Retail Inventory Management Methods & Alternatives

Consumer brands rely on retail inventory management to balance cash flow and stock levels. Learn about methods and alternatives for service businesses.
Written by:  Allison Reich
Published:  June 10, 2024
retail manager proactively managing inventory

Reaching for a product and finding an empty spot on the shelf is frustrating. When you’re forced to work around out-of-stock items, it can be hard to provide standardized services and offer consistent shopping experiences. Given the current climate of shortages and supply chain delays, businesses facing inventory issues may have to opt for lower-quality options to meet client needs. 

Many business owners and managers react to these experiences by seeking out inventory management solutions. The rationale is that companies won’t run out of their best products if they keep careful track of each item and stay on top of reorders.   

However, granular inventory management isn’t always the best solution to stocking challenges. In many cases, well-structured procurement processes and help from the right technology can give a business peace of mind over its inventory practices.

This article covers the basics of inventory management for retail brands. It details the methods and metrics brands use to manage high volumes of retail inventory. It also shares the top alternative for businesses looking to maintain appropriate inventory levels without resorting to time-consuming, per-item inventory tracking. 

Download the free ebook: 5 Ways Your Purchasing Process is Leaking Cash, (And How to Fix It)

What is retail inventory management?

Inventory management is a way for businesses to order, track, organize, and control their stock and supply levels to ensure they have the right goods in the right quantities at the right time. 

This management system can apply to materials and supplies for internal use or products for sale.

Retail inventory management refers specifically to managing retail goods for sale to consumers. Retail inventory might include garments for a fashion brand or various products for an ecommerce store. 

To replenish and keep track of their stock and internal supplies, many businesses rely on the following practices: 

  • Forecasting demand
  • Retail procurement
  • Purchase order management
  • Receiving and recording new stock
  • Maintaining an organized warehouse
  • Monitoring stock levels
  • Managing reorders
  • Analyzing sales patterns to account for variables like seasonality

Effective retail inventory management aims to minimize costs associated with overstocking or stockouts while maximizing sales and profit. 

How does retail inventory management process traditionally work?

Retail inventory management follows a regular cycle of ordering, storing, tracking, and managing stock levels for a location or a company. 

  • Retailers typically look to their forecasting demand as a starting point to determine what they need and when to order it. They place orders with their suppliers, factoring in lead time, popularity of certain SKUs, expected market trends, and other considerations. Shelf life and spoilage are also taken into account for some items, like food and beverages. 
  • Once the requested goods are received, an inventory management team catalogs and stores them in a warehouse or stockroom. Many track their inventory levels through manual counts, such as a spreadsheet. Some use technology like barcodes and RFID tags to monitor stock levels in real time, checking items into the system during stocking and back out at the point of sale (POS) system or shipment. 

Store inventory data helps retailers make informed decisions about restocking. It can be used to consider factors like typical turnover times and carrying costs (also called holding costs). The data can also help identify slow-moving items that need a promotional push or underperforming items that need to be discontinued.

  • Efficient inventory management also considers the impact of returns and exchanges on inventory, ensuring that returned items go back into inventory or are disposed of according to company policy. 

For instance, many fast-fashion brands skip restocking to save time and reduce inventory complexity. Instead, they give customers the option to donate or dispose of items and handle the return as a store credit or refund. 

While this method means the brands “lose” the value of the item, it may be more cost-effective if the associated shipping and restocking fees outweigh the per-item loss in the transaction. Store credit is also a retention and upsell play since customers often spend beyond their store credit amount to secure free shipping and volume discounts. 

The ultimate goal in inventory management is to maintain optimal stock levels that meet customer demand without overstocking, thereby reducing costs and maximizing sales and profitability. Streamlining inventory handling time also optimizes inventory spend management.

What are the main challenges of retail inventory management?

A lot can stand in the way of accurate inventory control. Forecasting errors, ineffective returns systems, and issues with supply chain and lead time can all make stock management challenging. 

Also, recent increases in supply chain disruptions are delaying restocking and affecting sales more than in the years before the pandemic. This makes demand forecasting techniques more important, which can introduce difficulties for smaller retailers trying to compete with larger ones. 

The need for effective inventory tracking and out-of-stock management creates a balancing act between meeting customer demand and maintaining cash flow.

5 Ways Your Purchasing Process Is Leaking Cash, (and How to Fix It)
Ebook

5 Ways Your Purchasing Process Is Leaking Cash, (and How to Fix It)

Identify top areas where your current purchasing process might be falling short—and costing you BIG.

Download the ebook

Categories of retail inventory

One factor that helps brands consider whether they need an inventory management system is the retail categories they serve. In some cases, like food and beverage, inventory management is an important factor in controlling costs. In others, the sales cycle is longer, decreasing the need for real-time monitoring. 

