What are the three major inventory management techniques?
Of course, just as there are different kinds of inventory, there are various theories on how to prioritize the items you reorder.
Maintaining good inventory management for your business means you have to stay on top of inventory turnover and ensure that you have enough finished goods to meet product demand. But there are other ways. These are the three major inventory management techniques:
- Push: Forecasting demand for a product (i.e. coats in the winter)
- Pull: Getting an item after a customer orders it (i.e. special orders)
- Just-in-time: Ordering inventory just before a customer needs it, but this requires a strong supply chain
Each of them has their own advantages and disadvantages, and it will depend on your inventory turnover and supply chain to see what is feasible for your business.
In the meantime, check these guides out as a way to figure out what your business needs:
What are the best ways to manage inventory?
Every business is different, but no matter what, you want to keep focusing your inventory management process on two things:
- Your inventory count
- Your inventory turnover
If you can maintain your stock level to meet customer demand, then your business will be successful. Inventory management software will take away the guesswork. What you need to do is determine which of the three major inventory management techniques you'll use and then how to implement that into your product purchasing and selling.
We’ve found four simple steps that can help businesses manage their inventory the best:
- Prioritize needs based on your chosen inventory management technique.
- Track product information.
- Analyze and report on inventory and sales.
- Track sales and purchase orders for restocking.
With the right inventory management process, you can be on your way to prioritizing the customer and staying ahead of the competition, while ensuring your business has the right tools to succeed.
Check out some of our top picks for inventory management software this year.
How do small businesses manage inventory?
Part of what makes inventory management so complex is the sheer number of theories on the best way to track, reorder, and quantify inventory.
With ecommerce growing as a marketplace for businesses—and global shipping becoming equally important—finding an inventory management system that extends your business’s reach is just as important as software that makes the job easier. Although there are numerous ways to track inventory, the best software will home in on the features you need without bogging you down in useless extras.
Every business is different, so we recommend getting started with our overview of what inventory management is (and how it can help your business). From there, you can see what you need—ecommerce options, a QuickBooks integration, or warehouse management —and use our reviews as a guide.
One of the big concerns inventory management tries to address is the best way to reorder products. You want to make sure your inventory levels stay high enough to meet customer demand, but you also don’t want to wind up with excess inventory that won’t sell (and the potentially high inventory costs associated with storing those items).
To find out how to balance your inventory needs with your cash flow, calculate your safety stock, and determine your reorder points for your products, check out our explanations of the most commonly used reordering methods:
Businesses also need to determine how they plan to track their inventory levels. There are two main schools of thought on the matter:
- Periodic inventory tracking
- Perpetual inventory tracking
Periodic inventory tracking requires taking a physical count of your inventory periodically—at the end of the month, quarter, or year. This, of course, is not optimal for all businesses, and can make tracking your inventory more difficult. Meanwhile, perpetual inventory tracking is focused on cost and stock levels on a transaction-by-transaction basis, allowing your business to continually update what's available, the cost, and your bottom line.
Some businesses need constant updating while others can wait. This guide should help you decide which option works better for you:
Another main component of inventory management? Costing. Costing helps you balance the books and calculate important metrics like your profit margins and your cost of goods sold (see our inventory glossary to learn more about that). Here are a couple of resources to help you decide how you allocate costs:
If you choose to use the first in, first out method (FIFI Method), you’ll be focused on selling the oldest items in your inventory first. That’s because the oldest cost (i.e. purchase order) for goods is going to be applied to the first batch of sold goods. If you sell the oldest goods first, you’ll be paying off the oldest purchase order (for those goods) first.
On the other hand, the last in, first out method (LIFO Method) applies the cost of the most recently ordered items to the most recently sold goods. Although it’s not commonly used outside of the US, the method does provide your business with a major tax advantage (by focusing on new costs first) and allows you to focus on the most current financial numbers while providing a great customer experience by selling the most recent products first.