Retail inventory management: tips, KPIs, and best practices

Get more digital commerce tips

Tactics to help you streamline and grow your business.

Shopping is often hailed as a form of therapy for consumers. The thrill of discovering new products, exploring the aisles (whether in a brick-and-mortar or virtual retail store), and making that perfect purchase… The experience often creates an unmatched sense of satisfaction that comes with a big old hit of feel-good endorphins.

However, while retail therapy may bring joy to shoppers, it usually elicits a different set of emotions for those running retail businesses. Most retail business leaders already know the feeling well – that heady combination of excitement mixed with anxiety, apprehension, and a sprinkle of nervous unease as you constantly strive to strike balance across your retail operations and achieve supply chain visibility.

Welcome to the intricate realm of retail inventory management! Here, the art of maintaining optimal inventory levels is crucial to ensuring you can meet customer demand, maximize profits, and sustain a competitive edge in the market.

At Linnworks, we’re passionate about developing kickass inventory software to help businesses walk the delicate tightrope that connects supply and demand. Whether you’re looking for supermarket streamlining solutions, big box store best practices, or apparel inventory management advice, our services are a lifeline for retail businesses. 

Interested in a guided tour of everything retail store and ecommerce managers need to know to achieve more effective inventory management? Then walk this way…

What is retail inventory management?

Retail inventory management refers to the strategic process of overseeing, organizing, and optimizing the procurement, storage, and distribution of goods to ensure sufficient availability of desired products while minimizing costs, stockouts, and excess inventory.

In other words, managing inventory for a retail store is a constant juggling act!

Why is retail inventory management important for retail stores?

Contrary to popular misconception, succeeding in the retail business isn’t just about stacking shelves or uploading fancy images, then ringing up purchases and watching the money roll in. If only life were that easy! But alas, no…

Regardless of whether your primary focus is on running physical retail stores or making online sales, the reality is much more complex. Behind those vibrant graphics or charming checkout counters lies the constant ebb and flow of inventory management.

Making sure you’ve got enough stock on hand to satisfy your customers’ cravings without drowning in piles of unused stuff is one thing. But trying to save money at the same time? That’s almost impossible without a dedicated retail inventory management system to help you.  

Retail inventory management software takes the strain by automating routine tasks and eliminating pesky human errors to simplify processes and facilitate growth by:

  • Improving supply chain management
  • Decreasing inventory costs
  • Minimizing safety stock and stockouts
  • Eliminating dead stock
  • Reducing shrinkage
  • Boosting profit margins
  • Predicting customer demand
  • Ensuring customer satisfaction
  • Enhancing cash flow

The 5 types of retail inventory

Business owner using laptop in tool store

From the raw ingredients that birth a product to the packaging that seals the deal, gaining a thorough understanding of the various types of inventory is vital to operational success. Let’s explore the five primary types of retail inventory.

Raw materials

Raw materials are the base ingredients that evolve into the coveted ‘must have’ items in your retail inventory catalog. The building blocks of creation, if you will.

These are the elemental components that form the foundation of your products – all the bits and pieces that go into making your final thing. Think fabrics for clothing in fashion inventory management, wood for tables in furniture inventory management, or ingredients for bakery items in food and beverage inventory management.

Work-in-progress (WIP)

Work-in-progress (WIP) is transitional inventory. These are items that are partway through the production process but aren’t quite ready to be called finished goods.

Imagine a car missing a wheel, a cake still needing frosting, or pair of jeans with its zip and studs still sitting somewhere in inventory storage. WIP inventory captures the essence of transformation, bridging the gap between raw materials and the final product. The ‘middle of the magic,’ for want of a better analogy.

Finished goods

Finished goods are the star of the inventory management show. They’re the all-singing, all-dancing, fully polished products ready to step into the spotlight, dazzle your customers, and bring in the profits.

These items are complete, fully assembled, packaged, and ready for sale. Picture a smartphone fresh out of its sleek box or a designer dress hanging elegantly on a store rack.

Maintenance, repair & operations (MRO) goods

MRO goods are the nuts and bolts of your operation – sometimes quite literally! From office supplies and cleaning products to spare parts for machinery, MRO inventory ensures that your business hums along without any hiccups.

They may not be in the limelight, but MRO goods are the unsung hero of your inventory management processes and are absolutely essential in keeping the show running smoothly. So, ignore them in your physical counts or inventory tracking procedures at your peril!

