19 Top Effective Inventory Management Techniques and Best Practices

19 Top Effective Inventory Management Techniques and Best Practices

Techniques of Inventory Management

Implementing effective inventory management is one of the biggest challenges facing your business.

Fail to employ the right inventory management techniques, and your business runs the risk of losing customers, losing money, and losing market share to your competitors.

Overstocks, backorders, improperly filled orders, and lost shipments are a few of the issues companies with poor inventory management practices deal with daily. Each can have a dramatic impact on your bottom line.

This is why building a robust inventory management program is so important. By utilizing best practices and focusing on creating an inventory management set-up that meets your business’s specific needs, you’ll not only have a better handle on your warehouse, supply chain, and shipping, but you’ll also keep your customers happy.

Today, we’ll walk you through 13 inventory management techniques that will help you ensure your warehouse operations run smoothly, prevent you from wasting money, and guarantee your customers are happy.

Benefits of Effective Inventory Management

Here are a few of the key ways more effective inventory management techniques can help you improve your operation:

  • Inventory management techniques save you money

We start with the most obvious benefit: better inventory management can save you money. It can help you spend less in a number of ways. 

If you deal with products with expiration dates, better inventory management ensures you rotate stock efficiently. This will help reduce losses on items that have gone past their sell-by date. 

It can also help by alerting you to issues with shrink. Many times, companies don’t have a firm understanding of how much of their inventory is walking out the door without being purchased. Inventory management can help you discover if you have a shrink issue, and that’s the first step to eliminating that problem.

  • Inventory management techniques improve cash flow

If you don’t have a firm understanding of how quickly products sell, it’s easy to order incorrect quantities. This will lead to excess carrying and storage costs for extra items that languish on shelves in your warehouse and lost revenue from missed sales opportunities if you don’t keep enough stock of popular items on hand. 

By forecasting and ordering according to your inventory management tools, you can increase your cash flow by keeping the proper amount of inventory on hand to meet demand at all times. 

  • Inventory management techniques organize warehouse management

Taking the previous point a step further, improved inventory management techniques will allow you to better utilize your warehouse space. By ordering proper stock levels, you’ll be able to allocate space to items that will sell as opposed to wasting space on overstock. 

  • Inventory management techniques improve customer retention

And finally, you’ll be able to improve your customer retention rates when you implement some of the key inventory management techniques we’ve outlined today. If you have the items customers want, when they want them, those customers are far more likely to come back to you in the future. 

Companies spend small fortunes luring in new customers, but don’t forget about the ones you already have. They’re a valuable source of revenue and you won’t have to spend as much money upfront bringing them back into the fold.

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9 Techniques for Inventory Management

1. Prioritize with ABC Inventory Methods

If you sell a wide range of products in a number of different categories, you might find that ABC inventory management techniques allow you better focus on the products that matter. 

ABC inventory breaks items down into silos — products that are high value but have low sales velocity, products with moderate value and moderate velocity, and low-value products that sell quickly. 

By breaking down items in this way, you’ll have a better understanding of how to prioritize ordering and inventory space in your warehouse or distribution center.

2. Implement Six Sigma Practices

If you’re not familiar with Six Sigma, it’s not something out of a Tom Clancy novel no matter what the name implies. 

Here’s an official definition:

Six Sigma is a quality-control methodology developed in 1986 by Motorola, Inc. The method uses a data-driven review to limit mistakes or defects in a corporate or business process. Six Sigma emphasizes cycle-time improvement while at the same time reducing manufacturing defects to a level of no more than 3.4 occurrences per million units or events. In other words, the system is a method to work faster with fewer mistakes.”

Six Sigma techniques can be applied to many warehouse processes, including picking and order shipping. Beyond that, you can also apply the methodology to your supply chain. By using this approach, you’ll maximize profits while lowering unnecessary inventory levels.

Learning Six Sigma techniques will require a bit of upfront investment in terms of time and implementation, but the return on investment is worth it. The increase in your efficiency will pay for investment in short order.

3. Embrace Lean Manufacturing

Building on the previous point, you should also consider implementing lean manufacturing processes in your warehouse. 

At its core, lean manufacturing is about eliminating waste. It aims to achieve this goal by allowing your business to learn the minimum amount of products, employees, and other key items you need to run effectively. 

By operating at this threshold, you’ll decrease waste and increase profitability. 

Streamlining your operation can have a dramatic impact on your bottom line.

4. Batch Tracking

Do you have an inventory filled with similar items? Batch tracking may make managing them easier.

