Retail Inventory Management: Definition, Technique and Tips

Ngoc Lee
Retail Inventory Management: Definition, Technique and Tips
Share this:

One of the pillars of a successful retail company is inventory control. Retail inventory management techniques assist retailers and e-commerce sellers in satisfying customers, reducing expenses, and maximizing profits. Then, what is retail inventory management? How to do it effectively?  Let's go over this article to figure out the answer to it. 

 Retail Inventory Management

What Is The Definition of Retail Inventory Management?

Retail inventory management refers to the process of assuring that you have the products that customers need on hand, without having insufficient or excessive amounts. Retailers can fulfill consumer demand without running out of products or holding surplus inventory by managing inventory. 

👉 Read More: What is Inventory Management? How Does it Work? 

Effective retail inventory management leads to cheaper costs and a deeper understanding of sales trends in practice. The following tools and approaches for retail inventory management provide retailers with more information with which to operate their companies:

  • Locations of products.
  • Quantities of each type of product.
  • By location and sales channel, which stock is sold well and which is not.
  • Style, model, product line, or item profit margin.
  • The ideal quantity of goods for back stock and storage.
  • How many things and how often should you reorder?
  • When should a product be discontinued?
  • The impact of shifting seasons on sales.

What Is The Process of Retail Inventory Management?

Building systems to log goods, accept them into inventory, track changes as sales are made, control the flow of goods from buy through final sale, and verify stock counts are all part of the inventory management system for a retail store. These systems' data assists you in reaching the advantages of inventory management in retail stores, such as decreased costs and larger profit margins.

10-steps-in-retail inventory management
 10 Steps In Retail Inventory Management

The steps involved in retail inventory management are outlined below.

Step 1: Create a centralized product database

List all of the items you sell in one place with the following information:

  • Product name
  • Stock-keeping unit (SKU)
  • Brand
  • Retail price, size, lot number, product category, location, and expiration date are all variables.
  • Vendor SKU
  • Wholesale cost
  • Minimum reorder amount
  • Economic order quantity (EOQ)
  • Case quantity amount
  • Inventory on hand
  • Reorder lead time

If you sell online, you need to assist staff in identifying items. First, fill up your inventory record whenever you add new items. Update any information that changes, such as a vendor or wholesale cost. Establish inventory-entry policies, including who is accountable for it and when it should be done. A retail inventory management system's power should be unlocked by having rich data.

Step 2: Determine the stock location

If you own a small company with only one store, keeping track of your inventory is simple. The items are almost certainly on sale or in the stockroom. However, omnichannel retailers and retail chains with several locations may have stock in warehouses, distribution centers, transportation, stockrooms, and shop shelves. There are additional particular places inside those destinations, such as sections, racks, and shelves. Missed sales and revenue are a result of misplaced and neglected goods. 

Practices in retail inventory management help to avoid this. To fully or partially automate the mapping of your inventory, utilize radio frequency identification (RFID) tags, barcode scanners, and labels with category and department designations.

Step 3: Carry out accurate stock counts regularly

To guarantee that your inventory is accurate, you should count it on a regular basis. To avoid mistakes, consider shrinkage, defects, damage, and returns. Instead of starting from scratch, a retail inventory management system makes the system simpler since you simply have to double-check your information. 

As a result, you may concentrate on deviations. The frequency of counting is determined in part by the complexity, scale, and kind of inventory management system used by your company. 

Regardless, experts advocate counting inventories at least once a quarter or once a year. Some companies count particular elements of their inventory on a daily basis. Physical counting and cycle counting are two examples of counting procedures. 

>> Explore More: Cycle service level - Definition and Formula

Carry-out-accurate-stock-counts -regularly
 Carry out accurate stock counts regularly

Step 4: Combine sales and inventory data to make reporting easier

Sales and inventory data may be combined using retail inventory systems. This diagram depicts which products are turning over the fastest (a statistic known as sales velocity) and which are trailing. Use product data to determine when and how much to repurchase, as well as when to give discounts or promotions.

Step 5: Create a Purchasing Process

Set aside time to evaluate data and place orders so you don't fall behind on seasonal patterns or risk running out of stock. You may specify stock levels for particular goods and get reorder alerts using an electronic system. These levels should contain a buffer that enables typical sales to continue. 

