Inventory Management Techniques Explained

Whether you run a physical or online store, effective inventory control is paramount. Too much inventory creates storage problems and reduces your flexibility to offer new products. Too little, and you can’t fulfill orders, which leads to customer disappointment and loss of business. 

Knowing how much stock you have leads to better buying decisions. As a result, most smart businesses use inventory control management software to track inventory from purchase to sale. 

How Does Inventory Management Work? 

The ultimate goal of business inventory management is to gain accurate real-time information on stock levels and stock locations, reduce operating costs, streamline merchandise flow, and maximize revenue. 

Store inventory management systems utilize a combination of barcodes, RFID tags, scanners, readers, and software. Products are scanned at the point of purchase, and the information is automatically relayed to the software, which updates your stock list accordingly. This means you’ll always know which items are selling, how much stock you have left, and when to reorder. 

Computerized inventory control procedures are popular because they guarantee accuracy, remove guesswork, and save on labor costs associated with human error and outdated manual processes like updating spreadsheets. 

Efficient inventory management methods aren’t just about tracking sales and available stock, though. They also save you warehouse space and reduce the amount of cash caught up in the supply chain. In addition, many systems analyze data and can communicate directly with suppliers to automate reorders when stocks get low. However, there must still be room for human intuition and input. Otherwise, it’s impossible to account for seasonal variances, sudden surges in demand, or the intricacies of whichever inventory management techniques you choose to employ. 

Inventory Management Techniques to Streamline Your Business 

If you’ve done some research already or taken inventory management training, you’ll know there are several inventory control methods to choose from. The combination that’s right for you will depend on your business, the products you sell, and your location relative to your suppliers, customers, and warehouses. 

These are the most popular inventory management techniques.

Bulk Shipping

Buying in bulk is the cheapest way to acquire stock and is a good option for businesses with a consistent demand for specific products that they know sell quickly. However, if demand drops or sales are slower than expected, storage costs rise. This is particularly problematic for small businesses and e-commerce stores that don’t have a lot of warehouse space. 


FIFO (first in, first out) and LIFO (last in, first out) are inventory management methods that determine the cost of stock. FIFO assumes that older inventory is sold first, which is best for perishable goods or products in unpredictable markets. LIFO assumes that prices always rise, so newer, more expensive inventory items are sold first to ensure maximum return on investment. 

Just in Time (JIT)

JIT inventory control involves the smallest outlay and maintains the lowest stock levels possible. It is popular with small businesses and startups because it uses working capital efficiently, saves on storage space, and minimizes waste. However, there are risks for potential shortages if you don’t order enough, as typically, JIT inventory is purchased just days before sale.

ABC Inventory Management

By grouping products into categories based on sale volume (A being the most valuable and C the least), businesses can prioritize orders to maximize their stocks based on performance. This is great for analyzing product popularity but is intensive on time. Plus, you run the risk of missing out on new trends as they emerge.  


Consignment means taking stock from a wholesaler without taking ownership of it, so you don’t pay until you’ve sold the products. This is good for businesses operating in volatile or uncertain markets as it ties up minimal capital. Plus, because you can return unsold goods without penalty, you can test new products and gather insights on buyer behavior.

Dropshipping and Cross-docking

Dropshipping eliminates warehouse costs as the manufacturer or wholesaler ships directly to your customers. However, if cross-docking is required, it’s not that straightforward. Cross-docking involves unloading from a supplier truck onto your own vehicles for delivery. Depending on your location and distribution radius, this can inflate costs significantly. 

Cycle Counting

Many businesses use cycle counting in combination with other inventory management techniques. By sampling a small amount of stock at regular intervals, you can assess how accurate your inventory records are. This is time and cost-efficient but ultimately less accurate than a full stock check and doesn’t necessarily compensate for seasonal changes in demand. 

How L3 Funding Can Help

Making the move to inventory management software is a big step forward in your company’s growth, and we understand it can be a daunting financial commitment. At L3 Funding, our mission is to give business owners the tools and advice they need to do great things. 

Contact us today to learn how we can help you face your inventory management challenges and get the merchant funding you need to easily identify your best-fit products.