amount of inventory can be found manually using the economic order quantity formula, or with the help of an automated EOQ calculator. In either case, understanding your EOQ can optimize inventory unit costs, as well as reduce warehousing fees, prevent overstock (or stockout) situations, and support accurate forecasting.
4. Just in time inventory management (JIT) to reduce holding costs
Just-in-time (JIT) inventory management aligns orders from suppliers with applicable production schedules. The idea behind the JIT approach is to keep as little inventory on hand as possible, meaning you don’t stockpile SKUs or raw materials ‘just in case.’ Instead, you simply reorder products to replace the order quantity you’ve already sold, which ultimately helps businesses reduce their holding costs, avoid excess inventory, and keep their products fresh.
5. FIFO & LIFO to keep inventory moving
FIFO and LIFO can each be used to determine the cost of your inventory. FIFO (First-in, First-out) is when the assets that are acquired first are also sold, used, or disposed of first — whereas LIFO (Last-in, First-out) assumes the last unit to arrive (i.e. new inventory) has priority. While FIFO is by and large the preferred way to keep inventory levels fresh, LIFO does a good job of preventing perishable inventory from going bad (so no profits are lost on spoiled items).
6. Safety stock to prevent stockouts
Safety stock is the extra inventory a company orders that goes beyond (i.e. slightly exceeds) its expected demand. Although inventory forecasting has become incredibly precise, the safety stock metric offers additional protection against fluctuations in seasonality and consumer demand, and it dramatically limits stockouts, as well. By allocating safety stock among your warehouses, you’ll feel confident you’re ready to handle customer orders at any volume.
7. Set the right reorder point to ensure reliable stock levels
The reorder point (ROP) is the minimum number of units of an item you need in stock to prevent stockouts and ensure order fulfillment. Once inventory levels reach the reorder point, this triggers the replenishment process to reorder that particular item. The ROP determines how much safety stock a business should have as a buffer, and helps maintain stock levels so they can always meet demand (without storing too much and impacting your bottom line).
8. Bulk shipments to meet high demand
Bulk shipments is a strategy where inventory is palletized so you can ship more goods all at once. Bulk shipping transports products in large quantities that are not packed, but loaded directly into a vessel; more succinctly, products are sent without any protective packaging, and the object that’s transporting them (like the hold of a ship) acts as the container. Shipping in bulk can offer huge cost savings and faster product movement to help meet high demand.
9. Regular inventory audits to keep track of inventory levels
An inventory audit compares your actual inventory levels to your financial records, as a way to guarantee accurate inventory accounting. Sometimes, inventory audits are as simple as performing a physical inventory count of your existing stock, while other times they might involve a third-party auditor. Regular audits are a vital component of your inventory management strategy, as they identify shrinkage and ensure you have the correct inventory levels at all times.
10. Batch tracking for quality control
Batch tracking allows brands to group and monitor stock that shares similar characteristics. A ‘batch’ is a particular set of goods produced together from the same raw materials (like a batch of milk, for example). This technique is the best way to see where your goods came from, where they went, what quantity was shipped, and when they’ll be expiring. In other words, batch tracking systems streamline product traceability and maintain quality control with ease.
11. Perpetual inventory management
A perpetual inventory system works by continuously updating your inventory counts as goods are both bought and sold. This management style is especially important for multichannel retailers who are leveraging online marketplaces, Shopify stores, or even brick and mortar POS. Perpetual inventory management provides an efficient way to keep track of inventory at any point in the year, and can save you from experiencing unfortunate stockout or overstock events.
12. Demand forecasting for healthy stock levels
Demand forecasting utilizes historical sales data to formulate an estimate or prediction of future customer demand. In essence, forecasting anticipates the goods and services your company expects customers to purchase in the coming weeks, months, and so on. Forecasting tools give you a holistic view into your entire inventory, so you can optimize storage capacity, maintain healthy stock levels, and avoid increased (or unnecessary) holding and carrying costs.
13. Dropshipping to cut down on startup costs
Dropshipping is a fulfillment method in which a retailer doesn’t keep the products it sells in stock. When a store makes a sale, rather than picking and packing the item from their own inventory, they purchase it from a third-party supplier and then have it shipped to the consumer; the seller never touches the product in the transaction. Ecommerce merchants use dropshipping to cut down on their startup costs, offer a broad product catalog, and develop greater scalability.