Review whether goods are sold out or at reorder points if you're using a manual approach, and add them to your shopping list. Purchases should be prioritized depending on their profitability, popularity, and lead time. Create a purchase order after that.

Step 6: Establish a Markdowns and Promotions Process

For a variety of causes, such as a cooling trend, obsolescence, or seasonal variables, product sales may fall short of expectations. If you provide markdowns, be strict about discounting and moving sluggish sellers so you can make money and create a place for more profitable items. Create a marketing strategy ahead of time to guarantee that you have adequate inventory on hand to fulfill demand.

Step 7: Create a Stock Receiving Procedure

You'll validate incoming orders and precisely record products into an inventory management retail store system during the receiving process. Any supplier error or damage in transportation might result in issues such as unexpected stock outages, overpayment to vendors, and deadstock if there is no defined method. 

Verify that the contents of each delivery correspond to the purchase order. Count cartons and pallets, making sure the product type and numbers are correct and recording any errors, damage, or shortages. Any concerns should be followed up with the vendors. 

Next, add the additional items to inventory counts and keep the goods. Price tags or bar codes may be added to the stock, depending on your demands. The easiest method of inventory management is continuous inventory management, which entails counting products as soon as they arrive.

Step 8: Create a Returns Procedure

You risk retaining unsellable stock or losing a chance to put a sellable item back on display if you don't have an inventory management strategy in place to handle client returns. When a customer returns an item, inspect it to determine if it is damaged or faulty, and then send it to the vendor for repair, write-off, or return. If the item is sellable, enter it into your inventory and set it where it belongs (in eCommerce inventory or a physical store, etc.).

Step 9: Determine a Dead Stock Procedure

Excessive stock wastes capital and reduces profits. Damaged commodities, erroneous delivery, and seasonal leftovers are examples of dead stock. To begin, make a list of things that fit into this category and remove them from stock. Appoint a location to store dead goods and dispose of them on a regular basis (weekly, monthly, or according to your business's needs). Ship pullbacks (items you may return to sellers for credit) as soon as possible. 

Take note of any return shipment dates. Return damaged or faulty items to suppliers, or document and alert suppliers, as appropriate. You may sell the remaining to outlets, donate them, recycle them, or dispose of them, depending on your product line.

 Determine a Dead Stock Procedure

Step 10: Select Inventory KPIs

Select and track certain inventory management KPIs to measure the efficiency of your process. For retailers,  inventory value, profitability, sell-through rate, and turnover rate are critical metrics.

Retailers' Inventory Ordering Techniques

 Inventory ordering techniques for retailers

These techniques can assist you in determining demand. This planning may be automated with inventory control software.

Economic Order Quantity (EOQ)

You can calculate the optimum order amount with this formula. Demand, ordering expenses, and carrying costs are all included in the calculation. The formula is:

EOQ = √ (2 × D × S / H)

D: demand in units S: ordering expenses per order, such as shipping H = holding costs, such as storage charge.

Safety Stock and Par Level In Inventory Management System

The quantity of stock you order as a safety net to avoid running out of stock is known as safety stock. This extra supply is kept on hand in case of inaccurate sales predictions or unexpected client demand.

Par level = safety stock + the minimal inventory necessary to meet customer demand

It's time to restock if the stock falls below the required level.

OTB (Open to Buy)

This method advises a store on how much stuff is for sale in monetary terms for a specific period of time. The objective is to assure sufficient supply while also producing positive cash flow. This is the formula:

OTB at retail cost = planned sales + projected end-of-period stock on hand, in transit, and on order - planned beginning-of-period inventory

Reorder Point

Retailers can determine the reorder point or stock threshold which will prompt reordering, using the lead time and sales data for new products to arrive from vendors. This is the formula:

Reorder point (units) = (Average daily unit sales* average lead time in days) + safety stock in units

Just in Time (JIT) - One of the best inventory management methods

This technique, which avoids tying up money in inventory and storage expenses, was pioneered by Japanese manufacturers. With high-cost and low-volume commodities like vehicles and appliances, JIT is the simplest to deploy. When compared to the danger of stock-outs, the savings on low-margin along with high-volume items would not be enough to justify the additional complexity.

Retailers' Inventory Accounting Techniques

 Inventory accounting techniques for retailers

For accounting reasons, get one of these techniques to calculate the cost of your inventory and commodities sold. Taxes, profits, and the usability of financial reporting are all affected by both strategies. They are only used for physical inventory accounting. They don't expect you to know and track the age of every item you sell.

