The Most Effective Types of Inventory Management Strategies - eSwap (2023)

Running an eCommerce business is a complex task that involves many different aspects. One of the most challenging points while managing an online store is choosing the proper inventory management technique. The decision you make will affect all your workflow. So, if you get it wrong, your business will reflect that. There are different types of inventory management strategies, and each has its advantages and disadvantages. Choosing one that best suits your needs is possible through trial and error. However, to save you time and money, we have compiled a list of the seven most effective inventory management strategies.

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What Is Inventory Management?

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Inventory management is all about keeping track and controlling your stock. It includes all the processes starting from manufacturing, buying, storing, and using. The main goal is to have the right product, in the right place, at the right time. Inventory management regulates the inventory flow, ensuring the company has enough stock to meet customer demand.

There are four types of inventory:

  • Raw materials
  • Work-in-progress (WIP)
  • Finished goods
  • Maintenance, repair, and operating (MRO)

Why Is Inventory Management Important?

Non-correct inventory management can elevate storage cost, working capital breakdown, waste of resources, and overall supply chain disorder. As a result, the amount of sales drops down, and the number of unsatisfied customers grows. So, inventory management is essential to keep your business running smoothly. It is a vital element of a practical and successfully growing company.

Moreover, an advanced solution will help businesses across the globe to know what is happening in real-time. Besides, it allows a proactive approach to avoid stockouts and other inventory management challenges.

Inventory management as an inseparable supply chain component can be carried out differently. Let’s look at more profound ones to find the best fit for your business.

The Most Advanced and Effective Types of Inventory Management Strategies

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There are many types of inventory management strategies. Some are more effective than others and fit different types of businesses. The most popular ones include:

  • Just-in-time (JIT) inventory
  • ABC inventory analysis
  • MRP Method
  • Dropshipping
  • Bulk shipments
  • Backordering
  • Consignment
  • Cross-docking
  • Cycle counting
  • EOQ Model
  • VED Analysis
  • FSN Method
  • Minimum Safety Stock

Let’s see how each approach works and what businesses they fit best. We won’t cover every single strategy in-depth, but we will touch on all the important points so you can make an informed decision.

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Just-in-Time (JIT) Inventory

Imagine having a manufacturing business. You need to order parts and materials to make your product. The goal of JIT is to receive these orders only when a seller needs them. That way, they don’t have to store anything and tie up their working capital.

JIT is a very effective inventory management strategy. However, it only works if everything runs smoothly. Any delays in the supply chain can cause production to grind to a halt.

If a retailer decides to use JIT, they need to have a very good relationship with their suppliers. Trust and transparency are key elements for JIT inventory. However, if there is no inventory management software, tracking everything and keeping everyone on the same page can be challenging. Using tools like eSwap can help eCommerce retailers stay on top of things and avoid workflow disruptions.

ABC Inventory Analysis

The ABC analysis is a method used to categorize inventory. The acronym for Always Better Control implies that some inventory is more important than others. The ABC analysis is a great way to focus on the items that matter most and manage them accordingly. It involves inventory items according to their classification into three groups (A, B and C).

  • The inventory in category A usually includes expensive, high-priced items that are not much in their number. These items are the most controlled ones.
  • The items in category B are less expensive than those in group A. Their number is higher, but this inventory, compared to the A category, is moderately controlled.
  • And the items of the C category are high in number and require fewer investments and minimum control.

MRP Method

Material Requirements Planning refers to a system determining how much of each raw material is needed to produce a finished product. MRP systems are often used to manage manufacturing processes such as inventory and production.

Inventory management is a vital part of MRP. Businesses can avoid stockouts and other production challenges by keeping track of raw materials, finished products, and work-in-progress products.

While most types of inventory management strategies imply controlling and managing the finished product, MRP emphasizes more on the raw materials. Here the manufacturers first carry out sales forecasting and only then order the inventory.

Dropshipping

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Dropshipping is a type of eCommerce business model where businesses sell products without having to carry any inventory. It may sound strange, but it’s a very popular and effective way to do business.

When a customer orders at a dropshipping store, the supplier ships the product directly to the customer’s door. The store owner never has to see or touch the product.