14. Bundling multiple SKUs to move dead stock
Product bundling occurs when several individual goods are sold together as a combined package, and at a lower price than if they were sold individually. Common examples of product bundles are value meals at restaurants, beach kits, or shampoo and conditioner sets. Bundling multiple SKUs into a single offer is a highly effective pricing strategy, in addition to being a compelling way to upsell and cross-sell a range of products (including your dead stock items).
15. Consignment inventory for lowered inventory costs
Consignment inventory happens when a consigner (a vendor or wholesaler) agrees to give a consignee (like a consignment store) their goods without the consignee having to pay for the inventory upfront. In this scenario, the consigner still owns the goods, and the consignee pays for them only when they sell. The benefits to this model include lowered inventory costs, reduced risk for new sales channels, and a stronger supplier/retailer relationship.
How Skubana enabled effective inventory management through automation
How Specialist ID beat their order ceiling
Specialist ID is a leading purveyor of photo ID badge holders and security-related accessories. But fifteen years into business, they’d reached a brick wall; they were passing over $5 million in gross sales, but still operating (in many ways) like they had when they were pulling in only $100,000 a year. With the same old inventory management systems in place, Specialist ID’s growth was significantly hindered — that is, until they called on the help of Skubana.
Skubana’s innovative inventory management software enabled Specialist ID to optimize all of their selling channels and beat their order ceiling, thanks to out-of-the-box features like automated demand forecasting and reorder points. In the words of Specialist ID co-founder and president, Patrick Barnhill: “We were at a point where we could not grow at all, and then when we got on Skubana, we went and doubled the company without any pain. And if we were able to grow sales, we could take 10X from here and still keep scaling, and it wouldn't be stressful.”
How LastObject expanded sales channels
LastObject’s mission is to create sustainable alternatives to single-use plastic products. This Danish company’s Kickstarter launched in 2019, highlighting two new products: the LastSwab and the LastTissue. After raising nearly $800,000 from this crowdfunding, LastObject started shipping their products worldwide. But handling all the taxes and legal issues involved in international shipping proved to be a huge, time-consuming challenge for this small business.
LastObject needed an ERP that could manage orders across dozens of platforms — including sites like Shopify and eBay. By partnering with Skubana, LastObject secured a reliable operating system that could manage multichannel sales (including marketplaces), and offer seamless, worldwide fulfillment. Skubana’s perpetual inventory management software easily integrated with many of LastObject’s existing processes, allowing them to keep up with regular inventory audits and gain a comprehensive view of their sales channel activity.
How Boldify increased profits with multi-warehouse integrations
A few years ago, Boldify was preparing to scale their beauty and personal care brand, so they went looking for an intuitive inventory and order management solution. They needed a platform that could plug into their Amazon and Shopify channels in real-time, and future-proof inventory for their wholesale channels. Thankfully, Boldify found Skubana, who handled their exact inventory dilemmas with pre-built integrations that worked seamlessly for their ongoing growth.
As Luciana Fistarol (Boldify Operations Manager) put it: "Skubana is able to interpret data coming from Shopify, Amazon, and three different 3PLs, and quickly change order rules. We're changing all the time — for example, which warehouse will fulfill which item. Without Skubana, I would have to work with all of the 3PLs individually; but with Skubana, I just click and it changes." With these multi-warehouse integrations and advanced automations to increase cost efficiency, Skubana has steered Boldify on the path of sustainable, profitable growth.
Frequently Asked Questions
What are the most commonly used inventory management techniques?
Inventory management techniques are the tools that help automate and streamline your inventory management process as a whole. Some of the most commonly used inventory management techniques among modern ecommerce merchants are ABC analysis, FIFO, LIFO, batch tracking, bulk shipments, bundling, and dropshipping.
What challenges do inventory management techniques solve?
The main challenges of inventory management include having too much available stock and not being able to sell it, not having enough inventory to fulfill customer orders, and not understanding what items you have in inventory and/or where they are located. But with the right inventory management techniques, your company can keep its products moving, ensure reliable stock levels, prevent stockout situations, and so much more.
Can I use more than one inventory management technique?
When selecting an inventory management technique, it’s important to choose the tools and processes that suit your business needs, and that address whatever operational issues you might be facing. At times, using a combination of inventory management techniques may be in your company’s best interest, like using ABC analysis in conjunction with product bundling.
Matthew Rickerby is the Director of Marketing at Skubana, the leading solution for multichannel, multi-warehouse D2C brands. For the past ten years, he’s covered e-commerce topics ranging from SEO to supply chain management.