With batch tracking, you’ll be able to track groups of items as one. This is especially useful if you have products that have expiration dates, recalls, defective parts, or other issues. By batching similar items, you can monitor groups rather than each individual item. 

This can save you time and effort and makes tracking large numbers of products much simpler.

5. Demand Forecasting

If you’re not using demand forecasting as part of your inventory management strategy, you’re missing out on a huge opportunity to improve your business. 

By looking at what’s selling, what isn’t, sales velocity, and other key analytic factors, you can predict future trends for your business. By understanding what might happen in the future, you can better prepare to meet demand. This allows you to maximize profits without tying your cash up with inventory that isn’t likely to sell. 

6. Practice the 80-20 Principle

The Pareto Principle, commonly referred to as the “80-20 rule” is a key way to make managing your inventory easier. 

Here, you’ll focus on the 20% of items that drive the 80% of your results, By prioritizing items and practices that produce the most return on investment (either financial or time), you’ll produce better results with less effort. 

A great deal of good inventory management involves simplifying and focusing your processes. The 80-20 rule helps you do that by allowing you to hone in on the things that bring the maximum ROI with minimal time investment.

7. Set Par Levels

Another great way to make inventory management more manageable is by setting par levels.

Par levels are the minimum amount of product you need to have in your inventory at any given time. Dipping below these levels means it’s time to order replenishment.

When it comes to setting par levels, it’s crucial to consider lead times and other potential ordering issues. If a product takes weeks to replenish, you’ll want to set your par level at a point where you’re notified to initiate a reorder well before you reach critical inventory levels.

By this same token, you should order enough new inventory to keep you at a level reasonably above the par level for the item. You don’t want to order so much that you’re sitting on extra inventory for a year or more. 

You also don’t want to order so little inventory that you need to continually reorder every few days.

By examining sales and inventory analytics, you’ll be able to find out how often an item is used or sold and develop a par level and replenishment strategy based on math.

If you use inventory management software, you can then set this number in the system so you’re alerted when levels are low. Some programs will even handle the reordering for you.

 8. Consider First In, First Out Principles

We’ve discussed the benefits of a First In, First Out (FIFO) approach to inventory management in other articles here on the site. As a reminder, this principle is one worth following for a variety of companies.

First In, First Out means that the oldest inventory is the first inventory sold. If you sell perishable products or have stock that needs rotating, this is a practical approach as it will help save you from wasting items in your inventory as it expires.

There are other benefits to the FIFO approach as well.

Utilizing First In, First Out inventory management ensures you’re not stuck with old inventory that has become obsolete while selling the newer versions first. There are tax advantages as well.

One of the keys to successfully implementing a FIFO approach involves setting up your warehouse properly.

You’ll need to design a plan that allows for stock rotation regularly. As new stock is received, it should go into the back of the warehouse while the older stock moves forward, so it’s what’s sold first.

While there are advantages to using the Last In, First Out method (for certain industries and situations), First In, First Out is more common and beneficial for a wide range of businesses.

9. Contingency Planning

No matter how well you plan, there are going to be times where things go astray.

These might be mistakes on your end or things completely beyond your control, but every business will deal with things going off the rails at some point.

A good contingency plan can help you navigate these turbulent waters and get you back on track with minimal effort.

Planning ahead for disasters can ensure you aren’t caught flat-footed. While no one can plan for everything, companies face some common recurring issues when it comes to inventory management.

  • Inventory miscalculations leading to shortages
  • Warehouse space issues when product sales spike unexpectedly
  • Oversold stock due to unforeseen sales spikes
  • Cash flow issues affecting stock levels
  • Manufacturer stock shortfalls
  • Slow selling products taking up space
  • Unexpectedly discontinued items

Having contingency plans in place for types of occurrences can not only prevent you from panicking, but it can also help you save money. Problems will arise, but you can reduce their impact by having the foresight to plan. Remember the Cub Scout motto: be prepared.

10 Best Practices for Inventory Management

 1. Use a Cloud-Based Inventory Management System

Back in the 20th century, managing inventory was often a challenge. Before the advent of computers and inventory management software, companies had to track inventory manually, which meant an increased potential for human error.

In today’s world, where companies often operate globally, the idea of manually tracking inventory is not only quaint but borderline impossible. With multiple warehouses, worldwide shipping, and global supply chains, the task of managing inventory has become more complicated than it was a few short decades ago.

This is where technology can help.

Modern inventory management software can automate huge chunks of your inventory management process. Barcode and RFID scanning eliminates human error because machines read codes on items instead of manually typing in numbers.

