Inventory is one of the most valuable assets for any business, but managing it well requires more than just tracking what’s in stock. Yet, 46% of SMEs still use manual methods or don’t track their inventory at all. We can know that many businesses still rely on outdated or manual systems, leading to overstocking, missed sales, and inefficient operations. Whether you manage perishable goods, fast-moving consumer items, or complex supply chains, effective inventory management is essential for long-term success.
In this guide, we cover the fundamentals of what inventory management is and common inventory management methods used, to the key metrics that measure success, inventory management system types available, and the major benefits you can expect. Understanding these essentials will help you build a strong foundation for smarter inventory decisions.
What is Inventory Management?
Inventory management is the process of tracking, organizing, and controlling the flow of inventory from purchasing and storage to sales and restocking. It ensures that you always have the right amount of stock, in the right place, at the right time. Whether you're managing raw materials, finished goods, or packaging supplies, inventory management helps you avoid both overstocking and stockouts.
At its core, inventory management is about striking a balance: too little stock leads to missed sales and dissatisfied customers; too much ties up cash and increases storage, insurance, and holding costs. Effective inventory management helps minimize excess while avoiding stockouts, ensuring smooth operations and improved profitability. The goal is simple, which is to maintain the lowest inventory possible without compromising availability.
Common Inventory Management Methods
Businesses choose from various inventory management methods based on product types, demand patterns, and seasonal factors. Here are the most commonly used techniques:
First In, First Out (FIFO)
FIFO is an inventory management method where the oldest stock is sold or used first. It’s beneficial for perishable goods or items with expiration dates, such as food, cosmetics, or electronics. Beyond physical stock movement, FIFO also impacts accounting: during periods of rising prices, it typically results in lower cost of goods sold (COGS) and higher reported profits, since older, cheaper inventory is recorded as sold first.
Last-In, First-Out (LIFO)
LIFO assumes that the most recently acquired inventory is sold first. Though it may not reflect the physical flow of stock, it can be advantageous in accounting, especially during inflation. By recording the newest, higher-cost inventory as sold first, businesses report higher COGS and lower taxable income. However, it’s important to note that LIFO is not permitted under international accounting standards (IFRS), though still allowed in some countries like the U.S.
Just-in-Time (JIT)
Just-in-Time (JIT) is an inventory management strategy where stock is ordered and received only when it's needed for production or sales. The goal is to minimize inventory holding costs, reduce waste, and improve efficiency. While JIT can free up cash flow and eliminate the need for large storage spaces, it depends heavily on accurate demand forecasting and reliable suppliers. Any disruption in the supply chain or unexpected spikes in demand can quickly lead to stockouts.
ABC Analysis
ABC Analysis is an inventory management method that classifies stock into three categories: A, B, and C, based on their value to the business. “A” items are high-value products that generate the most revenue but make up a small portion of total inventory. “B” items are moderate in both value and quantity, while “C” items are low-value but often account for the largest share of stock. Based on the Pareto principle (80/20 rule), ABC Analysis helps businesses focus attention and resources on the items that have the biggest financial impact.
Economic Order Quantity (EOQ)
The Economic Order Quantity model calculates the ideal order size that minimizes the total cost of ordering and holding inventory. It represents the optimal stock level a business should order at any given time to avoid frequent reorders and reduce excess storage.
Determined by the formula:
EOQ = √(2SD / H)
D: The annual demand in units
S: The fixed cost per order
H: The annual holding cost per unit
By ordering the EOQ amount each time, businesses strike a balance between frequent, costly reorders and expensive excess stock, thereby reducing overall inventory expenses and saving a business a considerable amount of money over time. Although the basic model assumes constant demand and fixed costs, it can be adapted to incorporate factors like quantity discounts, storage limits, or seasonal demand fluctuations.
Minimum Order Quantity (MOQ)
Minimum Order Quantity (MOQ) refers to the smallest number of units a supplier is willing to sell. It helps businesses control purchasing costs by aligning orders with supplier requirements and can reduce per-unit pricing. Meanwhile, it may also lead to overstocking if demand doesn’t match the minimum quantity.
While you generally aim to avoid having more inventory than demand, MOQ ensures cost efficiency, similar to Just-in-Time strategies, by helping to balance order size with inventory carrying costs.
Safety Stock Inventory
Safety stock is inventory kept on hand to protect against unexpected demand spikes, supplier delays, or supply chain disruptions. It acts as a buffer to prevent stockouts when forecasts or lead times vary.
This method is especially valuable when your lead times are long or unpredictable. By reordering once inventory reaches the safety stock level, businesses ensure smoother operations and reduce the risk of lost sales or production halts.
Inventory Management KPIs
Inventory KPIs offer clear, measurable targets that align with business goals and improve operational decisions. Below are some of the most commonly tracked:
Inventory Turnover Ratio
Inventory turnover ratio measures how often your inventory is sold and replaced over a period. It reflects how efficiently stock moves through your business.
