What Is Retail Inventory Management? 8 Tips to Improve

Michael Hickins | Content Strategist | April 25, 2023

Inventory management goes to the heart of retail, a business that depends on making the right goods available to customers at the right time and price. Retailers use a combination of data analytics, automation, and experienced staff to ensure that they’re offering the right blend of goods to meet demand at an attractive price while minimizing the expense of carrying too much stock. Efficient inventory management also helps retailers reduce excessive transportation and carrying costs.

What Is Inventory Management?

Inventory management is the process of tracking and controlling the quantity, cost, and location of inventory, helping businesses identify how much stock to order at what time. It’s a crucial part of the supply chain process, ensuring that the right amount of product is available at the right place and time.

Inventory management focuses on the flow of goods from ordering through storing, distributing, selling, and restocking. For large retailers, inventory management involves managing and accounting for total companywide stocks of goods, as well as for item levels for each of their warehouses, distribution centers, and outlets. Retailers must strike a balance between holding enough inventory to meet customer demand and minimizing the amount of stock they hold in inventory, as unsold items represent carrying costs such as rent and transportation, in addition to the cost of acquiring those stocks.

Key Takeaways

  • Inventory management helps retailers ensure that they have enough stock to meet demand while reducing the financial and environmental costs of storing and transporting excess inventory.
  • Inventory management software not only helps retailers ensure that they have the right goods in stock, but also that they can take advantage of their inventories across all sales channels.
  • Retailers use manual inventory checks and other audit methods to ensure that inventory records are accurate.
  • Retailers can choose their own inventory accounting method, but regulators expect them to stick to that method to ensure consistent year-to-year reporting.

Retail Inventory Management Explained

Retail inventory management is the process of forecasting necessary levels of inventory to be held for sale or in storage for each type of good, across sales channels. It includes using software to help determine demand and value goods held in inventory for accounting and auditing purposes. It also entails a variety of best practices used to ensure that goods are being stored and shipped effectively to retail outlets. The overall goal of inventory management is to ensure that retailers have enough goods on hand to satisfy demand, and to minimize the expense of holding unsold goods.

Why Is Retail Inventory Management Important?

Effective inventory management is crucial to retailers because it ensures that they have enough product on hand to capture every possible sale, it keeps costs down, and it helps retailers improve their understanding of customers and buying patterns. Sound inventory management also helps prevent retailers from overstocking products that expire or become obsolete, such as perishable foods or medicines, and products prone to obsolescence, such as fashion and holiday items.

In addition, having accurate inventory data across sales channels helps retailers get products to consumers faster, improving customer satisfaction and reducing stress on staffers. It also helps reduce inventory shrinkage—inventory that a retailer should have but doesn’t because of internal theft, incorrect recording of inventory on intake, miscounted inventory, goods damaged or spoiled on arrival, misplaced inventory, or other reasons. Moreover, without strong inventory management, retailers can’t return damaged goods to suppliers because they won’t know how or in what condition those goods were delivered.

Having a firm grip on inventory and sales trends helps retailers manage their supply chains better. Whether using just-in-time ordering to minimize carrying costs or putting in fewer, bigger orders, retailers can better determine economic order quantity—the ideal order size that minimizes the costs of holding inventory.

5 Types of Retail Inventory

Inventory management involves tracking goods as they make their way from manufacturer to distributor to warehouse to retail outlet. In some cases, it also involves management of partially built goods, as well as an inventory of maintenance and other goods. Below is a list of some goods that may need to be inventoried.

  1. Raw materials: Raw materials include any components, ingredients, or other materials used in the construction or assembly of the final product. Examples are steel, wood, cotton, and plastic. They’re the basic building blocks of finished products and must be carefully managed to ensure the smooth running of the manufacturing process.
  2. Work-in-progress (WIP) items: WIP inventory consists of materials processed during manufacturing but not yet finished. They may include partially assembled products or components still in production. The value of WIP inventory includes materials, labor, and direct overhead costs of production.
  3. Finished goods: Finished goods have been completely manufactured and packaged and are ready for sale.
  4. Maintenance, repair, and operations (MRO) goods: MRO goods are items used to repair and maintain equipment and facilities, such as tools, spare parts, and cleaning supplies.
  5. Packaging materials: These are materials used to package and protect goods during transport. They include boxes, cartons, labels, and peanut wrappers.

