Inventory management techniques describe different ways to strategically manage stock for a specific business. For any business, effectively managing inventory is crucial to ensuring profitability and maintaining control over stock levels. Companies often employ different inventory management methods depending on their products, industry, and more.
In 2013, Walmart experienced an inventory crisis, losing over $3 billion due to out-of-stock merchandise and a lopsided inventory turnover ratio.
Sure, plenty of mammoth companies have mismanaged their inventories and lost billions while remaining successful. However, with only half of small businesses in the U.S. making it to year five, prioritizing small business inventory management is a critical means of growth and survival.
Inventory management strategies provide cost-saving and profit-boosting benefits for small businesses that help them remain profitable and competitive. Below is a list of some of the most popular and effective inventory management methods and directions for using them to improve your business. Consider implementing these strategies to improve your sales and achieve a balanced inventory flow.
Inventory management techniques are the methods you use to decide how much stock to order, when to reorder it, and how to track it as it moves through your business. Think of them as playbooks for keeping the right products in the right place at the right time, without tying up cash in stock you don't need.
No two businesses run the same way, so no single technique fits everyone. What works for a fast-moving e-commerce brand won't suit a manufacturer juggling raw materials, which is why most businesses mix and match a few methods to match how their stock actually behaves.
You already know the pain of getting inventory wrong. Sell out of your best product and customers walk. Overorder and your cash sits on a shelf collecting dust instead of funding your next move. The right techniques help you avoid both.
Get them working together and the payoff adds up fast. You cut stockouts, so shoppers actually find what they came for. You reduce overstock, which keeps your cash flowing instead of frozen in unsold goods. Your counts get more accurate, so you're making decisions on real numbers, not guesses. And when the right products are always ready to ship, your customers stay happy and keep coming back.
That's the whole point: less firefighting, healthier margins, and a business that scales without the growing pains.
| Technique | Best for | Key benefit |
|---|---|---|
| Economic Order Quantity (EOQ) | Growing businesses | Minimizes holding costs |
| Minimum Order Quantity (MOQ) | Retailers & wholesalers | Limits excess stock |
| ABC Analysis | Small businesses | Smarter reorder prioritization |
| Just-in-Time (JIT) | Companies cutting costs | Reduces waste |
| Safety Stock | Fluctuating demand | Prevents stockouts |
| FIFO & LIFO | Food & beverage (FIFO), raw materials (LIFO) | Accurate costing |
| Reorder Point Formula | Steady-demand industries | Avoids stockouts & excess |
| Batch Tracking | F&B tracking expiry | Fast recalls |
| Consignment Inventory | Retailers wanting lower carrying costs | Less risk |
| Perpetual Inventory | Multi-location retailers | Real-time accuracy |
| Dropshipping | Side-hustle sellers | Low startup costs |
| Lean Manufacturing | Manufacturers cutting production costs | Less waste |
| Six Sigma | Any industry | Near-zero defects |
| Lean Six Sigma | Complex manufacturing | Cuts waste & variation |
| Days Sales in Inventory (DSI) | Retailers with physical stock | Measures stock liquidity |
| Cross-Docking | High-turnover retailers | Faster delivery, lower logistics cost |
| Materials Requirement Planning (MRP) | Product manufacturers | Prevents excess stock & delays |
Economic order quantity (EOQ) is a method that uses the lowest amount of inventory necessary to meet peak customer demand without going out of stock or producing obsolete inventory. It's used to create inventory control, or to minimize costs while maximizing profits through inventory management.
EOQ uses three variables in its formula:
The formula for calculating EOQ is:
Economic order quantity = square root of [(2 x demand x ordering costs) ÷ carrying costs]
Best for: Quickly growing businesses with regular inventory needs
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Minimum order quantity (MOQ) refers to the lowest amount of stock that a supplier will sell to you. If you don't buy the MOQ, the supplier won't sell you the product.
For retailers, MOQs are especially helpful in limiting excess stock and maintaining steady profit margins. By only offering products in bulk, retailers can more easily balance production and demand.
Best for: Retailers and wholesalers looking to balance production costs with demand
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ABC analysis is an inventory management technique that involves sorting inventory into three categories, according to how well they sell and how much they cost to hold:
ABC analysis helps you make smarter decisions about reordering, which, in the long run, can reduce obsolete inventory and help optimize your inventory turnover ratio.
Best for: Small businesses struggling to manage inventory levels
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Just in time inventory management (JIT) is the process of making:
Essentially, JIT creates goods to order. When orders come through, manufacturers only order the inventory needed to produce those specific items. This method is effective in fulfilling customer orders swiftly while minimizing storage requirements.
The JIT system can be integral in minimizing costs, excess inventory, and unnecessary warehousing. However, keeping up as order volume grows can be very difficult.