FIFO (First In, First Out)

This strategy suggests you sell your oldest inventory items first. This method is one of the simplest choices to comprehend and utilize. This method follows a product's natural lifecycle: Older items are frequently sold first, before they deteriorate, become outdated, or lose value in some other ways. The most common option for retailers is FIFO, which is regarded to provide a better approximation of real-world business realities than LIFO.

LIFO (Last In, First Out)

This method implies that newer merchandise is sold first. These commodities are frequently more expensive than older stock, lowering declared earnings and taxes. LIFO has the danger of letting inventory sit on the books permanently, overvaluing or undervaluing it in comparison to market costs. LIFO accounting is less trustworthy since it is more prone to manipulation.

Retailers' Inventory Analysis and Forecasting Techniques

 Inventory analysis and forecasting techniques for retailers

Retailers utilize this category's tactics to better analyze their own operations. They identify the best-selling products, for example, in order to prioritize them. These are also used by retailers to estimate their return on inventory investment and evaluate the worth of their inventory.

ABC analysis

Inventory is divided into three groups using ABC analysis:

  • A represents your most valued items, which are usually the 20% of inventory that accounts for 80% of sales or profits.
  • B is for the bigger proportion of mid-range items that do not fall into either A or C.
  • C indicates the most things that sell the least or generate the least profit.

Retailers utilize this data to enhance how they manage inventory in each group, including how much they store and how they buy it. Marketing efforts and other strategic actions can be guided by ABC analysis data.

 ABC analysis


This approach, which refers to quick, slow, and non-moving evaluation, divides inventory into three categories, similar to ABC. The division focuses on sales velocity in this area (the level at which you can generate revenue). Price rises may be possible for fast-moving things. Likewise, a business owner may decide to phase out non-moving merchandise. 

Because F items are closest to packaging stations and on the most visible shelves, an online merchant may structure a warehouse so that F products are the simplest and fastest to choose.


This method also classifies items based on demand fluctuation and sales forecasting complexity. X things have consistent demand, Y items have high fluctuation, and Z items have irregular and unpredictable demand. Retailers may also mix the ABC and XYZ systems to separate their inventory for more accurate ordering and stocking. 

For example, your reordering rules for an AX item, which contributes significantly to your bottom line and has consistent demand, would likely differ significantly from those for a CZ item, which contributes the least to your bottom line and has unexpected demand.

Batch Tracking

Quality control is the goal of this segmentation process. This technique classifies commodities into categories based on how they were made or processed using similar raw materials. Retailers track details on items by batch or lot, including expiry dates, manufacturing location and date, origin, recall status, defective rates, and purchaser. 

A grocery store chain, for example, wishes to keep track of all the yogurt's expiry dates in its inventory. To eliminate shade variance, a paint shop would ensure that each of the cans in a customer's order came from the same lot. In the meanwhile, some products, such as medications, require an audit trail.

GMROI (Gross Margin Return on Investment)

This calculation involves how many gross profits merchants make on each dollar spent on inventory. Many retailers assess its value departmentally. This is the formula:

Gross margin return on investment = gross margin / average inventory cost

Inventory Turnover Rate

This formula informs a store how many times its whole inventory is sold in a year, and it's a good measure of financial stability and liquidity. There are a few options for determining this. One is the average inventory value/cost of goods sold. Add the initial and ending inventory amounts and divide by two to get the average inventory. The sales value/inventory value formula is the second formula. Inventory turnover rates average approximately eight across all forms of retail. 

If your value is much higher or lower than your peers, you should consider using this approach. Steps like placing products on sale more aggressively and purchasing more or less of a product included. Considering your turnover rate also aids in the planning of orders for commodities with extended lead times.

Forecasting Retail Demand

Use these methods to estimate how much your consumers wish to spend. There are several qualitative and quantitative approaches to choose from. Moving average and time-series analysis are two typical quantitative approaches that include past sales and seasonality. 

By combining different methodologies, predictive analytics software can conduct this type of predicting. Having a clear understanding of demand may help you increase profits by assisting you in determining personnel, buying needs, and the best inventory to hold.

Retailers Inventory Audit Methods

 Inventory audit methods for retailers

Spot Checking

This technique entails checking a certain department or business location on a regular basis. Spot checking is a useful way to catch errors in inventory operations before they turn into bigger concerns. Managers should do inventory spot checks on a regular basis, particularly after implementing a new strategy or making a significant change to the inventory management retail strategy.