Formula:
Inventory Turnover Ratio = Cost of Goods Sold ÷ Average Inventory
*A high turnover ratio indicates strong sales and reduced holding costs. However, an excessively high ratio may point to frequent stockouts or missed sales due to insufficient inventory.
Stockout Rate
Stockout rate measures how often products are unavailable when customers want to buy them. It indicates how well inventory levels meet demand.
Formula:
Stockout Rate = (Number of Stockouts ÷ Total Demand) × 100%
*A high stockout rate indicates issues with forecasting or replenishment, leading to lost sales. Conversely, a very low rate may point to overstocking or excessive safety stock.
Sell-through Rate
Sell-through rate measures the percentage of inventory sold compared to what was received from suppliers. It shows how quickly stock moves and indicates supply chain efficiency.
Formula:
Sell-Through Rate = (Units Sold ÷ Units Received) × 100%
*A low sell-through rate may signal overstocking or pricing issues, while a high rate suggests strong demand and timely reordering.
Backorder Rate
Backorder rate measures the percentage of customer orders that cannot be fulfilled immediately due to stock shortages. It reflects how well a company maintains inventory for in-demand products.
Formula:
Backorder Rate = (Number of Backordered Orders ÷ Total Orders) × 100%
*A high backorder rate indicates inventory shortages and potential customer dissatisfaction, while a low rate suggests effective stock management.
Types of Inventory Systems
Businesses use different inventory management systems based on their operational needs, including manual, periodic, and perpetual methods.
Periodic Inventory System
Inventory is counted at fixed intervals, such as weekly, monthly, or quarterly, rather than in real time, because the records are only updated after each count. While you may be using barcode scanners and spreadsheets or software to log data, but there’s no movement tracking between counts. Sales and purchases are logged separately, and stock value is calculated at the end of each period. This system is suitable for businesses with simple SKUs and stable sales cycles, like independent bookstores or seasonal gift shops.
Perpetual Inventory System
Perpetual inventory system automatically update stock levels the moment items are received, sold, transferred, or returned—no waiting for manual counts. Each transaction is tracked in real time through barcode scanners, POS systems, or RFID technology, giving retailers full visibility of inventory across all locations.
For example, staff can instantly see whether an item is available in another store or warehouse, trigger auto-replenishment before hitting stockout, and track movement patterns to optimize stock distribution. It’s especially valuable for businesses with high SKU counts, multi-store operations, omnichannel fulfillment, or multiple warehouses, where delayed data means lost sales or poor customer experience.
Manual Inventory System
Manual inventory system requires staff to physically count stock and record quantities using paper logs or spreadsheets. This approach suits small businesses with limited SKUs and low turnover, such as handmade goods producers. However, manual tracking is labor-intensive and prone to errors, making it unreliable and inefficient as inventory complexity or volume increases.
Benefits of Inventory Management
Inventory management is essential for a successful business. Let’s unlock the key operational benefits.
Maximize Profitability
By closely monitoring inventory levels, demand patterns, and turnover rates, you can avoid costly overstock and clearance sales that erode margins. Preventing stockouts ensures you don’t miss revenue from lost sales. Efficient inventory management also cuts storage, insurance, and spoilage costs, directly increasing your profit margins and supporting sustainable growth.
Improve Cash Flow
When inventory piles up with slow-moving SKUs, your cash gets tied up in stock that doesn’t sell, which means you have less to spend on essentials like marketing or restocking bestsellers. Poor visibility often leads to overordering “just in case,” driving up storage costs and reducing liquidity. With proper inventory management, you keep only what you need, free up working capital, and reinvest where it truly matters.
Efficiency Order Fulfillment
Real-time inventory data allows you to quickly locate products and choose the optimal fulfillment source. This reduces delays and prevents errors like shipping wrong items, and costly returns and backorders that damage customer trust and increase operational expenses.
Maintain Customer’s Positive Experience
When a popular item runs out or arrives late, customers may cancel the order or shop elsewhere next time. By maintaining accurate stock levels and timely fulfillment, you can avoid broken promises and keep customers coming back.
Stronger Supplier Negotiation Power
By identifying high-demand items and seasonal trends, you can commit to regular orders and negotiate better prices for volume discounts, favorable payment terms, or priority fulfillment.
In addition, clear visibility into slow-moving or seasonal items helps you adjust orders to avoid excess stock and reduce carrying costs. When suppliers know your exact needs and timing, you can build more strategic, cost-effective partnerships that improve margins and supply reliability.
Enjoy The Benefits of Inventory Management with Eurostop
With the right systems and strategies, you can optimize stock levels in all locations, manage cycle counts accurately, and balance demand with supply efficiently across your entire business. Eurostop’s advanced inventory solutions empower businesses of all sizes to streamline operations and enhance profitability. Trusted by retailers worldwide, Eurostop is the ideal partner to support your inventory management needs and drive sustainable business growth.