Best for: Growing companies looking to reduce costs as much as possible
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Safety stock inventory is a small surplus inventory that companies keep on hand to guard against variability in market demand and lead times. Safety stock plays an integral role in the smooth operations of your supply chain in various ways, such as:
Without safety stock inventory, you risk:
The safety stock formula is relatively straightforward and requires only a few inputs for calculation. The formula for finding safety stock is:
(Max Daily Sales x Max Lead Time in Days) – (Average Daily Sales x Average Lead Time in Days) = Safety Stock Inventory
Best for: Companies in industries that experience regular demand fluctuation
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FIFO and LIFO are two widely used accounting methods in inventory management that can determine accurate cost and profitability.
FIFO (first-in-first-out) is an inventory accounting method based on the idea that the first items in your inventory should be the first to leave. LIFO (last-in-first-out) conversely states that the last items in your inventory should be the first ones that leave.
Food and beverage companies use FIFO since they deal with perishable goods. LIFO is a great method for non-perishable homogeneous goods like raw materials.
Best for: Food and beverage companies (FIFO) and raw materials (LIFO)
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The reorder point formula tells you approximately when you should order more stock, or the lowest amount of inventory you can sustain. Businesses can take the guesswork out of reordering by determining reorder points, so they never have too little or too much. This way, you ensure you are not over-purchasing or under-purchasing inventory, enhancing your supply chain operations.
The formula for finding the reorder point is:
(Average Daily Unit Sales x Average Lead Time in Days) + Safety Stock = Reorder Point
It can be monotonous manually setting reorder points, so getting them correct is pivotal so you don't experience stockouts. The best inventory management software uses automation to determine your reorder point for you so you never fall victim to unexpected disruptions.
See what automated inventory management can do for you.
Best for: Industries with little to no demand fluctuations
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Batch tracking is a method that uses batch numbers to trace goods along the distribution chain using batch numbers.
Through batch tracking, you can keep tabs on all your raw materials, WIP inventory, and finished goods: this keeps you from filling your warehouse with unusable items. Efficient management of goods means your warehouse remains organized and reduces errors in fulfillment.
Best for: Food and beverage companies that need to track expiration dates
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Consignment inventory is a business arrangement where the consignor, usually a vendor or wholesaler, gives their goods to a consignee, which is generally a retailer. In this agreement, however, the consignee doesn't have to pay for the goods until they sell them.
This inventory management technique allows retailers to enjoy less risk and low ownership costs, which can be great for testing new products on the market.
Best for: Retailers looking for lower carrying costs
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A perpetual inventory management system, also known as a continuous inventory system, prioritizes real-time inventory tracking so no transaction goes unaccounted for.
With real-time updates, businesses can more accurately forecast demand and be more proactive about reorders and inventory turnover. It's a natural fit if you're wrestling with multi-location inventory challenges.
Best for: Multi-location retailers who experience seasonal demand
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Dropshipping is a business model that allows you to sell and ship products you don't own and don't stock. Your suppliers, wholesalers or manufacturers, produce the goods, warehouse them, and ship them to your customers for you.
The dropshipping process is relatively simple:
Dropshipping allows individual product sellers the luxury of low start up and inventory costs.
Best for: Those looking to sell products as a side hustle
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Lean manufacturing, often referred to as lean warehousing, is a system for maximizing customer value while minimizing manufacturing waste.
This system seeks to prevent three types of waste:
The five principles of a lean manufacturing system are:
By minimizing or eliminating Muda, Mura, and Muri while adhering to the five principles, champions of lean manufacturing believe this inventory management technique can produce the highest-quality products while increasing your revenue and productivity. Inventory control can often be enhanced through integration of lean strategies.
Best for: Manufacturers looking to decrease production costs
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Sigma, or Six Sigma, strives to combat waste by producing almost no defective products. The idea behind Sigma is to improve the manufacturing process to reach near perfection.
The first and most-used method in Six Sigma is a 5-step process called DMAIC:
The DMAIC process uses data and measured objectives to create a cycle of continuous improvement in your manufacturing methods.
Best for: Sales teams looking to grow their customer base
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Lean Six Sigma combines lean manufacturing with Six Sigma to create a complete system that removes waste and reduces process variation for streamlined manufacturing and optimal product output.
Lean Six Sigma primarily uses Six Sigma's methods as the backbone of its system. Processes such as DMAIC are used to drive focused manufacturing improvements while incorporating many lean techniques and tools to reduce wasteful steps and processes.
Best for: Industries with more complex processes, like engineering and manufacturing
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Days sales in inventory (DSI) measures the time it takes for a retailer to sell its entire inventory. When you determine your company's DSI, you can quantify if your inventory is flying off the shelves. You'll also gain other insights, like:
Use the following calculation to find DSI:
DSI = (Average Inventory / Cost of Goods Sold (COGs)) x 365 days
By learning your DSI, you inherently learn about the liquidity of your inventory, which can help you make smarter decisions about your products.