Beyond that, inventory management software can prevent costly problems like overstocks (which lead to additional carrying costs) or overselling (which can lead to dissatisfied customers waiting for backorders) by ensuring you always have the proper amount of stock on hand.

Inventory management can transform your entire warehousing, shipping, and ordering operations. Beyond that, cloud-based solutions mean your team can use these tools on a wide variety of devices, anywhere on the planet.

If you’re not using inventory management software, there are a wide variety of options on the market. These customizable software solutions offer tools for every kind of business and prices that will fit any budget.

 2. Keep Accurate Stock Records

If you’re using inventory management software, keeping accurate stock records is simple, as we discussed in the previous point. As items are scanned in your warehouse, shipping center, or retail locations, the inventory is updated automatically.

However, if you’re a small business, you may still be doing the bulk of your inventory management manually. In these instances, it’s vitally important to keep accurate stock records at all times.

By maintaining accurate stock records, you will always know how much of an item you have on-hand when you need to reorder, and so on.

There are multiple benefits to making sure your records are accurate. Beyond preventing running out of key items or carrying more items than you need, precise stock records also help with accounting, warehouse management, marketing, and other facets of your business.

Plus, inaccurate stock records compound over time. A minor discrepancy today can blossom into a much bigger headache down the road. Resolving inventory management issues costs you money and time too.

This is why it’s better to make good inventory management an ongoing initiative and keep accurate stock records. The daily effort will save you from major headaches in the long run.

 3. Establish Cost-Efficient Purchasing Procedures

One significant facet of inventory management is ensuring you have the right stock levels in your inventory relative to the level of demand each product generates.

Because of this, it’s important to establish procedures for determining exactly how much inventory you need to carry on an item-by-item basis.

To do this, you’ll need to consider recent historical data. A product that’s not selling well or has a downward trend in sales requires you to carry less. Armed with this knowledge, you can adjust your stocking guidelines to better meet demand. 

The same applies to popular items.

If you have items in inventory that aren’t moving at all and seem unlikely to sell ever again, it’s time to consider liquidating those items and moving forward with other products.

Inventory management software can be a major asset in all phases of this process. A good inventory management software system will show you inventory levels, sell rates, and more.

Using that information, you can then determine what levels you need to maintain per product and set commands in the software so that it only reorders when levels drop below a certain point and only replenishes with a level of product that fits with the sales level.

This can save you money in the long run by preventing you from paying for and carrying inventory you don’t need or coming up short on popular items.

4. Split Inventory into Different Categories

If you’ve been managing inventory for any length of time, the idea of breaking up your inventory into different categories should seem obvious, but we encounter many businesses that aren’t utilizing this approach.

Too often, we think of inventory as one giant, amorphous thing. It’s all the products and manufacturing components we use in our business.

This can make tracking inventory feel daunting.

It’s often easier to better handle your inventory management issues by breaking things down into categories. You will still have one overarching “inventory,” but by separating products into groups, it’s easier to see how individual items are performing.

There are a wide variety of ways you can break up your categories. Don’t assume it’s only by product type.  Inventory can also be separated by how fast its turnover rate is, profitability, and so on.

Think of it like the old forest and trees analogy. Your entire inventory is the forest, but, we can focus on individual trees that may need attention by breaking things down into categories.

5. Develop Active Relationships with Your Suppliers

Relationships are at the heart of any business. We most often think of the one that exists between the customer and our business.

And while there’s no denying the importance of developing a great relationship with your customers, your business is also well served by building great relationships with your suppliers too.

Suppliers are a lifeline for your business, and by building good relationships with them, you can often get perks.

These “benefits” could be as simple as getting extra attention when you have an issue with an order to as important as ensuring your orders fulfill in times when there’s not enough supply to go around.

The critical point here is that it never hurts to have a good relationship with your suppliers. Building these personal connections can benefit your business in ways you may not have realized.

 6. Monitor All Aspects of Inventory

A lot of new businesses look at inventory management and underestimate the complexities involved with managing products.

It’s easy to see why. Many companies still think of inventory management as a simple count of products on hand.

In today’s business world, inventory management is much more complex. It gets even more challenging as your company grows.

Modern inventory management essentially covers everything to do with your inventory, meaning from the moment you order things from your supplier until your product is delivered to a customer’s door.

Because of this complexity, we need to ensure we’re tracking all the different aspects of inventory management to guarantee things are running smoothly.