6 Retail Inventory Management Techniques

Inventory management involves tracking, storing, and replenishing goods to ensure that customers can buy what they’re seeking. Below are six techniques retailers use to effectively manage their inventories.

  1. Inventory valuation, as the name suggests, is the process by which retailers assign a monetary value to their inventory. This value is based on the cost of manufacturing and obtaining the items in stock, including anticipated discounts, taxes, and storage fees. This valuation is used for tax accounting and reporting purposes.
  2. Regular reconciliation is a process retailers use to compare inventory counts held in different systems against actual physical counts. This process helps ensure that inventory records are accurate and up to date.
  3. Physical inventory counts involve counting all inventory items across all warehouses, stores, and locations and comparing the tallies to inventory and accounting records. These counts are time-consuming and labor-intensive and typically disrupt operations for the duration of the count—for this reason, they’re often performed annually before the next financial year begins to reconcile discrepancies between records.
  4. Cycle counts are counts of samples or sections of inventory taken throughout the year to ensure that everything is counted over time. Because cycle counts involve regular—often daily—counting of a small percentage of inventory at any given time, they’re less disruptive than physical counts and can uncover problems throughout the year, rather than all at once.
  5. ABC analysis is a method of ranking products in inventory from A to C, based on their financial importance to the business, with “class A” items being the most valuable in terms of sales, risk, demand, and cost. This method helps retailers decide which items to prioritize for cycle count frequency.
  6. Spot checks are like a scaled-down cycle count, whereby retailers randomly select items from inventory and check them against records in the accounting system. This process helps to identify any discrepancies in inventory records.

10 Steps in Retail Inventory Management

Inventory management is a crucial, if underappreciated, aspect of running a retail business. It involves keeping enough items in demand to keep customers happy but not so much that the business loses money from having to bear the carrying costs of unsold merchandise (such as rent and transportation costs). Proper inventory management involves active monitoring of stocks, the use of technology to forecast demand, and a smart strategy for replenishing stocks as demand begins to lighten inventory of certain items.

The following is a breakdown of the steps retailers take to manage their inventories:

  1. Monitor, audit, and manage inventory proactively: A no-brainer, perhaps, but every retailer needs to count its inventory periodically to ensure its records are accurate. These exercises, most often completed with a retail inventory management system, should consider losses from theft, as well as damage, defects, and returns. Count frequency depends on the complexity, scale, and type of the retailer’s inventory management system, but the recommendation is once a quarter—once a year at minimum. Some retailers count high-priority stock daily.
  2. Create a main category hierarchy: Such a hierarchy ensures that the most valuable or profitable categories of goods are tracked most closely, minimizing the risk of losing business to stockouts. This is known as ABC analysis.
  3. Identify and move deadstock: Deadstock, also known as obsolete inventory, includes damaged items, incorrect deliveries, and leftover seasonal products that aren’t expected to sell. Record items that fall into this category and remove them from inventory to minimize carrying costs. Designate a place to hold deadstock, and manage it regularly, at a cadence that makes sense for the business. Promptly ship merchandise that can be returned to vendors for credit (called pullbacks). The remainder can be sold to discount outlets, bundled, or given as free gifts with a purchase, donated, or recycled.
  4. Know where your stock is: For retailers with just one location, knowing where the inventory is located is straightforward: Goods are probably either on display or in the stockroom. But retail companies with multiple sites, as well as those selling through a mix of physical, digital, and catalog channels, might have inventory in transit or scattered across warehouses, distribution centers, stockrooms, and store shelves. Misplaced or overlooked products can represent missed sales and lost revenue. Use radio frequency identification (RFID) tags, bar codes, and labels that include category and department codes to fully or partially automate inventory mapping.
  5. Invest in ecommerce: Ecommerce gives retailers additional outlets for overstocks, including the ability to sell goods at a discount on a differently branded site.
  6. Don’t forget sales data: An effective retail inventory management system integrates sales and inventory data from every available system, including point-of-sale (POS) systems, ecommerce systems, and systems that record customer interactions with sales and service agents. This picture shows you which goods are selling fastest (a metric called sales velocity) and which are lagging. Use this data to decide when and how much to reorder and when to offer promotions or discounts.
  7. Invest in brand-building: Building a variety of strong brands lets retailers align customer expectations, goods, and prices more effectively. This way, a retailer can sell slow-moving goods at a lower price on a secondary website or physical location without tarnishing the image of stores targeting higher-end consumers at higher prices.
  8. Focus on worker and customer safety: Inventory should be displayed or stored safely so that customers, employees of other vendors, and the retailer’s own employees aren’t at risk from falling goods or goods stored in an otherwise hazardous manner.
  9. Manage inventory from a POS system: Point-of-sale systems combine the ability to accept payment with the ability to check goods out of inventory. When a transaction is processed through a POS system, it automatically updates inventory data across locations in real time. Some POS systems also interface directly with other financial systems, including accounts receivable, sales, and returns/exchanges.
  10. Set smart reorder points: Retailers can use sales data to calculate the automated reorder point—the inventory threshold to trigger reorders. A simple, rules-based approach saves time and reduces the possibility of costly inventory management mistakes.

