4 Best Inventory Management Techniques for the Retail Category

Key Takeaways:

  • Effective retail inventory management is vital for business success, as it ensures products are available for sale and prevents cash tie-up.
  • Techniques like FIFO strategy, par level setting, contingency planning, and regular auditing help optimize inventory management.
  • The inventory management process involves demand forecasting, reorder point calculation, order placement, tracking, and regular review.
  • Centralizing product records, accurate stock counting, integrating sales and inventory data, and establishing purchasing and receiving processes are essential for efficient inventory management.
  • Having procedures for markdowns, promotions, returns, dead stock handling, and monitoring key performance indicators (KPIs) further enhance inventory management effectiveness.

Many companies in the retail category still dread the word “inventory”. They consider inventory management a herculean task due to the sheer effort involved in managing it. However, it possesses the potential to make or break any business. Companies can’t sell anything unless they know where the product is, where it’s supposed to go, and how much they have. Holding inventory ties up a lot of cash for companies. That’s why good retail inventory management becomes crucial for growing a company. With proper inventory management techniques, companies can control inventory, avoid spoilage, and save on storage costs.

Want to know how retail inventory management techniques can help you ensure enough stock on hand and increase sales? Request a free proposal and we will get back to you in within two working days.

Top Inventory Management Techniques

Inventory management techniques #1: FIFO strategy

First-in, first-out is one of the most important inventory management techniques for companies in the retail category. In this technique, companies move out their oldest stock first and then the newest stock. This strategy is especially important to reduce unsellable spoilage for companies selling perishable products. Practicing FIFO is also a good idea for non-perishable products. If the same boxes keep on sitting at the back, they become obsolete. Moreover, packaging design and features also change over time making them look worn out.

Inventory management techniques #2: Determine inventory levels

Setting par levels make it easier for companies to manage inventory. Par levels are the minimum number of products that companies need to have at any point in time. If the stock dips below a predetermined level, companies know it’s time to order more. Usually, companies order the minimum quantity and get back above par. However, it requires companies to do some research and make decisions upfront to systemize the process of ordering. Improving inventory management system makes it easier for companies to adjust par levels.

Inventory management techniques #3: Effective contingency planning

Companies face a lot of issues such as sales spike and cashflow shortfall while managing inventory. Also, there can be instances when manufacturers run out of products or discontinue a product without warning. Such issues can cripple businesses if not managed well. Determine where risks are and develop a robust contingency plan. Devise strategies that can prove helpful during such as a situation. Also, know-how will it impact different parts of the business.

Anticipating contingencies requires companies to analyze different factors impacting the retail inventory management. Give SpendEdge a try by subscribing for a demo to gain insights for improving the inventory management process.

Inventory management techniques #4: Perform regular auditing

Regular reconciliation is one of the key inventory management techniques that help companies keep a check on products in stock. Companies can either do it manually by counting all the inventory at once or start spot-checking throughout the year. Companies can also use cycle counting to audit their inventory rather than doing a full physical inventory. Cycle counting spreads reconciliation throughout the year and helps companies to check products on a rotating schedule by improving the inventory management system.

Top Inventory Management Techniques

Process of inventory management

Here’s a simplified 5-step process for inventory management:

Demand Forecasting:
Predict future demand based on historical data and market trends. Use tools like sales data analysis and market research to estimate how much of each product you’ll need.

Reorder Point Calculation:
Determine when to reorder items by setting a reorder point. Consider factors like lead time (time between ordering and receiving) and safety stock (buffer for unexpected demand changes).

Order Placement and Monitoring:
Place orders for items when their stock reaches the reorder point. Monitor order status and delivery times closely to ensure timely replenishment.

Inventory Tracking and Organization:
Keep real-time track of inventory levels using tools like barcodes or RFID. Organize storage to facilitate easy access and prevent damage. Use techniques like FIFO to manage stock rotation.

Regular Review and Adjustment:
Continuously review inventory performance. Adjust reorder points and forecasts based on actual demand. Identify slow-moving or excess items and take corrective actions, such as promotions or discounts.

How Does Retail Inventory Management Work?

Create a centralized record of all products:

To help your staff identify products, it’s important to add product images and descriptions. This is particularly crucial if you sell online. When you add new products, make sure you also update your inventory record. Keep your inventory record up-to-date by updating any changes such as vendor or wholesale cost. It’s important to establish policies for entering inventory, including who is responsible and when to do it. Having comprehensive data will help you take full advantage of your retail inventory management system.

Identifying stock location:

If you’re running a small business with just one store, keeping track of your inventory’s location is relatively simple. Your items are probably either on display or in the stockroom. However, if you manage a retail chain with multiple locations or sell through various channels, your inventory could be spread across several warehouses, distribution centers, transit points, stockrooms, and store shelves. Within these locations, there are more specific sections, shelves, and racks where products are stored. Misplacing or overlooking products can result in lost sales and revenue. To prevent this, retailers use inventory management practices involving radio frequency identification (RFID) tags, barcodes, and labels with category and department codes. These tools can fully or partially automate your inventory mapping, making it easier to keep track of your stock in real-time.

