Types of Inventory Management: A Complete Guide

What is Inventory Management?

As described in our recent article about inventory management, it is the process of ordering, storing, using, and selling a company’s inventory. Its importance cannot be overstated since inventory comprises one of the retailer’s most valuable assets. Knowing when to restock inventory, what price to pay for inventory, and when to sell at what price is a complex, balancing act: 

Bottom line: An effective retail inventory management system must provide real-time product volume and location information to support the most efficient buy/sell/delivery decisions that are critical to retailer profitability. This article dives into the many types of inventory management to give you the knowledge you need to determine the best solution for your organization.

Types of Retail Inventory Management

Changing global supply chain conditions of late have highlighted how unexpected events and trends wreak havoc with ERP forecasts and various types of inventory management. Tankers delayed at ports around the world, supply shortages, strong demand, and social media-driven fads are wreaking havoc with ERP forecasts. 

The most widely used inventory management techniques are:

Just in time (JIT)  

This method focuses on saving storage costs and reducing waste by keeping a low level of stock and placing orders when they are needed. However, JIT requires accurate forecasts that meet customer expectations and can cause problems in meeting occasional peaks in demand, which under current volatile market conditions is risky. In addition, this method can put volume purchase discounts out of reach for smaller retailers. 

ABC Analysis

This method recognizes that some items require more attention than others based on specific criteria. ABC Analysis assesses all available inventory, organizing it into three categories. “A” items are high value, with low frequency of sales and lower stock levels; this group requires regular attention because of their significant economic impact and unpredictable ability to sell these products. “B” items are of moderate value and sale frequency. “C” items are low in value, high frequency of sales, and in large stock. Therefore, this group doesn’t need as strict observation, since its financial impact is smaller, and constantly changing. This monetary value- focused method ignores other factors.

Weighted Average Cost (WAC)

This method uses a weighted average to determine the amount that goes into cost of goods sold (COGS).The weighted average cost method divides the cost of goods available for sale by the number of units available for sale. This method is most commonly employed when inventory items are so intertwined that it becomes difficult to assign a specific cost to an individual unit.

First in First Out (FIFO)

In this approach, oldest stock (first in) is sold first (first out), which is particularly well suited for managing perishable products. It is also a strategy that helps prevent products without an expiration date from deteriorating or becoming obsolete due to a change in design or enhancement of features. This type of system requires a warehouse to be organized so that the oldest product is closest to the front of the shelf, and the newest product is stored at the back—a simple process that can save waste. However, this is a labor-intensive effort for grocery stores, which are also subject to customers constantly shuffling products around. 

Last in First Out (LIFO)

This method assumes that the items most recently added to inventory (last in) are the first units sold (first out). In other words, products leave in the reverse order in which they arrived. Though not as common as the FIFO method, LIFO optimizes cost of goods sold and ending inventory. Particularly advantageous during periods of inflation, LIFO goods are typically the most expensive, which increases COGS and reduces profits. Thus, companies use LIFO to report the low net income on financial statements, minimizing their tax liability.

Periodic Stock Review

This review is simply an analysis of products with respect to future sales. It is particularly useful for those retailers that manage their inventory manually, although it is best to have some specific software. It involves establishing a predefined period for reviewing stock and comparing current production levels with future projections to determine the amount of inventory to order. This inventory management system requires a huge investment of time and is highly exposed to human error.

Dropshipping 

Instead of receiving the merchandise and then shipping the products yourself to the customer, the manufacturer or wholesaler takes care of it. It usually means paying a little more for the product, which is offset by the cost savings. However, order processing can be complicated and you lose control over the customer experience, so it’s not all wins.

Intensifying Importance of Retail Inventory Management 

Inventory management is the heart of retail operations that pumps revenue to ensure financial health of the retail organization. This centerpiece of retail management is driven by sales projection and product turnover. Ineffective inventory management has negative consequences: Insufficient inventory sends shoppers to competitors; and inventory glut is a liability that leads to discounts and diminished ROI. 

The traditional way of projecting inventories according to a business’ sales history was upended in 2020. Recall what happened to the simplest of products, toilet paper. No one could have forecasted that pandemic-driven panic buying. What’s more, 2020 sales became unreliable for 2021 projections and beyond since the un-natural, bloated demand in 2020 evaporated. 

However, the crisis involving hand sanitizer, bleach, disinfectant spray, bleach wipes, etc. taught retailers that unplanned international crisis factors can slow the supply chain to a crawl. Along those lines, the ongoing ebb and flow of COVID positivity rates will no doubt continue to affect demand for masks and make inventory projections a murky endeavor.