Inventory Accounting Methods for Retail

Inventory accounting methods vary, but all of them assign a value to a retailer’s inventory. The accounting method chosen directly affects the amount of revenue the retailer reports on its financial statements, which in turn also affects its tax liabilities. While companies are free to choose their approach, regulators expect them to stick to their chosen method every year without filling out an IRS form or getting IRS permission.

  • Retail inventory: This method is used to estimate the value of a store's merchandise. Because it’s only an estimate, it shouldn’t be relied upon in financial statements. The method provides the ending inventory balance by comparing the total cost of inventory to the price of all the merchandise held in inventory. It can be calculated using the following formula: (beginning inventory + new inventory purchases) - (sales x markup percentage) = ending retail inventory.
  • FIFO: The first-in, first-out (FIFO) inventory accounting method is the most widely used by retailers. It assumes that the first items retailers buy are also the first ones they sell, assigning the oldest cost “layer” to inventory for cost of goods sold (COGS). First-in goods typically cost less than those purchased later because material prices and other inventory costs tend to rise over time due to inflation. Using this method results in lower COGS and higher gross income relative to other valuation methods—which consequently lead to a higher tax bill. FIFO inventory rotation is recommended for retailers that deal in perishable products, products likely to fall out of fashion, and those with seasonal appeal. FIFO is the only inventory costing method allowed under International Financial Reporting Standards (IFRS), which applies when doing business in most countries outside the US. In the US, where companies follow generally accepted accounting principles (GAAP), businesses may use either FIFO or LIFO (last-in, first-out).
  • LIFO: The last-in, first-out inventory accounting method assumes the newest items are the first items to be sold, assigning the most recent inventory’s cost layer to revenue and COGS. LIFO matches current revenues more closely with current expenses. This can be a benefit during inflationary periods when the COGS is highest because it reduces a company’s gross profit and, consequently, its tax liability. LIFO is the recommended inventory rotation method for businesses selling products that aren’t perishable or ones that don’t face the risk of obsolescence, but it’s accepted only in the US under GAAP.
  • Specific identification: This method of valuing inventory tracks specific, individual items from purchase to sale over the item’s lifetime. The specific identification method is often used for high-value items, such as furniture or vehicles, because their value changes over time depending on the manufacture date, model, and other specifications. This method, which gives the most accurate valuation of the cost of inventory, is practical only for smaller inventories, where tracking each item by serial number or RFID is feasible.
  • Weighted average cost: The weighted average cost (WAC) inventory method assigns an equal value to all units of a given item held in inventory by applying an average cost for the item in question. This method lets retailers assign the same cost to all goods sold, regardless of when they purchased the goods or how much they paid for each item. The WAC method is ideal for direct-to-consumer brands that have a high volume of inventory with items similar in cost, such as electronics.

Retail Inventory Management KPIs

One of the most important aspects of running a successful retail business is managing inventory. That includes ensuring the business has sufficient quantities to meet demand while also minimizing the amount of unsold inventory. The former goal is key to maximizing revenues, while the latter ensures the business doesn’t spend more than necessary on goods that don’t sell.

Below are 17 key performance indicators (KPIs) retailers use to measure their ability to properly manage inventory.

