Inventory can either power your business or quietly drain its profits.
The only difference is smart, proactive inventory management.
At its core, inventory management is the process of ordering, storing, using, and selling a company’s goods, whether raw materials or finished products.
But beyond tracking what’s on the shelf, the right inventory strategies reduce excess stock, prevent costly stockouts, and help you make better decisions across your supply chain.
And the cost of getting it wrong is massive.
According to a study by IHL Group, global retailers lose nearly $1.8 trillion annually due to inventory distortion—a combination of overstocking and out-of-stocks. That’s almost the same as the GDP of Canada.
Poor inventory management leads to waste, delays, markdowns, and missed sales opportunities. On the other hand, adopting smart inventory strategies can unlock faster turns, tighter controls, lower holding costs, and, ultimately, higher margins.
But not every strategy fits every business.
Whether you’re managing a retail operation, running a 3PL warehouse, or overseeing multi-location inventory, the key is choosing approaches that match your order volume, product type, and fulfillment model.
In this article, we’ll break down 10 proven inventory management strategies, including how they work, when to use them, and real examples of companies putting them into action.
Let’s get started.
10 Effective Inventory Management Strategies
Let’s look at some of the most popular and effective inventory management strategies now:
1. Just-in-Time (JIT) Inventory
Just-in-Time (JIT) inventory is all about reducing excess stock by receiving goods only when they’re needed—not earlier, not later. Instead of stockpiling materials or finished products, businesses coordinate closely with suppliers to ensure timely deliveries aligned with production or customer demand.
This lean warehousing approach helps cut down on storage costs, reduce waste, and keep operations efficient.
When to use it:
JIT works best when you have stable, predictable demand and reliable suppliers. It’s a common strategy in industries with fast-moving inventory and short production cycles, like automotive or electronics manufacturing.
Here’s a classic example of successful implementation of the JIT strategy in action:
Toyota’s entire production system was built around JIT principles, helping them reduce waste and improve efficiency. They only ordered parts as needed for specific production runs, minimizing inventory holding costs and streamlining workflows.
But JIT isn’t without risk. During COVID-19, many JIT-reliant companies struggled when global supply chains were disrupted, highlighting the importance of supplier resilience and contingency planning.
Pro tip: If you’re considering JIT, invest in real-time inventory tracking and build strong supplier relationships. Delays or inaccuracies in either area can bring operations to a halt.
2. ABC Analysis
ABC analysis is a way to prioritize your inventory based on how much it contributes to your bottom line. It categorizes products into three buckets:
- A items: High-value, low-quantity (these need tight control and accurate forecasting)
- B items: Moderate value and sales frequency
- C items: Low-value, high-quantity (these are often inexpensive and frequently sold)
By segmenting inventory this way, you can focus your time, budget, and management efforts where they’ll have the biggest impact.
When to use it:
This strategy is ideal for businesses with a large product catalog or a wide SKU range. It’s especially useful when you want to optimize storage, reduce carrying costs, or focus replenishment efforts more strategically.
Here’s a hypothetical example of how ABC analysis helps streamline operations:
Let’s say an e-commerce brand carries 2,000 SKUs. After running ABC analysis, they realize 200 SKUs (A items) drive over 75% of revenue.
With this insight, they shift focus to forecasting and tightly managing those 200 products, automating replenishment for the low-impact C items, and streamlining how they stock B items.
Retailers like Amazon use similar tiered inventory management to optimize fulfillment center space and prioritize their fastest-moving items.
3. Safety Stock Inventory
Safety stock is extra inventory kept on hand to protect against unexpected demand spikes or supply chain delays. It acts as a buffer, so even if a shipment arrives late or demand surges suddenly, you can still fulfill orders without stockouts.
The goal isn’t to overstock everything but to strategically add a cushion to products that are either high-priority or subject to variable demand or supplier reliability.
When to use it:
Use safety stock when you have long lead times, fluctuating demand, or unreliable suppliers. It’s especially useful in seasonal businesses or industries where customer expectations for availability are high, like pharmaceuticals, fashion, or consumer electronics.
