6 useful inventory management techniques for small businesses

Selling products requires effective resource planning. Making sure you always have enough stock to meet customer demand without overwhelming your storage capacity demands a delicate balance. However, multiple inventory management techniques are open to small-to-medium enterprises (SMEs) to get this done efficiently.

Even with an effective inventory management system on your side, smaller businesses need to choose techniques that are optimised to their size, scale and type of sales. With many options available and the right approach needing to be decisive, how does a company leader choose the right way to proceed?

In this article, we’ve highlighted some of the most useful ways to handle inventory management for small business to help make the process easier. We’ve listed 6 techniques of inventory management to help keep supply and demand under control at all stages of manufacturing and sale.

What does inventory management mean?

Inventory management is the practice of managing and tracking supplies of products or components. When done right, it ensures that businesses always have a sufficient quantity of stock to meet the needs of production and demand.

The kind of stock management used can be more or less complex depending on the products being made or sold. If there are more stages to the manufacturing process, the more intricate inventory management becomes. Maintaining the most profitable inventory level is crucial in all cases to get the best results and ensure supply and demand are always met.

What are the 6 best inventory management techniques?

To get the best from inventory management software for a small business, companies must carefully consider the techniques of inventory control  used to tailor their operations. This is an important choice that analyses all the factors that may affect your business's processes as well as its common costs.

Of course, no one system works in every situation. Your inventory management technique will depend on your method of producing, selling and ultimately storing the parts and stock used by your business.  

Below, we analyse 6 major types of inventory management that SMEs can put into practice.

1. Just-in-time (JIT)

Just-in-time management is an inventory management in supply chain technique wherein companies forego storage capacity and order stock only when it is needed. The idea behind this is to minimise waste and costs by avoiding holding surplus goods in warehouses.

Instead, the manufacturing and sale process is optimised to calculate the time when specific items are required in the production or sales process. In this way, they arrive just-in-time for their use. 

What businesses does JIT suit best?

A JIT approach works best for companies with little-to-no storage capacity or those looking to save on warehousing costs.  This may also prove beneficial for businesses using flexible storage capacity, such as those employing newer concepts like the sharing economy for these needs.

However, no matter the situation, business owners and managers must also have optimised and efficient processes to get the best from the methodology.

It is also a complex and time-sensitive method to implement. Any delays can cause bottlenecks in production or lead to shortages during sales periods, so companies with complex supply chains might need to commit resources to make sure everything runs efficiently and on time. 

2. Materials requirement planning (MRP)

MRP uses sales forecasting to help companies adequately plan their inventory levels. The system uses data collected by the company to identify the supply requirements to meet demand, allocate resources, schedule effectively and spot potential problems and opportunities.

What kinds of businesses use MRP?

MRP is primarily used by manufacturing businesses, albeit ones with on-site storage capacity. It works best with companies that have their own production lines and that require several components to build the goods that they sell. 

Stock levels need to be monitored often to best utilise materials requirement planning to avoid accidental stockpiling of raw materials. Additionally, this needs careful sales forecasting data analysis to ensure accurate planning.

3. Economic order quantity (EOQ)

EOQ is an inventory system formula that assesses a company's stock level based on factors like its rate of demand and production costs. This system aims to quantify the highest number of units that can be bought whilst minimising the associated costs of warehousing and purchasing.

What kind of businesses might use EOQ techniques? 

EOQ is common for manufacturers, especially ones with inconsistent demand. This can help save money and improve efficiency by ensuring that companies always order goods or supplies in bulk without stretching storage capacity.

Generally, this type of inventory management is better for companies with decent warehousing where bulk buying is more manageable. 

4. Minimum order quantity (MOQ) 

Minimum order quantity (MOQ) takes a different approach to EOQ. Instead, it focuses on quantifying the smallest amount of stock that can be purchased, stored or sold rather than managing excess inventory for cheaper prices.

Depending on output and storage, companies can plan for a high MOQ where buyers must purchase large quantities of product in one go. Alternatively, they can opt for a low MOQ approach, where customers only need to buy as little as 1-50 units at a time.

When should companies use MOQ?

Companies selling fewer but more expensive products can use MOQ techniques to manage their stock inventory. The same may be true for companies supplying other businesses, where, to avoid stockpiling or to break even, they set a high MOQ for buyers.

5. Safety stock inventory

Safety stock is an inventory management technique where companies take on and store some additional stock that is surplus to their essential requirements.  

Unlike many of the methodologies discussed so far, which have focused on controlling inventory to gain maximum efficiency, safety stock instead focuses on keeping extra supply on hand in case of delivery delays, demand surges or production hold-ups.   

What businesses benefit from safety stock inventory management?

Safety stock methods are useful for businesses that want to avoid shortages caused by fluctuating demand. In this case, it requires a company to have sufficient storage capacity to take on the additional safety stock needed to react to a sudden halt in supply or spike in sales.

6. Dropshipping

Companies that are just starting out can use dropshipping to get selling quickly. The system lets newly formed businesses or those entering new markets set up and sell products even if they lack much in the way of warehousing and storage capacity. 

Instead of holding a supply of product in their own inventory, businesses order stock directly from a manufacturer once a sale is made. This is then delivered from the producers straight to the customer without the company ever having to hold the stock themselves.  

What types of businesses could benefit from dropshipping? 

Dropshipping is an inventory management technique that is well-optimised for smaller eCommerce companies or ones trying a new line of products to test a market. It’s best used by businesses that are selling fewer units at a time to avoid possible delays or too much pressure on the supplier side.

What is the importance of inventory management?

Inventory management is very important to the smooth running of a business.There are multiple benefits of inventory management when it is done correctly. 

First and most importantly, it helps businesses keep track of their stock at all times. That way, they can accurately plan their production and sales effectively to meet expected demand.

Choosing a good inventory management strategy can also save money and improve cash flow by ensuring resources are used most efficiently and reach the right place at the right time when manufacturing and selling products. It is also essential for meeting demand to keep customer satisfaction high.

A strong inventory management strategy also avoids losses caused by missing inventory by guaranteeing that all stock is traceable. 

Perpetual vs periodic inventory management

Another choice business owners come up against when considering inventory management in a supply chain is perpetual vs periodic inventory management. Many of the techniques discussed above fall into these two categories. However, both differ quite distinctively from one another in terms of the management level and the detail level they go into to count stock. 

Perpetual inventory management techniques

A perpetual inventory system is more detailed than a periodic inventory technique. These adjust system records after each and every sales transaction, so businesses always know exactly what stock capacity exists in their warehouse.

Whilst this is one of the most accurate and detailed forms of inventory management, it is also the most complex to set up and control. However, it can be highly effective for companies looking to sell large quantities of goods.

Periodic inventory management methods

Periodic inventory methods, on the other hand, are a little looser in the frequency of their record-keeping. These focus instead on manual stock counts at periodic intervals. 

This is better suited to businesses that sell a few higher-value units rather than bulk stock quantities. This is also much better suited for smaller businesses with lower headcounts that cannot yet manage perpetual inventory methods.