  • Gross margin percentage is a measure of the profit made per dollar of sales. It deducts the cost of goods sold (COGS) from total sales. The resulting number divided by total net revenue and multiplied by 100 gives the gross margin percentage, calculated using the following formula:
    Gross margin percentage = [(net sales – cost of goods sold) / net sales] x 100
  • Stock-to-sales ratio, also known as inventory-to-sales ratio or I/S ratio, measures the value of inventory against the value of sales over a given period. Its value as a KPI is that it measures a retailer’s ability to maintain the right amount of goods in inventory without suffering from stockouts while also not holding too much inventory.
    While it’s usually better to keep inventory-to-sales ratios as low as possible, the goal should be to achieve a stock-to-sales ratio that’s healthy for the business rather than the lowest possible one. A ratio of between 0.167 and 0.25 is considered optimal. Use the following formula:
    Stock-to-sales ratio = inventory value / net sales value
  • Demand forecast accuracy measures how close a retailer’s unit sales forecast came to pegging actual on-hand quantities. It measures what a company forecast, ordered, and sold in a prior period. Use the following formula:
    Demand forecast accuracy = [(actual sales – forecast unit sales) / actual sales] x 100
  • Time to receive is the rate at which new stock is processed and readied for sale. This KPI measures the efficiency with which a retailer receives stock. Use the following formula:
    Time to receive = time for stock validation + time to add stock to records + time to prep stock for storage
  • Inventory turnover, also known as the inventory turnover ratio or inventory turns, is the number of times a company sells and replaces its stock in a given period, usually one year. Retailers use inventory turns to determine if they are carrying too much inventory. A low inventory turnover ratio might reflect weak sales or excessive inventory, but it can also be an advantage if it means management had the foresight to increase inventory ahead of price hikes or spikes in demand. And while a high inventory turnover ratio could suggest strong sales, it could also be the result of insufficient inventory. Use this formula for calculating inventory turns:
    Inventory turnover = cost of goods sold / average value of inventory
  • Sell-through rate (STR) shows how much of what a manufacturer has received was actually sold. It helps indicate the efficiency of a supply chain. Use the following formula:
    Sell-through rate = (number of units sold / number of units received) x 100
  • Days on hand (DOH) is the rate of inventory turns calculated by day. This KPI, also known as average-days-to-sell inventory or average age of inventory, is calculated using the following formula:
    Days on hand = (average inventory for period / cost of sales for period) x 365
  • Rate of return (ROR) is used to measure the profit or loss created by an investment over a given period. Also called return on investment (ROI), ROR can be used on a variety of assets, ranging from intangible assets, such as stocks and bonds, to tangible assets, such as inventories and real estate. Use the following formula:
    Rate of return = [(current value – initial value) / initial value] x 100
  • Backorder rate measures the number of orders a retailer can’t fulfill when a customer places an order. This KPI isn’t the same as an out-of-stock—an item your business isn’t expecting to receive—because the business could potentially have it back in stock later. Backorder rate shows how well a company stocks in-demand products, and generally it should be as low as possible. Use the following formula:
    Backorder rate = (number of delayed orders due to backorders / total number of orders placed) x 100
  • Put-away time is the time it takes a retailer to stow goods into storage.
  • Perfect order rate measures how many orders a retailer ships to customers without any issues, such as damages, inaccuracies, delays, or improper invoicing. This metric can be used as a proxy for customer satisfaction. Use the following formula:
    Perfect order rate = [(number of orders delivered on time / number of orders) x (number of orders completed / number of orders) x (number of orders that are damage free / number of orders) x (number of orders with accurate documentation / number of orders)] x 100
  • GMROI, or gross margin return on investment, shows how much profit a retailer earns from its inventory. Retailers use this KPI to analyze their ability to turn inventory into cash after accounting for the cost of that inventory. The higher the GMRO ratio, the better, as the number indicates the profitability of each unit of inventory. Use the following formula:
    Gross margin return on investment = gross margin / average inventory cost
  • On-time delivery measures the rate at which a retailer fulfills orders within an agreed upon timeframe or deadline. A relatively low number suggests bottlenecks in fulfillment management, often because of an excessive reliance on manual processes, such as for entering shipping addresses or scheduling deliveries. High performers for this metric tend to have superior demand forecasting, minimal backorder rates, and well-maintained distribution and warehousing equipment. Use the following formula:
    On-time delivery = number of shipments received by customers on time / total number of shipments) x 100
  • Average inventory is an estimate of the value of the inventory a retailer has on hand during a given period. Retailers should strive to keep their average inventory consistent over the course of a year. Calculate average inventory using the following formula:
    Average inventory = (beginning inventory + ending inventory) / 2
  • Lead time is the amount of time between when a customer places an order and receives it. Several factors can affect lead time, including the time it takes for the retailer to process an order and ship the item, as well as the time it takes for the manufacturer to make the item. Thus, this KPI measures the efficiency of an entire supply chain or business. Inventory management decisions need to consider lead time to ensure the business doesn’t run into a situation where it can’t fulfill orders due to a lack of stock or raw materials. Use the following formula:
    Lead time = order processing time + production time + delivery time
  • Inventory shrinkage is the amount of inventory a retailer should have on hand but doesn’t for a variety of reasons, including shoplifting, internal theft, supplier fraud, and organizational error. It’s the difference between inventory on record and actual inventory, calculated using the following formula:
    Inventory shrinkage = ending inventory value – physically counted inventory value
  • Holding costs, also known as inventory carrying costs or cost of carry, is the total cost to a retailer to maintain unsold inventory in storage as a percentage of total inventory value. This KPI includes the cost of insurance, labor, and renting storage space, as well as the price of any unsellable products. Calculate inventory carrying costs using the following formula:
    Holding costs = cost of storage / total inventory value x 100