Dropshipping is a great way to start an eCommerce business with little to no upfront investment. It’s also a great way to test new products without carrying inventory risks.

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However, dropshipping is not without its challenges. Because you’re not carrying any inventory, you have no control over the quality of the products you sell. Product quality may suffer a lot if the supplier happens to be unreliable.

Bulk Shipments

This inventory management strategy is used when a business buys large quantities of products at once. The idea is to get a discount for buying in bulk and then sell the products individually at a higher price.

Bulk shipments can be a great way to save money on inventory. However, they can also be risky. If an accident happens and the products are damaged, you may be stuck with a lot of inventory you can’t sell.

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Backordering

When a customer orders a product that is out of stock, the seller can choose to backorder the product. This means the customer’s order is placed on hold until the product becomes available again. The customer pays for the product upfront and then waits for the product to come back in stock. It is important to inform the customers that their order is on hold and when they can expect it to ship.

Backordering can be very beneficial, but the strategy can be risky because you may end up with a lot of unsold inventory if the product never appears in stock again.

Consignment

Under the consignment inventory management strategy, the seller only pays for the product once it is sold. This means the products are stored at the consignment store until a customer buys them. The store owner does not have to pay for any unsold inventory.

The consignment strategy can be very beneficial because it allows you to test new products without paying for them upfront. However, it can also be risky because you may eventually end up with a lot of unsold inventory that you have to pay for.

Cross-Docking

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Cross-docking is a type of inventory management in which products are shipped directly from the supplier to the customer without stopping at a warehouse. This means the retailers don’t need to store their products in a separate location.

Cross-docking can be very beneficial because it eliminates the need for warehousing. However, retailers risk having to pay for products that are damaged in transit. Moreover, if too many products are circulating through the system, it can be challenging to track them.

Cycle Counting

Retailers using cycle counting typically count a certain number of items in their inventory each day. Cycle counting is an effective strategy for businesses oriented towards continuous improvement.

One advantage of cycle counting is that it allows businesses to keep track of their inventory without interruption. However, the strategy can be time-consuming and may not be accurate if items are moved around the warehouse frequently.

EOQ Model

EOQ is the Economic Order Quantity inventory management technique. The main focus of attention becomes quantity. A company should make the right decisions about how much inventory to order at a particular point. Here when reaching the minimal inventory level, the responsible person reorders items. Order costs and carrying costs become lower with the help of this EOQ model. Hence the EOQ model ensures the right quantities when needed.

VED Analysis

The next inventory management strategy type is VED standing for Vital Essential and Desirable. It is mainly concerned with some additional inventory parts. There are extra elements that the whole process cannot operate without. For example, components essential for products are usually costly. Additionally, any company can have a low inventory level for desirable parts, which are not often necessary for production.

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FSN Method

FSN stands for Fast, Slow and Non-moving inventory. This is one of the most popular methods of inventory control. It is beneficial for controlling obsolescence. Of course, not all items are similar. Some are used more, thus needing to be updated frequently. In contrast, the others are not necessary at all. Therefore, according to this method, inventory can be classified into three groups.

  • Fast-moving inventory,
  • Slow-moving inventory,
  • Non-moving inventory.

Minimum Safety Stock

And the last one from the list of the most effective types of inventory management strategies refers to the safety stock. It is the level of inventory with the help of which businesses avoid stockout. Companies place the new order beforehand when using the minimum safety stock, especially when the existing inventory isn’t over yet.

For example, a company’s total inventory is 18,000 units, and a new order arrives when the inventory reaches 15,000 units. In this case, 3,000 units of inventory are part of the minimum safety stock level.

Inventory Management Software Integration

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Digitization is a beneficial strategy for any field, including inventory management. Integrating all your inventory data in a single software is a quick and convenient format for tracking your inventory, warehouse, orders, and other essential aspects of the eCommerce business.

One of the tools that can allow you to do that is eSwap, the inventory management software which allows you to utilize many features with just a few clicks. The main features of the platform include:

  • Workflow automation
  • Warehouse Management
  • Shipping Management
  • Multi-channel Listings

Explore the other software opportunities, and don’t hesitate to link your business to a quality online tool that will maximize the effectiveness of any strategy you choose.