Perishable and non-perishable goods: This category includes items with a short shelf life, such as food products, flowers, and some pharmaceuticals. Perishable products require frequent restocking and careful management to avoid dead stock. Often, these items need a first in, first out (FIFO) system to ensure inventory turnover. Non-perishables are items that have a long shelf life, like canned foods, dry goods, and other packaged products. They can be stocked in larger quantities since they last longer.

Fast-moving consumer goods (FMCG): These are products that sell quickly at relatively low cost, such as toiletries, over-the-counter drugs, cleaning supplies, and other everyday items.

Slow-moving consumer goods (SMCG): This category is comprised of items with a longer sales cycle and higher price points. It includes furniture, high-end electronics, and appliances.

Fashion and apparel: This inventory type includes clothing, footwear, and accessories subject to seasonal changes and trends. It must be managed with an eye on changing consumer preferences. Brands must consider overstock and disposal when planning their buying cycle.

Luxury items: These are high-value items often characterized by their quality and brand prestige, such as jewelry, designer wear, and premium electronics. Inventory levels in this category are typically lower but require high security and may have different sales cycles from commodity goods.

Specialty goods: Specialty goods are a niche category catering to specific interests or hobbies, such as sporting goods, musical instruments, or art supplies. Demand can be variable depending on seasonality or consumer interest trends.

Consumables: Most businesses — even retail brands — rely on consumable items to run daily operations.

  • Hotels buy linens, towels, personal care products, cleaning supplies, paper products, and other items to care for guests and maintain facilities.
  • Clothing stores need packaging, shipping supplies, bags, cleaning supplies, furniture, break room supplies, and hangers to serve guests and support staff.
  • Dispensaries need packaging, labeling, display cases, secure storage, and other necessary items to keep products safe while creating a welcoming atmosphere for clients.

Brands that do both — such as retail shops — may have a combination of inventory management goals and needs to manage their wholesale product purchases as well as their indirect spend.

Retail inventory management strategies

Depending on your brand’s niche and sales volume, it may rely on certain management strategies to ensure timely delivery of goods and a stable inventory management cycle. 

Here are some of the most common methods used when brands must manage inventory:

Just-in-time (JIT) Inventory

When brands use this approach, they can minimize inventory levels by ordering products as close as possible to when they are needed for sale or production, reducing storage costs and risks of overstock. It’s trickier to be successful with this strategy in the face of supply chain constraints or shortages.

Demand forecasting

Many brands estimate their future supply needs based on previous data and assumptions about sales growth for the coming quarter or year using a process called demand forecasting. Referencing historical sales data when forecasting future demand and adjusting inventory levels can help prevent both overstocking and stockouts.

ABC analysis

This strategy involves categorizing inventory into three groups, with 'A' items being the most valuable and 'C' the least). It allows businesses to prioritize resources and focus more closely on managing the most important products. ABC analysis is an approach similar to the Kraljic matrix, which companies use to identify the various impacts inventory or supplies have on a business.

Bulk shipments

Buying in bulk can reduce purchasing costs by optimizing both purchase and handling expenses. It can also unlock volume discounts and reduce stock volatility for mission-critical items.

Vendor-managed inventory (VMI)

In VMI, suppliers manage inventory levels based on pre-established service parameters set by the retailer (potentially via an open purchase order) to reduce stock shortages and minimize excess inventory. This method requires specific vendor relationships and contracts.

Drop shipping

In this method, a third-party shipper fulfills ecommerce orders as they are placed. Drop shipping helps streamline the order process, improve delivery times, and eliminate warehouse management struggles, enabling consistent and quick customer service. 

Cycle counting

Cycle counting is an alternative to physical inventories that involves regularly scheduled counts of small portions of inventory. It ensures that every item is accounted for at least once during a period without significantly disrupting operations.

5 Ways Your Purchasing Process Is Leaking Cash, (and How to Fix It)
Ebook

5 Ways Your Purchasing Process Is Leaking Cash, (and How to Fix It)

Identify top areas where your current purchasing process might be falling short—and costing you BIG.

Download the ebook

Using forecasting strategies to control stock and supply levels

Inventory forecasting is a critical strategy in retail management. It aims to predict future product demand to optimize inventory levels. 

This process involves the following key steps:

1. Historical sales data analysis: The foundation of effective inventory forecasting lies in analyzing past sales data. Analysis helps identify patterns, trends, and seasonal fluctuations in product demand, providing a baseline for future predictions.

2. Market trend evaluation: Beyond historical sales, understanding broader market trends is essential. This includes monitoring industry news, consumer behavior changes, and economic indicators that can influence demand. Evaluating purchase price variance for items you regularly stock is also important to forecasting spend in these areas.

3. Product lifecycle assessment: Each product has its lifecycle stage — introduction, growth, maturity, decline — which affects its demand forecast. Recognizing where a product stands in this cycle allows for more accurate inventory planning.

4. Supplier performance review: Inventory forecasting also requires evaluating supplier reliability and lead time to ensure restocking aligns with forecasted demand without causing overstock or stockouts.