From supply chain to warehouse management to order processing and shipping, your inventory management operation is a complex and multi-faceted part of your business. Create plans to handle each part of the chain because problems in one place will invariably affect other parts of your process.

7. Take Advantage of Technology

We’ve stressed how challenging managing the logistics of inventory can be in the modern world, but the good news is there is no shortage of tools that you can utilize to make the process easier.

Inventory management software is essentially ubiquitous at this point. Finding a software solution that will help you manage your warehouses boils down to determining what tools you need and then trying out products until you find the one that fits.

Beyond that, updating your warehouses can be part of the tech-based solution as well. Barcode and RFID technology has made tracking your inventory easier than ever. Items are tracked by scanning, numbers, and locations adjusted by the software automatically. These advances can save you time, money and help you avoid many inventory problems.

Tech has been a game-changer in the field of inventory management. If you’re not continually exploring the new tools on the market, you’re missing out on opportunities to make your warehouses run more effectively.

8. Structure Your Warehouse to Optimize Inventory

Whether you have multiple warehouses around the globe, a single warehouse at your place of business, or a lone stockroom, organizing that space is critical.

A disorganized warehouse not only makes the tasks of processing returns and orders more difficult, but it can also create inventory issues as items are misplaced or lost. This can lead to lost product and lost employee hours as your team tries to locate things.

Establishing an organized warehouse area with clearly marked sections for products, returns, shipping, and other duties can help you streamline your inventory management efforts.

Adding in things like barcode and RFID scanners can keep you instantly updated on where products are at each stage of their journey: from the moment they’re received until they’re shipped to a customer.

Every business has different needs when it comes to their warehouse, but taking the time to study Kanban and lean manufacturing initiatives can give you a real insight into how you might optimize your warehouse layout for better inventory management.

 9. Conduct Regular Inventory Checks

We all know about the annual inventory, that magical time of the year where companies focus on counting everything and comparing the physical counts to their numbers as they reset for a new year.

However, if you’re only conducting inventory audits once a year, you’re making the project bigger than it needs to be, and you’re letting potential problems compound over time.

Rather than reduce operations (or worse, stop them completely) for the big annual count, your business would likely be better served by using cycle counts.

Cycle counts find you conducting inventory audits based on sections, or product types, or other parameters. These are done frequently throughout the year, and because they’re not a full inventory, they don’t require a significant shift in your operations.

A cycle count can give you a quick overview of one specific section of your inventory, allowing you to spot problems early on. If you rotate them throughout the year, it’s the equivalent of getting at least one extra inventory in per 12 month period (or more, depending on how you schedule your cycle count rotation).

If your annual inventory is a yearly nightmare, consider cycle counts and more frequent audits. These bite-sized inventory counts can make your life easier and help you keep a tighter rein on your inventory management.

10. Prepare for the Future

Running a business can be overwhelming. Even the smallest businesses feature a lot of moving parts that require constant attention. Trying to manage inventory for a massive company with multiple locations worldwide can quickly grow beyond your ability to control.

This is why you must plan for the future.

When looking at inventory management tools or designing your inventory management strategy, it’s important to look at where you are and consider where you want to be.

Inventory management practices should scale with your business. While you may not need complex software or scanners, or other items now, it’s easier to plan today for a time when you will need them rather than be caught off guard when that day arrives.

Final Thoughts

Whether you’re a small business still operating with pen and paper inventory management methods or a global company using complex inventory management software to make sure you always have the stock you need, the value of good inventory management is undeniable.

Effective inventory management systems can help you reduce your costs, better analyze sales for future forecasts, keep customers happy, and help you maximize profits while dealing with the twists and turns your business will throw at you.

Inventory is likely your company’s biggest asset, making it unique that so many companies struggle to manage it effectively.  There’s a misguided belief that inventory management has to be tedious or difficult, but this couldn’t be further from the truth in today’s world.

Modern technology has made it possible to automate large portions of your inventory management program.

Scannable barcodes have reduced the inevitability of human error when manually entering numbers.

Stock monitoring has made it so you’ll either receive a notification when items reach a re-order level or the software will handle it for you without requiring human input.                                                                                         

Real-time updates ensure that scanned items are added or removed from inventory and tracked through your warehouses automatically, eliminating the need for constant manual recounts.

These are a few of the ways that technology has made inventory management easier. With the power of inventory management software and the best practices highlighted in this article, it’s never been easier to take control of your supply chain, warehouses, and stock levels.

The hardest part of inventory management is often taking that first step and getting started, but we’re here to help. The effort is worth it because proper inventory management can impact your business in significant ways.

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