Managing inventory is crucial for every business, from raw materials processing and component manufacturing to ecommerce stores and retail shops. But every industry has unique requirements for inventory control, so it’s no surprise that each business seeks inventory management methods tailored to its specific needs.
Understanding the different methods of inventory management for 3PLs, direct-to-consumer (DTC), and other fulfillment operations can help you choose the best approach for your company’s needs. Read about different types of warehouse fulfillment control options with inventory management examples from a variety of industries.
- The fundamental types and rules of modern inventory management
- Retail and ecommerce inventory management examples
- How automation transforms traditional inventory management examples
- The difference between manual and automated stock control
- Choosing the right inventory management approach for your operations
- FAQs regarding inventory management
The fundamental types and rules of modern inventory management
The golden rule for inventory is about balance — don’t overbuy, don’t understock. When you’re operating a complex fulfillment or warehousing business, however, following the golden rule is easier said than done.
Choosing the best inventory method helps preserve the balance between over- and under-stocking, even for complex business models. Here are four types of inventory management that suit different purposes.
Just-in-time inventory management (JIT)
JIT inventory takes a lean approach, only ordering products or parts when necessary for production and sales. This reduces warehousing costs and potential waste or obsolescence.
A prime example of a company using the just-in-time inventory method is the computer manufacturer Dell. The brand only orders parts for a new computer when it sells one, essentially building computers to order and avoiding costs for component depreciation and inventory overhead.
Material requirements planning (MRP)
Material requirements planning (MRP) is ideal for manufacturers who make complex products with multiple components. The idea behind MRP is to reduce inventory carrying costs while avoiding production delays. It works by using advanced software to calculate all the assemblies, components, and raw materials necessary to fulfill predicted demand. Demand is calculated based on previous customer sales orders and forecasted market demand.
Black & Decker was the first company to use MRP in 1964, and many other businesses followed suit.
Economic order quantity (EOQ)
Economic order quantity uses a formula to calculate the right order size to meet demand while minimizing inventory expenses. It’s ideal for high-inventory fulfillment operations that predict constant demand for fixed-price products.
Operations using EOQ replenish inventory as orders are placed, creating a consistent fulfillment method without tying up capital in excess inventory. Retailers and manufacturing companies often use this model to balance inventory holding costs and shipping fees and manage raw materials.
Day sales of inventory (DSI)
Day sales of inventory management is one of the most popular inventory management trends for 3PLs. The method calculates the average number of days inventory sits in a warehouse or fulfillment center before it sells. Calculating DSI allows companies to see which products are moving and prioritize their warehouse space accordingly. Most companies prefer a low DSI, as it reflects lower capital tied up in inventory.
Automated inventory management technology like Logiwa IO facilitates low DSI by providing real-time inventory data and demand forecasting. Retail companies that specialize in time-sensitive products, such as perishable goods, fashion, and furniture, often rely on DSI management methods to prevent inventory obsolescence due to changing trends or product spoilage.
Retail and ecommerce inventory management examples
Retail and ecommerce operations often operate on razor-thin margins. Staying competitive in a tight retail market means handling complex warehousing and fulfillment operations efficiently.
The most successful direct-to-consumer (DTC) and third-party logistics (3PL) fulfillment operations have discovered how to leverage modern technology to optimize warehouse operations through product prioritization, safety stock management, and inventory tracking.
Stock prioritization and classification
Most DTC and 3PL fulfillment companies classify stock using the ABC Analysis method. With this method, stock is divided into three categories:
- A items: Strictly controlled high-value, low-volume items
- B items: Routine management for moderate value, moderate volume items
- C items: Minimal control for low-value, high-volume items
Class A items may not sell often, but they can make up the bulk of annual consumption value. Under the ABC method, fulfillment operations focus labor and capital on high-value Class A items, with monthly assessment or constant monitoring. Lower priority Class B and C items are audited less frequently.
First-In, First-Out (FIFO) is the go-to inventory management option for fresh and perishable ecommerce items. The oldest stock is moved first to prevent spoilage and reduce waste. Other types of stock classification methods include VED (vital, essential, desirable) analysis, FSN (fast, slow, non-moving) analysis, and batch/serial tracking that focuses on specific items.