Packing materials

Packing materials are the final flourish that wrap up your products with finesse, encompassing everything from boxes and tape to labels and tissue paper. But packaging isn’t just about protection. It’s a canvas for your brand’s identity.

Top tip: Our experts have all been around the inventory management block a few times, so believe us when we say you should never underestimate the art of presentation. As the old saying goes, “You never get a second chance to make a first impression.” So make that box that arrives on your customer’s doorstep as impressive as possible.

How does retail inventory management work?

Retail inventory management checks in clothing store

Top secret spoiler alert: Inside every piece of retail inventory management software, there’s a troop of magical elves. Trapped forever within the confines of the motherboard, they work tirelessly 24/7 to manage inventory and maintain the optimum economic order quantity to minimize unsold inventory.

Obviously, we’re joking. But that is sometimes how it feels. Good inventory management systems are akin to having an unseen yet ever-present wizard on payroll, constantly waving their magic wand of organization and precision to keep your shelves stocked just right.

Not-so-top-secret spoiler alert: It’s not just about stacking boxes. The best inventory management techniques comprise a combination of tracking, forecasting, and balancing. Let’s peel back the magician’s curtain and explore the inner workings together.

Tracking product information

AKA: Your inventory management blueprint

Imagine knowing everything about each product in your inventory at a glance – an ever-changing, continually updating blueprint of all your product information containing everything from SKU numbers and descriptions to supplier details and pricing.

Inventory tracking helps businesses maintain a digital repository of product specifics, ensuring accuracy across all inventory-related tasks. This is particularly important for companies that sell across multiple channels or locations, as data centralization is essential for effective retail inventory management.

The power of Linnworks inventory tracking

With Linnworks, you can create comprehensive product profiles that store every crucial detail in one place, making it easy to manage and update information for each item. Plus, our platform integrates seamlessly with various sales channels to centralize inventory data for enhanced visibility.

Tracking sales

AKA: The pulse of your retail inventory

In the fast-paced world of retail, it’s vital to know how much stock you have, what’s flying off the shelves, and what’s just lounging around. This data is gold for making stock management decisions regarding reordering, discontinuing products, and adjusting pricing strategies.

Of course, retail management software doesn’t get you out of doing inventory counts altogether (bummer, we know). However, the good news is that it makes managing inventory levels much easier because you only need to double-check how much stock you have, rather than wiping the slate clean and starting from scratch every time.

The power of Linnworks sales data

With Linnworks, you can track sales in real time and generate insights into top-selling products, popular buying times, and overall sales trends to align your inventory with customer demand.

Creating stock receiving processes

AKA: Your retail inventory welcome mat

Creating stock receiving processes ensures that newly acquired inventory purchases are accounted for, inspected, and integrated seamlessly into your inventory. The best retail inventory management systems allow new items to be scanned and auto-reconciled. Hence, reports on inventory levels remain up-to-date in real time, all of the time.

Top tip: For enhanced cash flow and bottom-line benefits, prioritize purchases for your retail store based on profitability, popularity, and lead time.

The power of Linnworks inventory records

Linnworks lets you set up stock receiving workflows to guide your team through the process, ensuring accuracy and minimizing errors when new stock arrives. You can also make customizations to auto-generate stock discrepancy reports when inventory levels don’t align with physical inventory counts.

Creating a returns procedure

AKA: The backdoor safety net

Most of the time, you can happily wave merchandise out of the front door, sending it on its merry way to delight your customers, never to be seen in your warehouse again. That said, you do need a reliable returns procedure for occasional instances where items are returned through the backdoor.

Efficient inventory management accounts for the flow of returned goods so you can keep your records up to date and make more informed decisions about restocking and dealing with damaged items.

The power of the Linnworks warehouse inventory management system

Linnworks inventory management software streamlines your returns procedure by providing a structured way to process returned items, update inventory levels, and help you assess the state of returned goods.

Demand forecasting

AKA: The crystal ball of savvy retail businesses

With effective retail inventory management systems, peering into the future is no longer reserved for wizards or teams of mythical elves!

Demand forecasting uses past sales data, current trends, and seasonality to predict future sales patterns. It really is like having a crystal ball that guides your inventory decisions, allowing you to wave goodbye to ‘guestimates’ and hello to pinpoint accuracy.

 The power of Linnworks customer demand forecasting

Linnworks proprietary software leverages historical stats and market trend analysis to provide insights into upcoming demand patterns, helping you plan optimum inventory levels for anticipated peak seasons and low sales periods.