Here’s an example of safety stock in action:
During the 2020 pandemic, grocery retailers like Walmart and Target relied on safety stock strategies to keep essentials like cleaning products and toilet paper on the shelves. Brands that maintained extra buffer inventory could continue meeting demand, while others struggled with empty aisles and customer frustration.
Pro tip: Don’t guess your safety stock levels. Calculate them using real data like average daily usage and supplier lead times. A good WMS like Da Vinci can automate this and update safety thresholds based on current trends.
4. First-In, First-Out (FIFO)
First-In, First-Out (FIFO) is a method where the oldest inventory is sold or used first. This is especially important for perishable goods, products with expiration dates, or anything that can become obsolete, like seasonal fashion or tech accessories.
The idea is to reduce spoilage, avoid dead stock, and keep products moving efficiently through your supply chain.
When to use it:
FIFO is a must for businesses dealing with food, beverages, cosmetics, or pharmaceuticals. But even non-perishables benefit from this method when managing products with changing models, packaging, or compliance standards.
Cosmetics fulfillment centers often implement FIFO to ensure that products are shipped in the order they arrive, minimizing the chance of sending customers items that are close to expiry.
This practice helps avoid costly write-offs due to expired goods sitting in the warehouse too long. For instance, PACK & SEND, a logistics company, highlights FIFO as a best practice in cosmetics order fulfillment to reduce the risk of stocking expired products and to provide customers with the maximum possible shelf life.
Pro tip: Set up warehouse shelving and bin systems that support FIFO, like flow racks or clear labeling. And let your WMS track inventory age so you’re not relying on manual checks to rotate stock.
5. Demand Forecasting
Demand forecasting uses historical sales data, market trends, and seasonality to predict future customer demand. It helps you order the right products at the right time, minimizing overstock and preventing stockouts.
Forecasting models can be simple (based on moving averages) or advanced (leveraging AI and machine learning), depending on the complexity of your operations and the accuracy you need.
When to use it:
Demand forecasting is essential for businesses experiencing seasonal fluctuations, launching new products, or operating in markets with volatile demand. It’s particularly beneficial for companies aiming to optimize inventory levels, improve customer satisfaction, and enhance operational efficiency.
Here’s an example of demand forecasting in action:
The Container Store faced challenges in managing inventory due to outdated technology and fragmented processes, leading to frequent stockouts and excess inventory.
By implementing a demand planning solution, they gained visibility into SKU-level data, enabling more accurate forecasting and streamlined replenishment planning. This transformation resulted in decreased inventory levels and increased inventory turns, enhancing overall efficiency.
6. Batch Tracking
Batch tracking (also known as lot tracking) involves grouping products by batch numbers to monitor production runs, expiry dates, and movement through the supply chain. It’s crucial for traceability, especially in regulated industries like food, pharma, and cosmetics.
With batch tracking, you can trace a product’s origin, quickly isolate issues (like recalls), and comply with safety standards. It also improves quality control and helps identify which shipments or customers received a specific batch.
When to use it:
Use batch tracking if your business deals with expiration dates, quality audits, or regulatory requirements. It’s also valuable for any business that needs better traceability across suppliers, production lines, or fulfillment centers.
Lush Cosmetics uses batch tracking to ensure quality and transparency. Each product is labeled with a batch code, letting customers know exactly when and where it was made, and even who made it. Internally, these codes help Lush trace raw materials and isolate issues quickly if any arise.
7. Economic Order Quantity (EOQ)
Economic Order Quantity (EOQ) is a formula that helps businesses determine the optimal order quantity to minimize total inventory costs, including ordering costs (like shipping or admin) and holding costs (like storage or insurance).
The idea is to find the sweet spot where you’re not ordering too often or holding too much.
