What are the Best Practices for Small Business Inventory Management?

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Inventory Management is such a crucial part of a business and yet so often neglected by many entrepreneurs, who label them less important in front of other processes and matters. However, managing inventory, even for small businesses is an important as well as a difficult task, as you have to constantly maintain knowledge about the market prices, international and national shipping, and also understand the supply and demand variables, along with the trend and interests.  

Best Practices for Small Business Inventory Management 

What is Inventory Management?  

According to Investopedia and the literal definition, ‘Inventory management is a systematic approach to sourcing, storing, and selling inventory—both raw materials, and finished goods.’ In business terms, inventory management means the right stock, at the right heights, place, and at the right time. It also requires to be at the right cost as well as price. Management of Inventory is the key to effective business management. 

Why is Inventory Management Important? 

On business working days, you will need a steady supply of goods to keep the sales coming in. If you are making good sales you need to focus more of your attention on sales and good service, however, if your inventory management is not good enough then it may affect your sales and performance. In fact, good inventory management can help you to avoid delayed shipping and shipping of defective goods to your customer, Remember, if your business is on a smaller scale, mistakes have to be avoided with efficient techniques.  

Best Practices and Techniques for Inventory Management 

Numerous Models and practices exist for handling Inventory Management, but in order to understand which model would better suit you, let us first have a look at the variations and conditions. 

1. Develop a strategy 

As we already discussed, there exist numerous models, you need to develop and classify your own strategy, which is the part that requires you to pay more attention to Inventory management? Once you comprehend the answer, choose a model accordingly. 

2. Categorizing  

This would only be applicable to businesses having multiple products, some high level, and some low level. You need to categorize your products in such a case and accordingly choose a model. 

3. Build a better Framework 

For Inventory management, you need to consider internal, as well as external factors. Hence the internal environment and the framework of your Inventory management should be such, that it could handle both of them. You can make use of modern devices to aid you in maintaining a good framework. Let us have a look at a few Models and Practices for Inventory Management. 

1. ABC Analysis  

ABC Analysis comes with a simple framework, which is also called as a Inventory Categorization Method. In such a technique you analyze your multiple products and categorize them into the most important, and the less important, or with High Priority, and low priority. Such categorization helps you with spending most of your time and focus on products that have high priority and better profits. So, you can accordingly prioritize their supply and storage. Products with high priority are usually marked as A in ABC and the ones with low priority are marked as C.  

2. Just-In-Time (JIT)  

This type of technique is especially beneficial for retailers who plan to manage their cash flow effectively. The idea is to only buy from your supplier when there is a demand from the customer, hence, this technique may not work well for an individual in the manufacturing business, as you would have to keep a track of buying and selling pattern to keep going, this structure would be well-suited for businesses who deal in Dropshipping, e-commerce, and so on.  

3. Safety Stock Inventory 

This technique is usually for retailers or individuals who may have frequent demand for products. Safety Stock Inventory technique implies to have small and additional storage of your products as a backup for your business. In case, the demand increases, you wouldn’t have to worry about getting out of stock, losing sales, or spending another few days waiting for the next supply of stock. Hence, this technique can ensure that your inventory management is proper and you never run out of stock and lose revenue. 

4. First-In-First-Out (FIFO) 

This technique is well-known and used by businesses that deal with products that are perishable in nature. Perishable goods are those goods that do not have a longer shell life and can get defective or non-usable after a certain period of time. FIFO technique ensures that you conduct proper warehousing and documentation, which ultimately would ensure that in the supply of new stock, you will keep the older stock in the first queue, thereby avoiding the loss of older stock. 

5. Reduction in Inventory 

Sometimes, most of the businesses are worried and have most of their capital invested in huge stockings that are not moving out regularly. In such a case, individuals should know before-hand when to reduce their inventory and cut off supply for a few days. One of the effective ways is to speculate when your capital invested in Stocks goes more than 30%, that’s when you should know that your inventory and supply have to be reduced.  

6. Inventory Turnover 

How can Inventory management help you in driving more sales or understanding the market better? It is simple, just have a grasp of your Inventory turnover. Keep making notes of how many numbers of times was your inventory used or sold within a fixed time period, let’s say a quarter or annually. This will help you to understand your demand and the market better, thus understanding your opportunities to increase profit in a particular season or month.  

7. Pick and Pack Process 

This technique or categorization will help you to fulfill your customer’s order at a speed, and with efficiency. There are usually four types of Pick and Pack processes, Zone picking, Wave Picking, Discrete Order picking, and Batch picking. You can choose either of them, according to the demand which your business gets, this is really helpful for small businesses.  


Small business Inventory Management can be helpful for keeping an overall efficiency and driving good sales. Various techniques and methods that can be used for Effective management of Inventory are, Pick and pack process, FIFO, managing Inventory turnover, Reduction in Inventory whenever required, Safety Stock Inventory, Just-In-Time technique, and lastly the ABC analysis.

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