Inventory Analysis and Forecasting for Retailers

Inventory analysis and forecasting are an important part of retail operations. They help retailers understand their stock levels and predict demand for their products. The goal for retailers is to ensure they have enough stock to meet customer demand and to prevent stockouts, as well as to avoid the unnecessary costs of overstocking. Consider these methods.

  • Qualitative forecasting involves combining human judgment (qualitative factors) with hard data to estimate future demand, usually for short-term predictions. Qualitative forecasting is particularly useful when new business conditions, such as a recession or significant supply chain disruptions, make it less likely that data analytics alone will be useful. It’s also useful for when one-off events occur that can’t be included in any dataset, such as when a celebrity attends a store opening or a regularly occurring event is canceled. Rather than rely only on their internal expertise, retailers can also turn to outside experts, customer focus groups, and other forms of market research.
  • Time series analysis uses quantitative data points over a given period to model future trends, considering the sales cadence of each retail business and accounting for how other variables change over time. For example, variations even within well-established seasonal patterns can affect sales volumes and inventory needs, such as when the number of days between the US Thanksgiving holiday and Christmas are at their lowest.
  • Causal forecasting uses statistical forecasting models to predict the impact of changes in one area of the business on another. For example, a retailer can forecast the impact of a new competitor taking market share or offering a rebate.
  • Simulation forecasting helps retailers understand the ripple effects of any decision, such as the impact of a celebrity appearance at a department store on sales of goods in areas of the store that might not be directly related, or how closing one retail location might affect demand at other locations. It combines elements of qualitative forecasting, in that it uses inputs that can’t be gleaned from historical data, and relies on the experience of a retailer’s business leaders to create hypotheses that are then subjected to quantitative tests. Simulations also let users see the results of different simulated scenarios displayed side by side.

Retail Inventory Audit Methods

Inventory audit methods let retailers identify discrepancies in their inventory and financial records and make sure their systems and reconciliations are efficient and accurate. Retailers use the following inventory auditing methods:

  • ABC analysis is a method of inventory auditing whereby items are grouped into three categories—A, B, and C—based on their value to the business, typically sales volume or profitability. Class A items are sold most frequently and should make up the largest portion of inventory; C items are the least frequently sold and smallest portion; B items are in the middle.
  • Cut-off analysis involves briefly pausing shipping and receiving during a count to compare shipping and receiving documents to the reported transactions to check accuracy, often as part of a physical inventory count.
  • Physical inventory count auditing involves auditors observing how all the items in a store are counted and compared against the inventory records. Auditors review their processes and conduct random test counts to verify their numbers.
  • Cycle count auditing is similar to the physical count audit and is conducted in the same way, whereby auditors observe the processes during one or more cycle counts to evaluate the frequency and accuracy to identify opportunities to improve accuracy.
  • Overhead analysis is an auditing method that examines the indirect costs associated with a store’s inventory, such as the costs of storage, handling, and transportation. This method helps retailers understand how these factors affect the overall inventory cost.
  • Freight cost analysis audits examine how freight costs are accounted for. They can be included in the COGS or charged as an expense, but the method needs to be consistent—auditors review records for this consistency.
  • Inventory reconciliation is an auditing method that compares inventory and financial records against physical counts to make sure inventory balances are carried forward and to identify discrepancies.
  • Inventory layers audits examine how retailers have recorded their FIFO and LIFO inventory layers to ensure that what retailers record as first in or last in is accurate.

