Types and Methods of Inventory Management for Small Business

Jan 25,2024
Industry News
By managing your inventory effectively, you can have the right products in the right quantities, avoiding product out-of-stocks and money being tied up in excess inventory

Inventory management looks at how much inventory to order and when. The inventory management process involves tracking inventory from purchase or creation to sale.

What is inventory management?

Inventory management is the part of supply chain management that aims to always sell the right product in the right quantity at the right time. If done effectively, businesses can reduce the cost of excess inventory while maximizing sales. Good inventory management small business can help you track your inventory in real-time, streamlining this process.

There are many ways to plan and manage inventory, each guided by your product and business needs. A pull strategy is based on customer demand, where you order small quantities of inventory as needed. Push strategies, on the other hand, rely on forecasting and are based on expected or predicted demand. Just-in-time production strategy is to produce products when they are ordered. The strategies used vary depending on the industry, type of business, and the company's inventory strategy.

By managing your inventory effectively, you can have the right products in the right quantities, avoiding product out-of-stocks and money being tied up in excess inventory. You can also ensure that your products are sold in a timely manner to avoid damage or obsolescence, or spending too much money on inventory taking up space in your warehouse or storage room.

What are the types of inventory management?

Inventory management is a collection of tools, techniques, and strategies for storing, tracking, delivering, and ordering inventory. Controlling inventory with inventory management methods is to minimize losses and maximize profits. 

Inventory management is an important part of manufacturing operations. Here are eight ways to help you optimize inventory control and reduce waste. Choose the method that best suits your manufacturing needs and start improving your production.

FIFO - first in, first out

First-in, first-out (FIFO) is one of the most commonly used inventory management techniques in manufacturing. The principle of the FIFO (first in, first out) method is that the first item in the inventory goes out first. First in, first out is a great way to keep your inventory fresh.

This system helps ensure that the oldest products are used first and reduces the chance of damage or obsolescence. First-in, first-out is an inventory valuation method in which assets are sold, used, or disposed of in the order in which they were produced or acquired. This method is often used for accounting purposes to provide a more accurate picture of an organization's inventory levels and costs.

LIFO - last in, first out

LIFO (last in, first out) is a method used to calculate inventory costs for cost of goods sold. The principle of the LIFO (last in, first out) method is that the last item in the inventory is the first to go out. LIFO helps prevent inventory from spoiling.

As the name suggests, the last-in-first-out inventory pricing method sells the last items placed in inventory first. This results in goods sold during inflationary times costing more because recent purchases are made at the highest prices. LIFO can lower taxes because the IRS allows businesses to deduct higher inventory costs from taxable income.

JIT – just-in-time approach

Just-in-time (JIT) inventory is a system in which a business orders only enough inventory to meet current customer demand.

The system minimizes holding costs, avoids the cost of excess inventory, and ensures the business always has the products it needs.

JIT is a system that allows companies to match raw material orders from suppliers directly to production plans. Businesses can avoid the high costs associated with maintaining large inventories by ordering necessary materials and components when they are needed for production. JIT can help companies improve overall efficiency and profitability

But this technology can be difficult to implement and maintain.

Fast, slow and stationary (FSN) analysis

The FSN inventory method classifies items based on their consumption rate, quantity, and inventory usage. Items are divided into fast moving, slow moving and non-moving.

Fast movement (F): refers to items that are used frequently.

Slow movement (S): refers to items that are used more slowly.

Non-mobile (N): This refers to items that are only used during a specific period of time.

FSN analysis helps in making inventory management decisions. For example, where should items be placed in the warehouse. For example, fast-moving items can be placed in easily accessible locations. It can also help determine which items are immobile and require money to save, and which items may require a change in ordering plans because they move slowly.

economic order quantity

The Economic Order Quantity (EOQ) model helps businesses determine the optimal order quantity for inventory. This approach helps determine how much inventory needs to be ordered, reducing costs associated with inventory acquisition, delivery and storage.

The approach takes into account various expense factors, such as holding and ordering, to help businesses find the most cost-effective way to manage inventory levels. EOQ is the optimal order quantity for a company that minimizes the total costs associated with ordering, receiving, and holding inventory. The EOQ model considers the trade-off between the cost of ordering inventory and the cost of holding inventory.

average cost calculation

To use the average cost or weighted average method, a manufacturer allocates costs to items in inventory based on the total cost of goods purchased or manufactured during a period divided by the total number of items:

Average cost formula = total production cost / number of units produced

Under this method, the cost per inventory unit is equal to the average of all costs incurred in acquiring or producing the unit for sale.

The average cost per unit is calculated periodically, usually at the end of each accounting period, and all units in the inventory are then valued at this average cost.

cycle counting

With cycle counting, inventory checks and balances can be confirmed by physical inventory counts to match records.

To do this, manufacturers need to take regular inventory and record product-specific adjustments. Cycle counting has many benefits, including reducing the need for annual or quarterly inventory counts, catching errors and discrepancies early, and providing accurate data for decision-making. Additionally, cycle counting can help identify areas where processes need improvement to prevent future errors.