Physical Inventory Audit

This process compares financial data to physical inventory counts. In a formal audit, an accountant checks the physical count. During audits, companies routinely halt operations to guarantee that no products are moved. Physical inventories take a lot of resources, effort, and preparation for big firms. A physical inventory, on the other hand, is an effective approach to preventing inventory shrinkage.

Cycle Counting

This method requires stores to count a portion of their inventory on a daily basis. Although retailers normally undertake a comprehensive physical inventory on a regular basis, you don't need to halt operations for this kind of count. Cycle counting is ideal for businesses with a large inventory that can't afford to stop operations to do comprehensive physical inventory inspections. 

This method may be troublesome for organizations who are unable or unwilling to use inventory management software. To cycle count, businesses must keep meticulous records.

Retail Inventory Management Best Practices and Expert Advice

 Best practices and expert advice for retail inventory management

Inventory management best practices help retailers achieve better stock accuracy, reduced costs, decreased shrinkage, and bigger profits. Follow the guidance of inventory specialists and strive to satisfy industry standards.

Exercise Your Ordering Skills

Make every effort to order the correct amount of product at the right time to meet demand and satisfy consumers. Set data-backed levels for your safety and par stock, understand reorder thresholds, improve order sizes with economic order quantity (EOQ), and plan purchases using the open-to-buy approach.

Take Charge of Your Supply Chain in both Store and Warehouse

Request accurate lead times and share sales and product projections with vendors. Monitor service levels from suppliers, such as the proportion of orders that are completed and fulfillment timelines. Talk with vendors that need to better and outline the specific steps needed to achieve your requirements. Prepare for contingencies by determining alternate sources for your most critical products in case your primary supplier fails to deliver.

Calculate your numbers

Keep an eye on your KPIs. Applying ABC, FSN, or XYZ analysis, determine which goods are your best and worst performers. Understand client demand indications and seasonal swings, as well as your turnover rate and GMROI. Make a concerted effort to increase the accuracy of your client demand and sales projections.

Increase Efficiency

Always continue to attempt to increase the efficiency of every aspect of your inventory management. Organize your warehouse and arrange it wisely. Other strategies to increase efficiency are listed below:

  • Pick the method that best fits your order quantity and product categories.
  • Items should be kept as near as possible to the areas and communities where they are most in demand.
  • Examine whether employing drop shipping or a third-party logistics supplier would improve the efficiency of your retail inventory management.
  • Loss prevention methods are used to combat shrinkage, and incoming items are monitored.
  • To calculate carrying costs, employ SKU management.
  • Ensure that you have the correct quantity of products on hand and that you know which ones sell the fastest.
  • To maintain consistency, document all of your procedures, including receiving.

Put accuracy first

Conduct inventory audits and counts on a regular basis. Set performance targets for your employees and train them in inventory management. Create an environment where accuracy is valued.

Make use of an inventory control system

You can automate numerous processes and make an immediate approach to achieving accuracy and efficiency by applying technology including retail inventory software for small businesses as well as big companies. You may link your point-of-sale (POS) system with inventory management by using the correct technology, which eliminates the need for manual data input, reducing mistakes and generating richer data. An automated system may also deliver stock alarm messages and make inventory coordination in many locations easier.

 Make use of an inventory control system


Effectively managing your retail inventory is critical for meeting customer demand while minimizing costs from overstocking or shortages. This requires tracking stock levels, optimizing order quantities, implementing robust processes for purchasing, receiving, and returns, as well as leveraging reporting and analytics. 

Partnering with a 3PL like EFEX can boost inventory efficiency through warehousing, real-time visibility, and seamless integration with your sales channels. Our fulfillment services provide the infrastructure and retail expertise to help you scale while reducing out-of-stocks, overhead, and waste. Contact EFEX today to learn how our customized solutions can set your inventory management on the path to increased sales and profitability.

Ngoc LeeNgoc Lee is an Content Creator Manager at EFEX. She wields her long-term expertise in Logistics and Supply Chain, harnessing her top-notch writing and research skills to bring incredibly valuable content. Whether you're a small startup or a well-established enterprise, Ngoc Lee is here to equip you with the essential knowledge of e-commerce, fulfillment, and all things business-related.