As already mentioned, inventory management is an essential part of every business. With the help of effective inventory management systems, companies can reduce their warehousing costs, inventory carrying charges, ordering costs, cost of obsolescence, etc. As a result, it improves the whole supply chain of the business. So, it is vital to take all the necessary steps to maintain an adequate inventory management and control system. While looking for a reliable method, remember to choose one that will fit your business’s needs and help you reach your professional aspirations!

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FAQs

What is the most effective management of inventory? ›

Inventory management techniques and best practices for small business
  • Fine-tune your forecasting. ...
  • Use the FIFO approach (first in, first out). ...
  • Identify low-turn stock. ...
  • Audit your stock. ...
  • Use cloud-based inventory management software. ...
  • Track your stock levels at all times. ...
  • Reduce equipment repair times.
27 May 2021

What are the basic strategies used for effective inventory management? ›

5 Inventory Management Strategies to Improve Efficiency
  • Use ERP software designed for inventory management. ...
  • Automate your inventory management system. ...
  • Use data analytics to optimize inventory management. ...
  • Forecast effectively with sophisticated planning tools. ...
  • Integrate mobile technology.
28 Jan 2021

What are the 4 types of inventory management? ›

The 4 Types of Inventory Management

The types of inventory management are Raw Materials, Works-In-Process, Maintenance, Repair and Operations or MRO and Finished Goods.

What are the 5 steps to effective inventory systems your answer? ›

5 Steps to Successful Inventory Management
  • Create a System to Get Accurate and Accessible Information on Your Inventory. ...
  • Create a Unique Process Customized for Your Business Type. ...
  • Keep an eye on Contemporary trends in the industry. ...
  • Be prepared for fluctuations in supply and demand.
29 Sept 2021

What is the most important type of inventory? ›

The three most important types of inventory are the raw materials, the work in progress (WIP) inventory, and the finished goods.

What is the most commonly used inventory method? ›

First-In, First-Out (FIFO)

The FIFO valuation method is the most commonly used inventory valuation method as most of the companies sell their products in the same order in which they purchase it.

Why effective inventory management is important? ›

Why Is Inventory Management Important? Inventory management is vital to a company's health because it helps make sure there is rarely too much or too little stock on hand, limiting the risk of stockouts and inaccurate records.

What are the most important elements in inventory management? ›

5 Key Elements of Inventory Management
  • Track your activity. As a business owner, you ought to know about any movement in your stock. ...
  • Daily counts. Managing your inventory is a daily inventory management task. ...
  • Manage out-of-stock products. ...
  • Clear description. ...
  • Organized work environment.
21 Sept 2016

What are the 3 types of inventory? ›

There are three general categories of inventory, including raw materials (any supplies that are used to produce finished goods), work-in-progress (WIP), and finished goods or those that are ready for sale.

What are the 3 types of inventory methods? ›

There are three methods for inventory valuation: FIFO (First In, First Out), LIFO (Last In, First Out), and WAC (Weighted Average Cost). In FIFO, you assume that the first items purchased are the first to leave the warehouse.

What are 5 types of inventory? ›

Depending on the business, inventory can include raw materials, component parts, work in progress, finished goods, or any packaging.
  • Raw materials inventory. ...
  • Maintenance, Repair, and Operating (MRO) inventory. ...
  • Decoupling inventory. ...
  • Work In Progress (WIP) inventory. ...
  • Finished goods inventory.
3 Dec 2021

What is an effective inventory management system? ›

The well-functioning system is a process of overseeing the flow of items into and out of your stock. It's a balance of having just enough products in the warehouse. Effective inventory management keeps the stock costs under control so you can run a successful business.

What is 5S in inventory management? ›

The 5S system consist of: sort, set in order, shine, standardize and sustain. Repeat it to yourself multiple times and write it down — go ahead, do it now!