The classic EOQ formula looks like this:
EOQ = Square root of 2DS / H
where:
D = annual demand
S = cost per order
H = holding cost per unit per year
When to use it:
EOQ is ideal for businesses with relatively stable demand and known ordering/holding costs. It’s commonly used in manufacturing, wholesale, and even e-commerce environments where optimizing inventory costs can significantly impact margins.
Here’s a hypothetical example of EOQ in action:
Imagine a wholesale distributor sells 10,000 units of a product annually. Ordering costs are $50 per purchase order, and storing one unit costs $2 per year.
Using the EOQ formula, they calculate the ideal order quantity to be 707 units. This reduces the frequency of orders while avoiding the cost burden of overstocking.
Pro tip: Use EOQ as a baseline, but revisit it regularly. Demand shifts, supplier changes, or warehousing costs can all affect the ideal order size over time. Many WMS tools can automate EOQ calculations based on current data.
8. Cycle Counting
Cycle counting is a method of auditing a subset of inventory on a rotating schedule rather than doing a full physical inventory count all at once. It helps catch discrepancies early, maintain accuracy, and reduce operational disruptions.
Instead of shutting down once a year to count everything, you might count high-value A items weekly, B items monthly, and C items quarterly, based on ABC analysis (see strategy #2).
When to use it:
Cycle counting is perfect for businesses with large SKU catalogs or busy operations where full inventory shutdowns are impractical. It’s a must-have for businesses aiming to maintain high inventory accuracy year-round.
Here’s a real-world example of cycle counting in action:
A food distributor implemented cycle counting to effectively track perishable goods, leading to a 20% reduction in expired inventory and annual savings of $50,000 in waste management. This practice allowed them to maintain fresher stock and improve profitability.
Pro tip: Combine cycle counting with your ABC classifications to prioritize what matters most. And make sure your WMS flags discrepancies and updates stock records automatically, that’s where the real efficiency gains happen.
9. Perpetual Inventory System
A perpetual inventory system continuously updates stock levels in real time, every time an item is received, sold, returned, or moved.
Unlike periodic systems that rely on scheduled physical counts, perpetual systems use barcode scanning, RFID, or integrated POS/WMS software to maintain up-to-the-minute visibility into inventory levels, locations, and movements.
This approach is crucial for businesses requiring tight control and rapid decision-making.
When to use it:
This inventory management strategy is best suited for high-volume operations like retail chains, third-party logistics providers (3PLs), or fast-paced distribution centers where manual counts are impractical. It’s also valuable in industries with slim margins or strict compliance requirements, where inventory accuracy is paramount.
Here’s an example of a perpetual inventory system in action:
Nordstrom, a leading U.S.-based specialty retailer, recognized that outdated inventory practices were impacting financial performance.
In response, the company implemented a perpetual inventory system to enhance inventory accuracy and merchandise management.
This system provided real-time visibility into stock levels, enabling better decision-making and improved customer service. The adoption of this modern inventory management approach contributed to operational efficiencies and a more responsive supply chain.
Pro tip: Implementing a perpetual inventory system requires reliable technology and processes. Ensure your WMS or ERP system is integrated with barcode scanners or RFID technology to automate inventory tracking. Regularly reconcile system data with physical counts to account for discrepancies due to theft, damage, or scanning errors.
10. Dropshipping
Dropshipping is an inventory management strategy where the retailer doesn’t store products in-house. Instead, customer orders are forwarded to a third-party supplier (usually a manufacturer or wholesaler), who ships the product directly to the customer.
This means you don’t hold inventory at all, eliminating warehousing, fulfillment costs, and the risk of overstocking.
When to use it:
Dropshipping is ideal for e-commerce businesses that want to scale quickly with low overhead. It’s also a good fit for companies testing new products or selling niche items with unpredictable demand. But it requires reliable supplier partnerships and strong customer service protocols, since you’re not in direct control of fulfillment.
Here’s a real-world example of dropshipping in action:
Wayfair, the online furniture giant, uses a dropshipping model for much of its catalog. Instead of stocking millions of bulky items, Wayfair partners with thousands of suppliers who ship products directly to customers. This allows them to offer a massive product range without managing massive inventory.