Setting minimum and maximum product quantity levels

AKA: The Goldilocks principle

We’ve said it before, and we’ll say it again…Goldilocks had it right! Not too much, not too little, but just right! Whether you’re selling online or in physical stores, getting your economic order quantity bang on is essential.

Setting minimum and maximum product quantity levels is about finding that sweet spot in your inventory turnover rate and installing a safety net to prevent stockouts and surplus inventory. In short, this inventory management feature ensures you’re always well-prepared without overburdening your storage space. 

The power of Linnworks product quantity inventory management

Linnworks’ inventory management system allows users to program alerts when products reach predefined thresholds to ensure streamlined reorder processes with minimum risk of carrying too much inventory, safety stock, or dead stock.


Woman working out retail costings

AKA: The financial navigator of the inventory management process

Assigning accurate costs for each item involves incorporating factors like manufacturing, shipping, and overhead expenses. Knowing exactly what each piece of inventory costs you is essential if you’re to make the best pricing decisions and plan for future growth and expansion.

However, product sales sometimes fall short. There can be a bunch of external reasons behind that – like a trend losing its sizzle or a product becoming old news due to new releases. The best way to navigate that? Play it smart by discounting sluggish sellers to free up cash flow and storage space for high-rollers.

Top tip: Ideally, you want to prep a solid plan for promotions in advance so you’ve got enough stock to keep up with the buzz. After all, staying ahead of the game is what smart retail inventory management is all about.

The power of Linnworks inventory valuation tools

Linnworks’ retail inventory management system assists with product costing by factoring in manufacturing, shipping, overhead, and inventory carrying costs, etc. This data can be integrated into individual product profiles, helping you set prices that align with business goals while ensuring expenses are covered.

Utilizing sales and inventory data

AKA: Channeling your sales insights

Each sales channel tells a different story, so harnessing data from each one is a smart  – nay, essential – move for any successful retail business. And we’re talking all business models here, from physical stores to online sales channels and multi-company marketplaces and sales hubs.

Analyzing sales channel data helps you understand which products shine on which platforms. This guides your inventory allocation and marketing strategies, allowing you to improve your inventory turnover ratio, calculate average inventory costs, and take steps to eliminate dead stock and inventory shrinkage.

The power of Linnworks integrations

Linnworks’ powerful integration platform aggregates sales data from multiple channels. The ability to connect seamlessly with popular online marketplaces (like Amazon, Walmart, eBay, and Etsy) and ecommerce platforms (like Shopify, WooCommerce, and Magento) provides a consolidated view of sales performance, which aids inventory allocation decisions.

Inventory counts

AKA: The reality check

Even with an inventory management system that handles most of the heavy lifting, reality checks are vital in the retail business. Inventory counts involve verifying the number of items in your inventory storage facilities and cross-referencing with your records.

In today’s digital climate, poor inventory management processes that rely solely on human effort are a surefire way to fall behind your competition due to laborious manual processes and costly data input errors. Conversely, an effective inventory management system actively improves accuracy and catches discrepancies, making it much easier to manage inventory data integrity.

The power of Linnworks inventory counts

Linnworks perpetual inventory management tools utilize barcode and QR technology to conduct accurate inventory counts in real time. The results help you manage inventory better by reconciling physical counts with digital inventory records to identify and rectify discrepancies.

Lot tracking

AKA: Tracing the trail of accountability

Lot tracking allows you to trace specific groups of products back to their origin, which enhances standards when it comes to quality control, recalls, and compliance.

Although primarily applicable to retailers dealing with perishable stock, lot tracking (also known as batch tracking) still holds a place in other types of retail inventory management. For example, when dealing with products that have batch-specific attributes like quality standards or category and department codes.

The power of Linnworks lot tracking

Linnworks enables users to assign and track specific batches of products effortlessly by tracing their journey from creation to sale. The result? Enhanced visibility, traceability, accountability, and supply chain management.

Establishing safety stock

AKA: The emergency stash

Good inventory management practices include carrying extra stock so you’re never caught off guard. Just like having an emergency stash of snacks (it’s not just us. We all do that, right?), safety stock acts as a buffer against unexpected fluctuations in supply and demand. 

The key to success lies in defining realistic minimum stock levels based on your inventory turnover ratio. That way, you have enough backup stock on hand to handle unexpected spikes in demand, but without punishing carrying costs through the roof.

The power of Linnworks safety stock management

Our intuitive software utilizes advanced algorithms and AI technology to define average inventory needs based on historical sales and market trends. When stock quantities approach the threshold, an alert is triggered to facilitate proactive reordering.

