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Retail inventory management is key to keeping costs down. Here, we explore what inventory management is, why it’s important and how a retail point of sale system can help.
What is retail inventory management?
Retail inventory management is the process of tracking, ordering, storing and selling the products you keep in stock and is crucial for both big and small businesses. It helps you understand what you have in stock, when you need to reorder and how quickly your inventory moves. For retailers, it’s the system that keeps shelves full, prevents overstocking and ensures you’re investing in products that actually sell.
Inventory management also helps with decision-making around where to store stock, how to organise it and how to avoid shrinkage or waste. Whether you run a high street shop, an online store or both, strong inventory management makes sure you always have the right products available at the right time.
Why is inventory management important in retail?
Inventory management matters because it affects almost every part of your retail business, from stock availability and supply chain to operations and cash flow. Here are the key benefits:
- Lower costs: Inventory management helps retailers understand which products sell quickly and which don’t, making it easier to order the right quantities. This reduces over-ordering, frees up cash tied to slow-moving stock and lowers storage and handling costs.
- Better cash flow: With clearer stock data, you can plan purchasing more accurately and free up cash for other areas of your business.
- Fewer stockouts: Running out of popular items frustrates customers — inventory management helps ensure shelves stay stocked.
- Improved forecasting: Real-time sales and stock information helps you spot trends and plan for seasonal or high-demand periods, especially if you’re selling across multiple channels.
- Less waste and shrinkage: Tracking stock closely helps reduce losses from damage, miscounts or theft.
- Happier customers: When customers can rely on you to have what they need, they’re more likely to have a more positive customer experience and shop with you again.
- Improved supplier relationships: When inventory levels and sales patterns are clear, you can place more accurate orders, avoid last-minute rushes and negotiate better terms with vendors. This consistency builds trust with suppliers and can support better pricing, priority fulfilment or more flexible delivery schedules.
- Better use of storage space: Knowing how quickly products sell helps you keep shelves organised and avoid paying for more storage than you actually need.
How does inventory management work in retail?
Here’s a simple breakdown of how inventory management works in a retail business and the process involved.
- Track your stock: Use your point of sale (POS) or an inventory tool to monitor current stock levels, track sales by product and identify fast-moving and slow-moving items. This visibility helps you decide what to reorder, what to promote and what may need discontinuing.
- Analyse demand: Review historic sales data, seasonal trends and customer behaviour to understand what stock you’ll need and when.
- Create purchase orders: Place orders, based on demand, with suppliers to restock items before they run out.
- Receive and check stock: When deliveries arrive, verify quantities and quality, then update your stock levels in your system.
- Store and organise products: Arrange items logically and label them clearly so staff can find products quickly and avoid miscounts.
- Sell and update in real time: As items sell, your POS should automatically adjust your stock levels so you always know what’s available.
- Review and refine: Regular stock takes and inventory process reviews help you spot issues early and improve accuracy over time. This might include reviewing sales trends, checking stock discrepancies, adjusting reorder points or updating how products are stored and tracked.
Inventory management methods for retailers
Retailers often use a mix of inventory management methods to decide how to order, track and fulfil stock, depending on product type, supplier reliability and storage capacity. Common approaches include:
Inventory ordering methods
- Just-in-time (JIT): Stock arrives only when needed rather than being stored long-term. To make this work, retailers rely on accurate sales data, short supplier lead times and regular communication with vendors. This approach reduces storage costs and excess stock, but requires dependable suppliers and careful planning to avoid running out of products.
- Economic order quantity (EOQ): Uses demand data, ordering costs and storage costs to calculate the most cost-effective amount to order each time. In practice, this means analysing how often a product sells, how much it costs to reorder and how much it costs to store, then using that information to avoid ordering too little (which causes stockouts) or too much (which ties up cash).
- Minimum order quantity (MOQ): Some suppliers set minimum order levels; retailers must account for this in planning.
- ABC analysis: Categorises products by value or importance so you can prioritise the items that matter most — “A” items need close tracking, while “C” items may only require occasional checks
- Par levels: Setting a minimum stock level for each product so you know exactly when to reorder.
- First-in, first-out (FIFO): Ensures older stock sells before newer arrivals, and is especially important for perishable goods or rotating seasonal lines.
Inventory fulfilment methods
- Bulk ordering: Ordering in larger quantities to reduce cost per unit and shipping fees. This works best for items with steady, predictable demand, but carries the risk of tying up cash or creating excess stock if demand changes.
- Drop shipping: Products ship directly from the supplier to the customer, so you never hold stock.
- Cross-docking: Products move quickly from supplier to sales floor without long-term storage, reducing handling costs and freeing up space.
- Consignment: You display and sell goods owned by another business and only pay the supplier once the item sells, usually keeping an agreed percentage of the sale as your margin. This reduces upfront costs and risk but often comes with lower profit margins and stricter terms.