Safety stock calculation and management
Stock optimization for ecommerce and retail often requires keeping a buffer during demand spikes. Large retail companies like Amazon use predictive analytics and robot automation to ensure sufficient inventory and optimize stock in real time.
Inventory tracking and visibility
Real-time visibility is crucial for multi-node networks moving high volumes of product. RFID and barcode scanning in integrated inventory management systems provide instant visibility from the warehouse to the consumer. Consistent visibility and SKU-tracking methods throughout the fulfillment process let you keep an eye on inventory levels while building customer trust.
How automation transforms traditional inventory management examples
Inventory management systems address four main steps: ordering, storing, using/selling, and record-keeping. Historically, each of these steps was managed with extensive accounting, manual inventory counts, and complex calculations on paper and spreadsheets.
Automated inventory management systems like Logiwa IO have taken the manual work out of these processes. One centralized system handles every aspect of the inventory management process, from accurate stock tracking to predictive demand forecasting and warehouse optimization.
With advanced inventory management, automated replenishment replaces manual ordering, and real-time tracking substitutes physical audits, reducing the potential for human error, overstocking, and stockouts.
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The difference between manual and automated stock control
A crucial difference between manual and automated stock control is warehouse optimization. The “Target mistake” is a prime example of misaligned inventory due to manual miscalculations. In 2022, Target miscalculated its season’s inventory, ordering inventory based on predictions from the previous year’s traffic. The company failed to consider more recent downward trends in apparel and home furnishings, which required slashing prices to free up space for more in-demand products.
“Amazon success” provides the perfect counterpoint to the Target mistake. Amazon incorporated automated stock control and data-driven forecasting with barcode scanning, RFID, and automated replenishment to optimize inventory movement and establish industry-defining delivery speed.
Rather than guessing future traffic based on historic sales data, predictive AI analytics analyzes everything from customer behavior and warehouse fulfillment patterns to industry trends and weather to assess future demand and order stock accordingly.
Choosing the right inventory management approach for your operations
When it comes to optimizing warehouse and fulfillment operations, 3PLs and large-scale DTCs rely on multi-warehouse visibility to remain competitive. However, the best option for inventory management still depends on industry-specific demand patterns and business scaling goals.
Logiwa IO offers advanced inventory management technology tailored to your business needs. Whether you’re a computer manufacturer or a 3PL handling multi-warehouse operations, we can help you create a competitive fulfillment operation in the face of changing consumer demand and industry-specific supply chain challenges. Get started today with a personalized demo!
FAQs regarding inventory management
What is the difference between traditional forecasting and AI-powered inventory management?
Traditional forecasting typically relies on historical sales data to predict future needs, a method that can lead to errors if market trends shift suddenly. In contrast, AI-powered inventory management—like that used by Logiwa—analyzes real-time variables including customer behavior, current industry trends, and even weather patterns to assess future demand with much higher accuracy.
How does modern inventory management support business sustainability?
Effective inventory control reduces environmental impact by preventing inventory obsolescence and waste. Methods like First-In, First-Out (FIFO) and Day Sales of Inventory (DSI) are essential for perishable goods and fast-fashion, ensuring that older products are sold before they spoil or become unsellable, thereby reducing the carbon footprint associated with discarded stock.
Why is real-time multi-location visibility critical for 3PLs and DTC brands?
For companies operating across multiple warehouses, real-time visibility prevents “phantom inventory” where records show stock that isn’t actually available for fulfillment. Centralized systems like Logiwa IO provide a “single source of truth,” allowing brands to optimize fulfillment by shipping from the warehouse closest to the customer, which lowers shipping costs and improves delivery speeds.
What are the benefits of using ABC Analysis for inventory prioritization?
ABC Analysis allows businesses to focus their labor and capital where it matters most. By categorizing stock into Class A (high-value, low-volume), Class B (moderate value/volume), and Class C (low-value, high-volume), fulfillment operations can maintain strict control over their most expensive assets while auditing low-priority items less frequently to save on administrative costs.
Can automated inventory systems prevent “Target-style” inventory mistakes?
Yes. Automated systems replace manual guesswork with data-driven replenishment and predictive analytics. By identifying downward trends in specific categories (like apparel or home goods) in real time, automation prevents businesses from over-ordering based on outdated “historic” traffic, helping them avoid the massive price slashes required to clear excess stock.