Do regular and accurate stock counts:

You need to count your inventory periodically to ensure it is accurate. Take into account shrinkage, damage, defects and returns to avoid errors. A retail inventory management system makes this process easier because you only need to double-check your data, rather than start from scratch. So, you can primarily focus on deviations. The frequency of counts depends to an extent on your business’s complexity, scale and the type of inventory management system you use. Nonetheless, experts recommend counting inventory once a quarter or once a year at absolute minimum. Some businesses count individual parts of their stock daily. Several counting techniques exist, including physical counting and cycle counting.

Combine sales data with inventory data to simplify reporting:

A retail inventory management system can integrate sales and inventory data. This picture shows you which goods are turning over fastest (a metric called sales velocity) and which are lagging. Use the product data to decide when and how much to reorder and when to offer promotions or discounts.

Purchasing process:

It’s important to schedule regular data review and order placement to avoid being caught off-guard by seasonal trends or running out of stock. You can use an electronic system to set individual product stock levels that will notify you when it’s time to reorder. Make sure to include a buffer in your stock levels to ensure that sales can continue at normal levels. If you’re using a manual system, review your sold-out or reorder point items and add them to your purchase list. When prioritizing your purchases, consider the profitability, popularity, and lead time of each item. Once you’ve prioritized your purchases, create a purchase order.

Establish a process for markdowns and promotions:

Product sales can fall short of expectations due to various reasons, such as a decrease in demand, product becoming obsolete or seasonal factors. If you decide to offer discounts, ensure that you have a disciplined approach towards it, and move the slow-selling products to make space for more profitable ones. Moreover, plan your promotional offers in advance to make sure that you have enough inventory to meet the demand. This can help you generate revenue and improve your sales performance.

Create a stock receiving procedure:

During the receiving process, you’ll verify incoming orders and enter goods accurately into an inventory system. Without an established procedure, any supplier error or damage in transit can result in problems like unexpected stock outages, overpayment to vendors and dead stock. Check each delivery against the purchase order to verify the contents match the order. Count cartons and pallets, confirming product type and numbers and noting mistakes, damage or shortfalls. Follow up with vendors on any issues. Then, enter the new products into inventory counts and store the goods. Depending on your needs, you might add price tags or bar codes to the stock. Perpetual inventory management, the simplest way of managing inventory, involves counting goods as soon as they arrive. Read the article on perpetual inventory to learn more.

Establishing a procedure for Returns:

Without an inventory management process for handling customer returns, you face an increased risk of holding unsellable stock or missing an opportunity to put a sellable item back on display. When a customer makes a return, check to see if the item is damaged or defective, and route it for repair, write-off or return to the vendor as appropriate. If the product is sellable, add it to your inventory counts, and put it in its correct place (in a physical store, ecommerce inventory, etc.).

Identifying a dead stock procedure:

Having excess inventory can tie up capital and negatively impact profitability. Dead stock typically includes items that are damaged, incorrect deliveries, or leftover seasonal products. To address this issue, it is recommended to first identify and record all such items, and then remove them from your inventory. You should designate a specific place to hold dead stock, and make sure to handle it regularly, whether on a weekly, monthly, or other appropriate basis. For merchandise that you can return to vendors for credit (known as pullbacks), make sure to ship them promptly and note any deadlines for the return shipment. Damaged or defective goods should either be returned to the suppliers, or documented and notified to the suppliers as per their policy. Depending on the nature of your product line, you may choose to sell the remainder to outlets, donate it, recycle it, or dispose of it.

Pick your inventory KPIs:

Select and monitor a few key performance indicators to determine the process’s effectiveness (KPIs). For retailers, indicators like profitability, inventory value, sell-through rate, and turnover rate are crucial. See samples and learn how to calculate them in the comprehensive tutorial on inventory management KPIs.


Effective retail inventory management is pivotal for retailers aiming to optimize operations, control costs, and maximize profits. By meticulously managing stock levels, streamlining supply chain operations, and implementing robust inventory control measures, retailers can ensure seamless order fulfillment, satisfy customer demands, and drive sales growth.From forecasting demand and setting par levels to performing regular audits and establishing efficient purchasing processes, every aspect of inventory management contributes to enhancing operational efficiency and financial performance. With the aid of advanced inventory management systems and strategic planning, retailers can gain real-time visibility into their inventory levels, streamline order processing, and optimize their supply chain operations. At SpendEdge, we understand the critical role of retail inventory management in driving business success. Our expert team offers tailored solutions and comprehensive insights to help retailers optimize their inventory management processes, enhance customer satisfaction, and achieve sustainable growth. Talk to our experts today to unlock the full potential of your retail inventory management strategy.

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Frequently asked questions

Retail inventory management is crucial because it ensures products are available for sale, prevents excess stock or stockouts, optimizes cash flow, and enhances overall efficiency and profitability.

Economic Order Quantity (EOQ) is the optimal order quantity that minimizes total inventory costs, including holding costs and ordering costs. It helps retailers determine the most cost-effective quantity to order for each product.

Last-In, First-Out (LIFO) is an inventory valuation method where the most recently acquired inventory is assumed to be sold first. This method can result in higher cost of goods sold during periods of rising prices.

First-In, First-Out (FIFO) is an inventory valuation method where the oldest inventory items are assumed to be sold first. This method aligns with the natural flow of inventory and helps prevent obsolescence and spoilage.

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