Case in point: Recently noted that at a major big box warehouse retailer, top shelves were filled with paper towels and toilet paper down the entire paper products aisle with little room for other products. The obvious conclusion is that there had either been an over-projection based on the previous couple of years, or anticipation of trucker protests causing supply chain bottlenecks. 

In addition to the difficulty of accurately projecting sales, inventory management involves many aspects that make a comprehensive technology solution crucial for omnichannel success: 

• Control and supervision of purchases
• Consideration of future demands
• Storage and processing of raw materials and finished products
• Control, monitoring, and supervision of storage
• Control/management of orders and returns
• Adoption of tools and innovations that optimize retail inventory management, such as Apps that facilitate order preparation and customer arrival (OneView Commerce’s Curbside Pickup Accelerator–a Pick and Pack App with integrations to Zebra location services) 
• Analysis of logistics performance indicators related to inventory
• New strategies to minimize bottlenecks identified in analysis of key performance indicators, which help analysts determine the markup for each product to make the store profitable; BI/AI tools integrated with inventory management address today’s volatile inflation driven economy.

Inventory Management Challenges

The three primary challenges of inventory management are having too much inventory and not being able to sell it, not having enough inventory to fulfill orders, and not understanding what items you have in inventory and where they’re located and selling at what prices. Other obstacles include:

Detailed information:

Without accurate stock information, there’s no way to know when to refill stock or which stock moves well. Automated stock replenishment simplifies associates’ responsibilities with respect to excessive count and re-count cycles counts and ordering.

Insufficient processes:

Outdated or manual processes slow down operations and infuse work with errors that undermine accurate inventory management; Insufficient tech stack is unable to support cloud offerings, provide adequate security, and evolve to keep up with device development. 

Changing customer demand:

Customer tastes and needs change constantly. Real-time information through consumption of social media is key for tracking trends, that will let you know when buyer preferences change and why. 

Efficient use of retail warehouse space:

Escalated fulfillment depends on making it easier and faster for pickers and associates to locate products.

The demands of omnichannel inventory management in an always-on shopping world make technology that provides real-time visibility crucial for optimizing order fulfillment across the entire omnichannel supply chain. Inventory status across the entire omnichannel enterprise at any given time calls for live feeds of transactional data (buys/sells/returns) that allow any application to access and update inventory status instantly. Furthermore, a cloud-native solution that makes it easy for store associates to locate, transfer, or ship items is key to providing exceptional customer service.

Inventory Management-driven Improvements

Applying advanced inventory management techniques spawns a complement of additional operational improvements across the enterprise:

Improve the customer experience with better service

• Avoid stock outages to give customers who shop in a retail store the confidence that what they’re looking for will be either ready for pick up or available on the shelf. 
• An automated solution lets you know if an item is available in stock and to locate it more easily in another store or warehouse/distribution center.

Track products more easily.   

• Monitoring products makes it possible to ensure order fulfillment with automated replenishment.
• Artificial Intelligence machine learning consumes all available data from previous sales demand, social media impact, transportation and supply chain shipping issues, and government factors (local, state , national, international) that could have long-term effect on stock and creates models that more accurately project sales.

Identify theft and loss.

• An automated solution helps identify theft when items sold and remaining items don’t align with total inventory, and alerts managers to stolen items—the first step in reducing economic losses.

Expedite order fulfillment by leveraging store networks.

• Retail organizations with multiple outlets, regardless of the distances between one and the other, can check stock across their enterprise and tag merchandise for order fulfillment and temporary stock replenishment. 
• Satisfy a customer looking for an out-of-stock product by finding it at the most optimum location in the retailer’s network, for expediting fulfillment and identifying a specific delivery date, either to the customer or store. 

Manage financial performance.

• Monitor in real-time the profitability of each store as well as departments, regions, and districts across the retail enterprise without waiting until the end of a quarter or the year.

Technology-Driven Strategies for Inventory Management

In order to master inventory management, retailers need a unified commerce strategy powered by a single, cross-channel technology platform that captures vital customer and inventory data at every touch point. Real-time inventory management tracks every buy, sell, receipt and return of your valuable merchandise. Automated replenishment based on configured thresholds is an important inventory management technique for minimizing the risk of stock-outs. Integrating the platform’s capabilities with mobile devices provides associates inventory management tools that enable them to better serve shoppers by locating merchandise.

A platform with expansive omnichannel integration capabilities offers unlimited opportunities to engage with shoppers and fulfill their preferences across their entire journey with convenient options such as In-Store checkout and Pick-Up + Delivery that protect brand loyalty. What’s more, a cloud-native, API-first architecture and headless commerce front-end empower rapid development of innovative services that can run alongside existing ERP systems to enable risk-free, iterative digital transformation.

To see how OneView’s Inventory Management solutions and its retail accelerators deliver an exceptional customer experience, book a demo here.