Pro tip: Dropshipping can hurt your brand if fulfillment is slow or inconsistent. Choose vetted suppliers, track performance, and sync your WMS or e-commerce platform to monitor order status and inventory availability in real time.
How to Choose the Right Inventory Strategy for Your Business
Not every strategy works for every business.
Choosing the right inventory management strategies depend on your products, operations, and where you are in your growth journey. Here’s how to make a smart, tailored decision.
1. Start with your product type
Are you selling perishables? Seasonal items? High-value equipment?
Different products have different needs. Perishables may need FIFO or batch tracking, while high-ticket items benefit from tighter cycle counts and demand forecasting.
2. Factor in your order volume
If you’re moving thousands of SKUs every week, a perpetual inventory system or ABC analysis will give you the control you need. Smaller businesses with lower volumes might get more value from simple safety stock rules or periodic counts.
3. Match the strategy to your business model
- Retail or DTC brands often benefit from demand forecasting, FIFO, and dropshipping
- 3PL providers need real-time systems like perpetual inventory and batch tracking
- Manufacturers tend to rely on JIT, EOQ, and VMI for leaner operations
Don’t pick a strategy in isolation; align it with how you fulfill, sell, and restock products.
4. Address current pain points
Before jumping into new systems, evaluate what’s holding you back. Are stockouts affecting customer experience? Are storage costs creeping up? Are you spending hours fixing inventory errors?
Let those challenges guide which strategies to implement first.
5. Look for tools that support strategy execution
No strategy works well if you’re relying on spreadsheets or outdated systems. A modern Warehouse Management System, like Da Vinci, gives you the visibility, automation, and tracking you need to put these strategies into action and measure their impact over time.
Inventory Management Strategies FAQs
What are the most effective inventory management strategies for small businesses?
There’s no one-size-fits-all answer, but small businesses often benefit from starting simple.
Inventory management strategies like ABC analysis, safety stock, or cycle counting are easy to implement and provide quick wins in accuracy and cost control. As you scale, you can adopt more advanced tools like demand forecasting or perpetual inventory systems.
Can you combine multiple inventory management strategies?
Absolutely. In fact, most successful businesses use a mix of inventory management strategies. For example, you might FIFO for perishables, ABC analysis to prioritize SKU management, and demand forecasting to optimize replenishment. The key is choosing strategies that complement your business model and solve specific challenges.
How do WMS platforms help with inventory strategy execution?
A Warehouse Management System (WMS) automates the heavy lifting behind these strategies. It gives you real-time data, tracks stock movement, flags reorder points, manages cycle counts, and integrates with forecasting tools.
Platforms like Da Vinci WMS also support batch tracking, safety stock levels, and vendor-managed inventory, so you can execute smarter without manual guesswork.
What’s the difference between inventory tactics and strategies?
Strategies are the high-level plans you put in place to optimize inventory, like using JIT or EOQ to control costs.
Tactics are the specific actions that support those strategies, like implementing barcode scanners, setting reorder thresholds, or rearranging warehouse layout to support FIFO.
Think of strategies as why you manage inventory a certain way, and tactics as how you get it done.
Manage Inventory Smarter With the Right Strategy and Tools
Inventory isn’t just a line on your balance sheet, it’s a major driver of margin, efficiency, and customer satisfaction.
The right inventory management strategies help you avoid costly stockouts, reduce holding costs, and keep your operations running smoothly. But it’s not just about picking one approach; it’s about finding the mix that works for your product type, order volume, and supply chain complexity.
So take a step back. Look at your current challenges. Then build a strategy that fits, and scale it with the right tools. Da Vinci WMS is built to help you do exactly that.
From real-time inventory visibility to demand forecasting, cycle counting, and batch tracking, Da Vinci gives you everything you need to execute and optimize your inventory strategy with confidence.
Ready to take control of your inventory? Request a demo and see how Da Vinci can help you turn inventory into a competitive advantage.