What is effective inventory control? ›

Inventory control means managing your inventory levels to ensure that you are keeping the optimal amount of each product. Proper inventory control can keep track of your purchase orders and keep a functional supply chain. Systems can be put in place to help with forecasting and allow you to set reorder points, too.

What is the most important function of inventory control? ›

Efficient warehouse management, including goods movement, transfer and storage, is one of the most important elements of inventory control.

What is the most important role of inventory manager? ›

Inventory Managers are responsible for maintaining daily records of products and shipments to identify what needs to be ordered versus what is available in stock.

What is the best way to keep inventory? ›

The best way to keep track of inventory is with an easy-to-use, robust inventory management software system. With inventory management software, you can get real-time alerts, add meaningful pictures to your inventory list, and utilize barcodes and QR codes to automate otherwise tedious, error-prone processes.

Which are the main types of inventory? ›

While there are many types of inventory, the four major ones are raw materials and components, work in progress, finished goods and maintenance, repair and operating supplies.

What is inventory management example? ›

Example #1

Given the high consumption of soaps, it reorders raw materials to start manufacturing the next lot. Raw materials ordered beforehand, in this case, act as the inventory for the company. And the already delivered finished products are the inventory for retail units that will be selling soaps further.

What is the strategic value of inventory? ›

Strategic inventory management is the process of tracking your goods and ensuring you have the right products in the right place (at the right time). With an effective inventory strategy, you can quickly respond to changes in demand to guarantee you accurately fulfill every order.

What are the two types of inventory management? ›

There are two main types of inventory management:
  • Periodic Method – Inventory records get updated manually on a scheduled basis.
  • Perpetual Method – Inventory records get updated in real time via barcode scanning and other automated means.

What are the two types of inventory? ›

Two types of inventory are periodic and perpetual inventory. Both are accounting methods that businesses use to track the number of products they have available.

What are the types of inventory control? ›

There are two key types of inventory control systems.
  • Perpetual inventory system. A perpetual inventory control system tracks inventory in real-time. ...
  • Periodic inventory system. A periodic inventory system is kept up to date by a physical count of goods on hand at specific intervals.

What are the 6 types of inventory? ›

The 6 Main classifications of inventory
  • transit inventory.
  • buffer inventory.
  • anticipation inventory.
  • decoupling inventory.
  • cycle inventory.
  • MRO goods inventory.
29 Sept 2020

What are the 13 types of inventory? ›

15 types of inventory
  • Finished goods. Finished goods are items that are completed and packaged for sale. ...
  • Work-in-progress inventory. Work-in-progress inventory includes items that are partially assembled. ...
  • Raw materials. ...
  • Safety stock. ...
  • Packing materials. ...
  • MRO supplies. ...
  • Smoothing inventory. ...
  • Decoupled inventory.

What are the 5 strategic methods in supply chain management? ›

Supply chain management has five key elements—planning, sourcing raw materials, manufacturing, delivery, and returns.

What are the 5 objectives of inventory management? ›

Objectives of Inventory Management System
  • Material Availability. ...
  • Better Level of Customer Service. ...
  • Keeping Wastage and Losses to a Minimum. ...
  • Maintaining Sufficient Stock. ...
  • Cost-Effective Storage.

What are the 4 basic reasons for keeping an inventory? ›

The reasons for holding inventories can vary from case to case basis.
  • Meet variation in Production Demand. ...
  • Cater to Cyclical and Seasonal Demand. ...
  • Economies of Scale in Procurement. ...
  • Take advantage of Price Increase and Quantity Discounts. ...
  • Reduce Transit Cost and Transit Times.

What are the top three to five principles of inventory management? ›

There five key principles of inventory management:
  • demand forecasting,
  • warehouse flow,
  • inventory turns/stock rotation,
  • cycle counting and.
  • process auditing.

What are the 3 strategic methods? ›

Within the domain of well-defined strategy, there are uniquely different strategy types, here are three: Business strategy. Operational strategy. Transformational strategy.

What is the main importance of inventory? ›

Regardless of the size of your company, having a proper inventory management system is very important for any business. It can help you keep track of all your supplies and determine the exact prices. It can also help you manage sudden changes in demand without sacrificing customer experience or product quality.

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