If done correctly, cycle counting can be a very useful tool for managing inventory.

ABC analysis

ABC analysis stands for Always Better Control Analysis. ABC analysis or ABC inventory management determines the value of inventory based on the importance of the items. Inventory items are divided into three categories:

Category A – high-value items that are sold infrequently

Category B – Medium value items sold with medium frequency

Category C – low-value items that are sold frequently

ABC analysis can determine which items you should reorder more frequently and which items you don’t need to keep in stock. ABC analysis optimizes your inventory turns and reduces obsolete inventory.

perpetual inventory system

A perpetual inventory system or real-time inventory management software automatically records sales, purchases, and inventory usage through a computerized POS system or ERP manufacturing software.

The system provides businesses with up-to-date information on inventory levels, allowing them to make more informed decisions about ordering and selling products.

Depending on business needs, a perpetual inventory system can be implemented in a variety of ways. For example, some businesses may choose to install point-of-sale systems at all of their retail locations, while other businesses may only implement these systems at certain locations or for certain types of products. Enterprise asset management software can also be used to track and manage inventory levels across multiple locations.

small business inventory management

Perpetual inventory systems offer many advantages over traditional inventory management tools and techniques. Perhaps the most important benefit is that they provide real-time information on inventory levels, which can help businesses avoid stockouts and lost sales. Additionally, a perpetual inventory system can help businesses reduce overall inventory costs by increasing visibility into inventory levels and turnover rates.

If you are considering implementing a perpetual inventory system in your business, there are a few things to keep in mind:

You need to decide which type of system will best meet your needs

You need to choose the right software and hardware for your implementation

You need to train your employees how to use the new system

A perpetual inventory system can be a valuable tool for any business with careful planning and execution.

Small business inventory management tips

Maintaining efficient, accurate and reliable inventory management is critical for small businesses. Next, we will delve into the professional techniques and methods of small business inventory management, and introduce strong relevant content to demonstrate the professionalism of our third-party inventory management services.

1. Choose an inventory method that suits your business

Understanding the inventory needs of different businesses, our third-party inventory management services offer a variety of methods, including a first-in, first-out (FIFO) strategy, to ensure your inventory management is a perfect fit with your business needs.

2. Accurately predict demand and prepare in advance

By leveraging our advanced predictive analytics tools, you can achieve more accurate demand forecasts. We provide historical sales records, market trends and seasonality analysis to help you prepare ahead of time in a highly competitive market.

3. Identify low turnover inventory early

Our inventory management system can detect low-turnover inventory in a timely manner and provide you with real-time data so you can adjust production and avoid product backlogs.

4. Intelligent tracking of inventory levels

With our automated reminder system, you can intelligently track inventory levels to ensure your products are always stocked and replenished in a timely manner.

5. Regularly audit inventory levels to ensure accuracy

We provide efficient cycle counting services to help you regularly audit inventory levels, identify potential problems in a timely manner, and ensure the accuracy of inventory management.

6. Utilize Just-in-Time (JIT) inventory management

Our inventory management system supports the Just-in-Time (JIT) approach, working closely with suppliers to ensure timely supply and minimize inventory costs.

7. Pay attention to quality control

We emphasize the importance of quality control and ensure your products meet high standards by providing a full range of quality management tools.

8. Consider drop shipping to reduce costs

Partner with our reliable dropshippers to eliminate warehousing and fulfillment costs, ensure products are shipped directly from warehouses to customers, and increase profits.

9. Real-time sales tracking and POS technology

Our inventory management system integrates seamlessly with point-of-sale (POS) technology to help you track inventory, costs and sales in real time, so you have full information support when making decisions.

10. Optimize the use of barcode systems

We introduce advanced barcoding systems that enable you to manage inventory easier, faster and more accurately, improving product visibility and inventory efficiency.

11. Purchase order management

With our purchase order management tool, you can easily track orders to suppliers, ensuring they are accurate and increasing the efficiency of accurately receiving inventory.

12. Accurately receive inventory to ensure accuracy

We provide training and support to ensure your employees receive inventory accurately and maintain inventory management accuracy and reliability.

13. Formalization and standardization of processes

We ensure that our inventory management processes run efficiently by minimizing human error through process formalization, standardization and regular review.

14. Optimize warehouse organization

Our warehouse organization solutions take into account warehouse layout and special requirements for perishable or fragile inventory to help you improve supply chain management efficiency.

15. Data-driven decision-making

Use our powerful inventory management system to obtain data in real time to help you make data-based decisions and improve the scientific nature of inventory management.

16. Supplier performance analysis

Our inventory management system provides supplier performance analysis tools to help you evaluate and analyze supplier performance, identify problematic suppliers, and ensure supply chain stability.

17. Invest in professional inventory management software

Choose our professional inventory management software to ensure small businesses can manage and optimize their supply chains, providing accurate information for making critical decisions.

By bringing in these professional tips and our third-party inventory management services, you'll be able to increase efficiency, reduce costs, and ensure the success and sustainability of your small business. We are committed to providing you with efficient and professional inventory management solutions to help you achieve greater success in the market.