5. Use of forecasting tools and software: By leveraging advanced tools and software that employ algorithms and artificial intelligence, businesses can significantly enhance the accuracy of forecasts by analyzing large datasets more efficiently than with manual methods.

6. Continuous revision and adjustment: Forecasting is not a set-and-forget process. It requires ongoing adjustments based on real-time sales data, unexpected market shifts, or supply chain disruptions.

The above steps help retail brands develop a more strategic approach to inventory management. They can reduce costs associated with excess inventory and ensure product availability meets customer demand.

Performing an inventory audit

Performing an inventory audit involves several critical processes to ensure accuracy and efficiency in managing a company's stock levels. 

Here are the key steps involved:

1. Planning and preparation: This initial phase involves setting clear objectives for the audit, selecting the inventory or locations to be audited, and determining the timing and resources required. It also includes training staff involved in the audit to perform their tasks effectively.

2. Physical inventory count: At this stage, businesses conduct a physical count of their inventory. Counters may use various methods, such as manually tallying items, using barcode scanners, or employing RFID technology for more accuracy and efficiency. It's essential to compare these counts against the recorded inventory levels in the company's management system.

3. Reconciliation of variances: After completing the physical count, discrepancies between the counted inventory and recorded figures must be investigated and reconciled. Reasons for variances could include theft, damage, misplacement, or recording errors. Adjustments should be made in the inventory records to accurately reflect actual stock levels.

4. Evaluation of inventory records: This involves reviewing the processes and systems used for recording inventory transactions, including purchases, sales, returns, and write-offs. The aim is to identify any weaknesses or errors in recording and processing transactions.

5. Report findings and recommendations: The final step is compiling a comprehensive report detailing the audit's findings. This report should highlight discrepancies uncovered during the count, assess the effectiveness of current inventory management practices, and provide recommendations for improvements.

By following these steps and regularly performing inventory audits, companies can maintain accurate records of their stock levels, minimize losses due to discrepancies or inefficiencies, and make informed decisions about purchasing and sales strategies.

Retail inventory management KPIs to use in analysis

Tracking key performance indicators (KPIs) for inventory management can help you better understand the flow of goods through your business so you can refine your approach to sourcing and replenishing products and consumables. 

Here are a few informative KPIs to consider when tracking inventory performance metrics:

  • Stock turnover rate measures how often inventory is sold and replaced over a specific period, indicating the efficiency of inventory management.
  • Inventory accuracy reflects the precision of stock records compared to the physical inventory, highlighting discrepancies for correction.
  • Sell-through rate calculates the percentage of units sold versus units received from a supplier within a certain timeframe, identifying potential overstock or understock issues.
  • Days sales of inventory (DSI) indicates how many days it takes to turn the average inventory into sales, showing how quickly products are moving.
  • Backorder rate shows the percentage of orders that cannot be filled from current stock and are placed on backorder, indicating stock availability problems.
  • Return rate calculates the rate at which purchased items are returned by customers, influencing restocking strategies and product quality assessments.
  • Supplier lead time compliance rate measures how often suppliers deliver goods within the agreed-upon timeframe, affecting inventory levels and turnover.

By closely monitoring these KPIs, retailers gain valuable insights into inventory management, enabling them to make data-driven decisions that enhance operational efficiency and profitability.

Manage stock and inventory more effectively with Order.co

All businesses need a reliable method for managing inventory levels, procurement processes, and expenses, especially when it comes to indirect spend. Even retail companies focused on consumer sales depend on consumables, office supplies, facilities management products, and other goods to keep their front and back offices running smoothly. For many businesses, a traditional inventory management system may not be the best or most cost-effective approach. 

Effective procurement management software can help every type of business unlock discounts and efficiency through bulk orders, whether for single stores or across multiple locations. It can keep the company’s supply chain resilient with effective out-of-stock management and quality control through high-performing suppliers. Procurement management helps keep customer experience and satisfaction high without burdening the bottom line. 

That’s why service-based businesses, retail brands, hotels, spas, salons, dispensaries, and many other businesses partner with Order.co for purchasing automation and spend management. Order.co helps all kinds of companies get the support they need without time-consuming granular inventory control. With Order.co, businesses give purchasing power to the front line so they can order the products and supplies they need without bogging down the process or losing control of the budget.

Order.co:

  • Offers a curated catalog of items from preferred vendors for easy orders, replenishments, and out-of-stock replacements
  • Features an automated approval processes and customizable workflows to ensure every purchase is within spend policy
  • Allows finance teams to keep control with role-based spend guidelines tied to budgets

Order.co delivers the consistency and cost control a business needs without maintaining granular inventory records. It also helps a retail business automate the procurement process for more effective inventory management. With the smart checkout stock visibility feature, buyers know if an item is in stock before they hit the buy button. 

If your business could use more balance in its inventory and indirect spend management needs, schedule a demo of Order.co today. 

Get started

Schedule a demo to see how Order.co can simplify buying for your business.

"*" indicates required fields

This field is for validation purposes and should be left unchanged.