8 Best Practices and Tips for Retail Inventory Management

Inventory management can be boiled down to several logical steps: Make sure you have enough inventory to meet demand. Make sure you can ship or deliver those items to your customers in a timely and cost-effective manner. Make sure you know where your goods are coming from, that you have a method for reordering them before you run out, and that you have found a reliable way of forecasting demand, so you know when and how often to replenish your inventory. Below is a summary of the more granular best practices.

1. Use ABC analysis:

ABC analysis represents the most basic first step in intelligent inventory management, which is making sure you have enough of the inventory that’s most valuable to your business.

Using ABC analysis, divide your inventory into three (or more) broad categories, ranked in order of sales volume or profitability, and prioritize your inventory accordingly. The Pareto Principle is a good rule of thumb: Hold 20% of inventory in goods that generate 80% of sales or profits—in the A category. The C category is for the least profitable or popular items, and the B category is for items in the middle. Retailers use this type of analysis to help determine future ordering as well as decisions on marketing, displays, and merchandising.

2. Forecast demand:

Demand forecasting is the process of predicting the demand of a stock item over a defined upcoming period. Forecast demand by reviewing historical sales and other data combined with applying knowledge of upcoming seasonality, market trends, and special events, such as holidays and promotions. Retailers can do their demand forecasting either by holding a finger in the wind or by using data analytics software, which has a good chance of outperforming even the most sensitive index fingers.

3. Set KPIs:

There’s an adage that what doesn’t get measured doesn’t get managed—which should be tempered by the idea that too many metrics spoil the broth. It’s important to set a fixed, and manageable, number of key performance indicators that are crucial to your business—such as inventory turns, sell-through rate, gross margin return on investment, and inventory shrinkage—and make sure people working toward those metrics produce the results you desire.

4. Optimize inventory turnover rate:

A slow inventory turn can indicate decreased market demand, which could indicate it’s time to reduce reorder quantities and safety stock, change pricing, offer incentives to reduce stock levels, or change the mix of goods offered for sale. Most items move through a lifecycle of increasing demand, followed by a leveling off and maturity before an eventual decline. Focus on items entering their decline stage and reduce stock levels before they become obsolete. On the flipside, a high turn means you’re not purchasing enough inventory to meet demand, or that it’s potentially time to raise prices to stabilize the ratio and boost unit profit margins.

5. Determine your reorder point:

The reorder point is the stock level that triggers replenishment in an inventory management system. While retailers can establish reorder points manually, using demand planning software helps avoid stockouts and ensures that the right items are ordered at the right time. Retailers use a reorder point formula as a trigger to replenish a given product. Broadly speaking, the reorder point is the daily usage in units multiplied by the days of lead time necessary for replacement, plus the units of safety stock, or the following:

Reorder point = (number of units used daily x number of days lead time) + number of units of safety stock

6. Establish safety stock:

Safety stock acts as an inventory buffer that cushions retailers against surprisingly strong demand, supplier delays, inaccurate (gasp!) demand forecasting, or a failure to place timely reorders. This represents the ultimate opportunity cost for retailers: In 2021, sales lost to stockouts cost US retailers $82 billion in consumer packaged goods sales alone. Retailers can maintain an appropriate level of safety stock by taking the number of products they sell per day and multiplying it by the number of days' worth of safety stock they want—an appropriate level depends on your business. A retailer selling 200 items a day that wants seven days' worth of safety stock would multiply 200 by 7, for a safety stock of 1,400 units.

7. Optimize pick and pack processes:

Pick and pack processes involve the physical steps that warehouse staff take to fulfill customer orders. A simple method for smaller operations is to have staff fulfill each order one at a time. Other methods include batch picking (multiples of the same item gathered at the same time for different orders), wave picking (similar orders filled at the same time), and zone picking (staff pick products only within assigned warehouse zones). Each approach seeks to fill customer orders accurately and in a timely manner, at the lowest cost to the retailer.

8. Implement lot tracking:

Lot tracking helps retailers organize and store inventory to ensure quality control, traceability, and proper fulfillment. It can be used to trace parts or ingredients associated with a group (or lot) of products back to their manufacturer or distributor, often to organize perishable goods by production or expiration date. Other uses include complying with regulations and tracing inventory that was recalled after it has been shipped.