- Safety stock: Keeping a buffer of extra stock to protect against unexpected demand spikes or supplier delays. This works well for popular or essential items.
Retail inventory management best practices
So how can you optimise managing inventory at your shop? Here are six inventory management best practices retailers can use to stay organised and control costs.
1. Invest in an inventory management system
You can do inventory management manually, but it can be tedious and inaccuracies often arise due to miscounting. Inventory management software allows you to automate the tracking process and saves you a substantial amount of time. Look for software that integrates with your POS, so your inventory count is displayed in real time. Learn more about how to choose the best retail POS system.
2. Set up stock alerts
Stock alerts can help you prevent product shortages at your shop. When you set up stock alerts, you can select a minimum inventory for each of your products and receive alerts when items are near or below the threshold.
3. Select suppliers strategically
Your suppliers are key players in your retail inventory management strategy, so you need to select them carefully. With each supplier, consider the price, product quality, reputation, and efficiency.
To best manage your vendors, be sure to set expectations early and form a strong relationship. Your success is dependent on their efficiency and effectiveness, so make it clear that you and your vendors are partners.
4. Implement SKU management practices
Businesses continue to increase the range of products they sell in order to meet the demands of consumers. But that doesn’t mean you should carry an overwhelming amount of products at your shop – it can actually hurt your profitability. SKU management is the process of analysing the carrying cost for each SKU item to determine which products are best serving your business. If certain SKUs aren’t performing financially, consider discontinuing them in your shop.
5. Optimise your order size
When you strategically plan a bulk order of materials from a vendor, you minimise purchasing and shipping costs. Analysing retail metrics, which you can easily do with data analytics tools in your POS, gives you insight into how you should create purchase orders.
6. Consider dropshipping
If you’re starting an online store, you may want to consider dropshipping, a retail fulfillment method where the store doesn’t hold inventory. Instead products are shipped from the manufacturer to the consumer.
What are retail inventory costs?
Retail inventory costs are the expenses associated with buying, storing and managing the products you sell. Understanding these costs is important because they directly affect your profit margins, cash flow and pricing decisions. Breaking them down helps retailers identify where money is being tied up and where efficiencies can be made:
- Ordering costs: The costs associated with purchasing inventory. This can include your vendor costs, shipping fees and inspections, which may involve staff time to check deliveries, verify quantities, assess product quality or handle returns if items arrive damaged or incorrect.
- Shortage costs: The costs that come up when a product is out of stock. These can be monetary costs, like expedited shipping, emergency supplier orders or lost sales, as well as non monetary costs, like customer dissatisfaction, negative reviews or shoppers choosing a competitor instead.
- Carrying costs: The combined costs of holding your inventory and are usually compared to the actual value of the product being held. Ideally you should carry 20-30% of your inventory value, but the average rate varies by industry.
How POS systems for inventory management can help
POS systems for inventory management should give retailers clear visibility into stock levels, automate updates as items sell and help you reorder at the right time. Square’s free inventory management does just that, so you always know what’s in stock, what’s low and what needs reordering – without needing to manually track or update inventory spreadsheets.
With Square, you can manage inventory from anywhere, import thousands of items in minutes and adjust prices or quantities with just a few clicks. Daily stock alerts help you avoid missing sales, while clear reports help you understand which products are driving profits and which may need retiring.
Fast setup, bulk editing and convenient item modifiers also keep queues moving and reduce staff errors. These features let you update prices, quantities or item details across multiple products at once, while staff can quickly add variations – such as size, colour or custom options – without slowing down checkout. And because your Square POS and Dashboard stay perfectly in sync, you spend less time managing stock and more time serving customers.
Learn more about Square free inventory management POS software as well as other ways we simplify your day-to-day with a bespoke retail POS system.
Inventory management FAQs
How often should retailers do inventory counts?
The minimum benchmark to conduct a full inventory count should be at least once or twice a year, but cycle counts (smaller, more frequent checks of selected products) are recommended weekly or monthly. Cycle counting helps you catch issues early, keep stock levels accurate and minimise disruption to day-to-day operations. Using a POS with real-time tracking also reduces the amount of manual counting required.
What is the difference between stock and inventory?
Stock refers specifically to the products you sell to customers, like the items on your shelves or in your stockroom. Inventory is a broader term that includes stock as well as all other materials your business uses, such as packaging, spare parts or supplies. In retail, people often use the terms interchangeably, but understanding the difference helps with more accurate reporting and planning.
How do retailers avoid overstocking?
Retailers can avoid overstocking by using sales data to forecast demand, setting par levels for each item (the minimum amount of each product you always want to have in stock) and reviewing inventory performance regularly. Reliable suppliers and smaller, more frequent orders can also help keep stock levels under control.
A POS with real-time inventory management, like Square for Retail, makes this easier by showing what’s selling, what’s slowing down and when it’s time to reorder so you’re not tying up cash in products you don’t need.
