Inventory Management Techniques and Strategies You Need to Know

Modern supply chains move massive amounts of products and raw materials — meaning that inventory management for major, multinational companies can get very complex.

Because these companies may be moving hundreds or thousands of products daily, there’s a lot of room for shippers to misplace inventory or ship it to the wrong location. The volume of cargo moved also makes getting an accurate count of goods extremely difficult without the right systems in place.

Good inventory management techniques can help reduce lost inventory, facilitate returns and order tracking and improve the overall efficiency of a business’s logistics operations. There are then knock-on positive effects for customers. That’s especially valuable since so many people order products and expect them to arrive only a couple of days later or less. 

Learn how businesses use a combination of new tech and tried-and-true methods to stay on top of their inventory. You’ll then be in a good position to start figuring out which of these options might best align with your company’s current and future needs.

Inventory Management Software

Management software is the foundation of most modern inventory management strategies. This tech makes it easier for businesses to collect, visualize and analyze the massive amounts of inventory data they create every day.

Smaller businesses may use general-purpose software, like spreadsheets and other manual tools, to keep track of their inventory. These tools, however, don’t scale up well. Past a certain point, some aspects of management need to be automated. Inventory management software can do this.

For example, some platforms will automatically update stock listings when a warehouse worker scans an item in using a barcode or RFID scanner, a technology that 48% of manufacturers used as of 2015. Others will pull in information gathered by industrial internet of things sensors and automatically update warehouse databases.

Modern inventory management software platforms help businesses know how much inventory they’re holding on to, which can reduce overselling. They can also cut down on time needed to verify inventory counts and help with recalls and returns. When warehouse workers have accurate and real-time information, they’ll cut down on the extremes of slow-moving goods and demand surges. 

Some warehouse management system (WMS) platforms have built-in inventory management software. Decision-makers at a footwear company invested in such a product to cope with ongoing growth. The company had 20,000 SKUs and processed about 2,000 orders daily. The chosen software solution gave impressive results. It enabled an 80% volume increase with minimal additional employees, plus a 70% jump in inventory accuracy.

Demand Forecasting

Many of these platforms can integrate with inventory forecasting tools. These tools use sales data and other available information — like current demand, economic indicators and the weather — to predict how much of a given item a company needs to stock.

These demand forecasting algorithms give warehouse managers an idea of how demand will fluctuate in the future. This setup can help prevent overstocks based on limited information. For example, you can use demand forecasting to make sure a warehouse doesn’t stock too much of a very seasonal item just because it’s in demand right now.

Coca-Cola sells its products in 250,000 stores and 700,000 vending machines throughout Japan. The brand’s leaders chose to use demand forecasting to reduce waste in the country. Data aggregation allows representatives to deliver 500 million beverages at the optimal time to extend shelf life. This approach also allows leaders to become more aware of customer preferences. They can then get insights on which products to stock in particular locations.

Radio-Frequency Identification (RFID)

RFID tags are similar to barcodes. Instead of storing product information optically, however, RFID tags store and transmit data using radio waves broadcasted to handheld scanning devices. These systems are frequently used in manufacturing to track parts and streamline the shipping process.

These tags offer a few different advantages over barcodes. Because they’re not reading data with an optical scan, the RFID scanner doesn’t need to “see” the tag. Therefore, scanners don’t need line of sight to scan. The reader can be as far as 40 feet away and still pick up the tag’s signal.

An RFID reader can also read multiple tags at once, making them a bit more efficient than barcode scanners, which need to take products one at a time.

Unlike barcodes, these tags are read/write capable, meaning a scanner can update the information encoded on each RFID tag. If a warehouse wants to update some product information — to show which area of the warehouse a product is stored or update the tag once it’s shipped out — they can do so with a simple scan.

RFID tracking has appealing applications outside of warehouses, too. Orthopedic surgeons who use RFID technology for surgical instruments say they’ve noted numerous benefits. For example, these medical professionals can get assurance that they’ll have the supplies needed for certain procedures. RFID can also help confirm that the equipment has been properly sterilized before a procedure starts.

Batch Tracking

With batch tracking, you track batches of items — products made with the same ingredients by the same manufacturer and at the same time. These batches tend to have similar characteristics, and keeping track of batch numbers can make inventory management much easier.

For example, this method of tracking is extremely useful for goods with expiration dates. If several pallets of fresh vegetables come in from a supplier and you’re tracking the batch those goods are part of, you’ll know when they were picked and when they’ll expire — even if you split the batch up.

Some businesses like industrial bakeries use automated software to segment ingredients into batches by weight or other quantities. Solutions are also available that detect when a person empties the raw materials into a mixer to prepare them. Such details support inventory optimization by enabling better visibility at more parts of the process. 

Batch tracking is also great for recalling products and isolating items with defects. Defective products often come from the same batch. If you can identify one product and the batch it came from, you can typically catch all the defective products before they’re shipped out. How well a company handles recalls can make a tremendous difference in how customers perceive the organization after the blunder happens.

Dropshipping

Dropshipping is a great way to manage inventory if you don’t want to manage it internally.

With dropshipping, a business fills demand by ordering products from third-party sellers and shipping them directly to consumers. Typically, these businesses are buying from a wholesaler or manufacturer who doesn’t sell directly to consumers or steering extra orders in their direction.

The dropshipping company only needs to worry about good customer service and working with their supplier to ensure the customer gets what they’re after.

You can also use dropshipping in combination with other inventory management techniques to reduce the amount of inventory that you’re managing directly. This approach will, however, make a business more reliant on the stock and warehouse strategy of other companies.

However, certain products are not well-suited for dropshipping. These include large or fragile items and apparel. Also, dropshipping has earned somewhat of a bad reputation due to the tactics of some users on social sites like TikTok. At least 20 people were recently selling Dum Dums lollipops on Amazon in direct violation of the site’s policies. They exploited dropshipping to tempt buyers with the sweets at prices cheaper than what the manufacturers could offer.

Just-in-Time (JIT) Management

This management strategy can minimize the amount of time between a customer making an order and receiving their items. This concept is in contrast to a “just-in-case” inventory management style, where businesses keep large stocks of in-demand items, just in case there’s an order.

Businesses implement a JIT strategy in a variety of ways. Some take advantage of predictive scheduling tech to align shipments of raw materials, production schedules and orders so that products are shipped “just in time.” Others find ways to increase efficiency in the warehouse, reducing the amount of time it takes to move products from receiving to shipping.

Pulling data from inventory management software or elsewhere is an excellent strategy for improving an existing JIT strategy. People can also get information from Internet of Things sensors on critical machinery when utilizing a JIT approach. Doing that can ensure people have sufficient spare parts inventories. Then, they won’t get caught in costly, time-consuming situations where equipment is out of commission for days or longer.

Improving Logistics With Inventory Management Techniques

Inventory management tends to be quite complex — which is why many of these inventory management techniques are so popular across the supply chain. As time goes on, demand tends to increase, and supply chains tend to get more complicated. Thus, inventory optimization will become more important in the future.

If you’re running a small- or medium-sized business, it may be a good idea to investigate these techniques sooner rather than later. Many of them — like RFID tags, inventory management platforms and a JIT approach — are easier to implement at smaller scales.

In any case, leaders should assess what their biggest inventory management challenges are, and which aspects exacerbate those issues. Are they facing issues sourcing parts from far-away destinations? Do employees often complain their current work processes are not efficient enough to cope with warehouse volumes? Determining the most pressing issues makes it easier to narrow down points of focus and explore management techniques and technologies to help.

Editor’s note: This article was originally published on August 13, 2020 and was updated August 22, 2022 to provide readers with more updated information.