12 Benefits of Retail Inventory Management Software

Inventory management software helps businesses keep accurate track of inventory and automate important functions, such as reordering and distribution. Sophisticated inventory management applications also help with forecasting so that retailers can project demand, avoid having to discount, and improve customer service and satisfaction.

1. Improve customer service: Inventory management software improves customer service by helping ensure that retailers keep items in stock. The software does that by providing accurate estimates of which out-of-inventory goods will be received by the retailer or warehouse and shipped to the customer, and by indicating which items are in stock that customers might accept as an alternative to the item they were seeking.

2. Increase the number of selling channels: Inventory management applications help businesses branch into new retail channels by letting them leverage current inventory across those channels. This practice helps retailers fulfill online orders without frustrating customers with stockouts, and it helps guide decisions about discounting or offering goods through the retailer’s discount-branded stores.

3. Accurate inventory tracking: Simply put, you can’t sell what you don’t know you have. Successful retailers precisely track what they have in inventory, what needs to be reordered, and whether they need to do something (such as offer discounts) to move inventory that’s getting stale.

4. Prevent overselling: Overselling occurs when a retailer sells more items online than it has in stock, resulting in a stockout that frustrates customers, damages its brand, and costs it sales. Overselling is usually the result of slow data synchronization between inventory systems and digital stores.

5. More accurate reordering: Inventory management software won’t forget an important milestone in the retail calendar or let inventories fall below the reorder point.

6. Manage multilocation warehouses: Retailers with multiple physical locations or ecommerce activities can use retail management software to shift goods between distribution centers, bringing goods closer to where they’re in high demand—or where storage is available or less expensive—so it’s then possible to ship goods more quickly and cost effectively to local stores.

7. Reduce costs: Inventory management software helps reduce excessive orders due to poor forecasting or warehouse distribution, and it reduces redundant processes that increase labor costs.

8. Forecast seasonality: Inventory management applications help retailers maintain appropriate stocks of goods across different selling seasons.

9. Improve productivity: Inventory management applications help automate rote tasks, reducing the number of steps employees need to take to complete such tasks while freeing them to focus more on making higher-level decisions.

10. Reduce aged inventory and deadstock: By determining appropriate inventory levels through ABC analyses and other analytic methods, inventory management software helps ensure retailers don’t acquire more stock than necessary.

11. Better expense tracking: Inventory management applications help retailers understand which goods are being bought, how and where they’re being stored, and how much it costs to store, transport, ship, distribute, and merchandise them.

12. Improve supply chain KPIs: Inventory management applications help manage the inflows and outflows of goods offered for sale, helping retail business leaders manage suppliers and reduce back orders, excessive shipping costs resulting from too many rush orders, and missed opportunities for selling goods in high demand. They also improve the accuracy with which key performance indicators are measured.

Manage Inventory Easily with Oracle

Oracle Retail Inventory and Planning Management applications provide visibility into and control of goods flowing across a retail business so that retailers can take action as needed to manage events needing their attention. The Oracle Cloud applications also help retailers manage costs and working capital, as well as meet revenue goals by determining necessary inventory levels across locations.

Inventory management is one of the most important aspects of running a successful retail business. It’s a process of tracking and controlling the supply of goods available for sale, essential in ensuring customers have access to the products they want in a timely manner.

Automating inventory management through a variety of applications helps retailers more accurately track inventory levels, reduce manual data-entry errors, and increase warehouse efficiency. Automation also helps retailers quickly identify potential stockouts, enabling them to take preemptive action. Customer-demand forecasting helps retailers keep enough stock on hand while helping them adjust their pricing strategies. Inventory management is how retailers set stock levels, manage inventory costs, and identify and dispose of any excess or obsolete stock to reduce costs.

Retail Inventory Management FAQs

What are the three major inventory management techniques?
The three major inventory management techniques are inventory valuation, used to determine the value of stock held in retail outlets and in storage; regular reconciliation, used to ensure the recorded inventory matches what can be physically counted; and ABC analysis, which helps retailers prioritize their inventories to focus more on best-selling items.

What are the most important KPIs for inventory management?
The most important key performance indicators for inventory management include inventory turnover, shrinkage, demand forecast accuracy, sell-through rate, days on hand, backorder rate, average inventory, and lead time.

What is the difference between the stock-to-sales ratio and the inventory turnover ratio?
The main difference between the two is that the stock-to-sales ratio references the monetary value of inventory, whereas the inventory turnover ratio is based on units or volume sold.

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