Best for: Retailers selling physical inventory
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Cross-docking is a supply chain tactic used to reduce inventory costs and speed up delivery times. Essentially, cross-docking removes the storage stage of the product lifecycle. In this method, products move directly from the truck, from the warehouse they were produced into outbound delivery trucks headed to customers' doors. This approach can reinforce your supply chain operations by optimizing shipping routes.
Cross-docking plays into the lean methodology. By eliminating any storage phase, companies can delete time that's not valuable to customers, thus saving inventory costs and increasing efficiency.
Best for: Retailers with high inventory turnover looking to reduce logistics costs
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Materials requirement planning (MRP) describes a process where manufacturers use both demand forecasting and the bill of materials (BOM) of a product to accelerate the production process. Manufacturers look specifically at three elements in MRP:
By establishing these elements before production, manufacturers can establish a more efficient process that doesn't create waste.
Best for: Product-based manufacturers struggling to meet inventory requirements
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Even with the right technique picked out, a few problems trip up almost every business. Here's how to tackle them.
This is where automation earns its keep. Teams using AI and automation for inventory save up to about 15 hours a week, according to Cin7's 2025 State of Inventory Intelligence research. That's time back for growing your business, not chasing spreadsheets.
After identifying the inventory management technique that makes the most sense for your business, you can finetune other processes and fully achieve inventory flow.
Here are a few other best practices that can complement your chosen inventory management technique:
Need proof it works? Take Fun in Motion Toys, the consumer goods company behind those wonderfully unique movement toys. They use Cin7's demand forecasting and warehouse management to anticipate what's coming and keep stock levels just right, which means no overstock and no stockouts. Even when peak season hits and orders surge, they stay efficient instead of scrambling.
Start a free trial of Cin7 today.
Still wondering about the best inventory management method for your business? We've got you covered. Here are some frequently asked questions and answers about inventory management techniques.
The four most popular inventory management techniques are:
These four methods tend to be the most widely used due to their proven success and their versatility to fit into several different business models.
First-in-first-out (FIFO) is the most commonly used inventory management technique in manufacturing. Manufacturers like using the FIFO method because its structure closely resembles how stock typically moves through the inventory lifecycle.
Many believe that FIFO is the best inventory technique because of how closely its model resembles the inventory flow.
In most cases, the first items you add to your inventory will be the cheapest since prices typically rise over time. As a result, those items will be most likely to sell first.
FIFO and just in time inventory management are the best inventory methods for small businesses.
While FIFO may provide your small business with the most accurate cost and profitability information, just in time inventory, while risky, can help small businesses save money in their early years.
Inefficient inventory management can have compounding effects that can stunt a business's growth and cause you to spend unnecessary time and money. While these techniques can add efficiency to your inventory processes, software can collect data to make smarter decisions for you, so you can focus on growing your business.
Connecting your inventory management through comprehensive software is a surefire way to achieve flow and add efficiency to your existing processes.
The 80/20 rule, also called the Pareto principle, says that roughly 80% of your sales come from about 20% of your products. In inventory terms, it's a reminder to give your top sellers the most attention: keep them well stocked, watch them closely, and don't let them run dry. It's the thinking behind ABC analysis, which sorts your stock by value so you always know where to focus first.
They solve different problems, so it helps to know what each one does. FIFO (first in, first out) sells your oldest stock first, which is great for perishables, while LIFO (last in, first out) sells the newest first and is often used for costing raw materials. JIT (just-in-time) keeps stock lean by ordering only what you need, right when you need it. ABC analysis is about prioritization, ranking your products by value so you manage the important ones most carefully. Many businesses use a mix rather than picking just one.
Start by moving off manual counts and spreadsheets, which drift out of date the moment stock moves. A perpetual inventory system updates your numbers in real time as items come in and go out, so what you see matches what's on the shelf. Pair that with regular cycle counts and barcode scanning, and you'll catch small discrepancies before they turn into big ones.
Divide your cost of goods sold (COGS) for a period by your average inventory value over that same period. So if your COGS was $500,000 and your average inventory was $100,000, your turnover ratio is 5, meaning you sold and replaced your stock five times. A higher ratio usually means stock is moving well, while a low one can signal overstock or slow sellers you'll want to address.
Inventory management software takes the manual guesswork out of tracking stock, so you're not stitching together spreadsheets across your shop, warehouse, and accounting tools. It gives you one real-time view of what you have and where, automates reorders before you run low, and forecasts demand so you can plan ahead. Whichever techniques you use, the right software makes them easier to run and far harder to get wrong.
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