Best practices and expert tips for better retail inventory management

Florist doing retail inventory checks on tablet

Now we’ve established how retail inventory management software works (we hope you’re not too disappointed that it isn’t down to the elves after all), it’s time to look at some other key considerations and pick up some expert tips on a few specific inventory management techniques.

We’ve narrowed our list down to five primary considerations and enlisted the thoughts of some industry experts with a strong inventory management focus. So let’s dive in!

Inventory fulfillment

Inventory fulfillment makes a science out of ensuring you have the right products, in the right quantities, at the right time to meet customer demand.

“The moment a customer receives a notification that the item they ordered is actually out of stock or even just backordered, the customer experience is essentially spoiled. Alternatively, items that sit in your warehouse, unaccounted for and unlisted, are merely dollars wasted.” – Erin Banta, Co-founder at Pepper.

Best practices include utilizing retail management software to achieve:

  • Real-time visibility – Maintaining insights into stock levels across all sales channels to prevent stockouts.
  • Demand-driven replenishment – Reordering products based on actual demand rather than arbitrary schedules.
  • Omnichannel integration – Seamlessly synchronizing inventory across all online and physical stores.

Warehouse management vs. inventory management

Wondering what the difference is between inventory and warehouse management? We’ve got you covered!

Warehouse management focuses on physical logistics and storage, while inventory management handles the broader aspects of product tracking, demand forecasting, and strategic decision-making. However, effective inventory management techniques apply similar best practices to both:

  • Design optimized warehouse layouts – Streamlining receiving, putaway, picking, packing, and shipping can save your warehouse operatives heaps of time.
  • Utilize cycle counting – Regularly conducting small-scale inventory counts helps to maintain overall accuracy.
  • Cross-functional collaboration – Foster communication between warehouse and inventory teams for smoother operations.

“Use your inventory management history to gauge when you need to restock your warehouse. Some items sell better during different seasons. It’s crucial to prepare in advance for seasons when you have an influx of sales so you don’t run out of stock and miss out on profits. Likewise, it’s counterproductive to overstock on items that aren’t in high demand for at least a few months.” – Michael Nemeroff, CEO and co-founder at Rush Order Tees.

Inventory accounting

Inventory accounting encompasses all the financial magic involved in tracking inventory costs, ensuring accurate valuations, and aligning numbers with reality.

“Accurate inventory accounting is the key to profitability. It’s crucial to value inventory correctly and record costs appropriately in the financial statements. Inaccuracy here can lead to misstated earnings and tax complications.” – Ryan Mckenzie, Co-Founder & CMO at Tru Earth

Best inventory management practices for accounting include:

  • Using a consistent valuation method – Choose a valuation method (like FIFO or LIFO) and stick to it to maintain consistency.
  • Conducting regular reconciliation – Frequently reconcile physical inventory counts with accounting records to catch discrepancies.
  • Having a formula for accurate costing – When calculating prices, you should include all inventory costs, including out-of-warehouse expenses like shipping and handling.

Inventory analysis and forecasting

Numbers don’t lie. And while figures and reporting may not necessarily be your favorite thing, analyzing stats, figures, and customer behavior to predict future demand is essential if you’re to stay one step ahead of the competition.

“Not understanding and planning for your inventory needs can get really expensive. Especially on platforms where advertising is expensive and organic rank is difficult to maintain. Running out of stock can cost you months of progress and make all those ad dollars you spent a waste of money.” – Keith Hartnett, Founder and CEO at Better World Products.

Best practices for effective analyzing and forecasting include:

  • Capturing data-driven insights – Make informed decisions by utilizing retail management software to leverage historical sales figures and market trends.
  • Gaining collaborative input – Gather insights from sales teams and customer feedback to refine forecasting accuracy.
  • Conduct regular reviews – Continuously analyze and adjust forecasting models to stay aligned with dynamic market shifts.

Inventory audit

Inventory audits are all about the detective work involved in verifying the accuracy of your inventory, pinpointing discrepancies, and ensuring accountability.

“The implementation of a well-defined categorization system is indispensable. A coherent categorization system enhances inventory accuracy and speeds up inventory audits, saving both time and resources.” – Leona Everly, Editor-in-Chief at Crossword Weekly.

There are several inventory audit methods you can employ – physical counts, cycle counting, ABC analysis, random sampling, freight cost analysis, etc. Whichever you choose, these are the best practices you’ll need to follow:

  • Develop a regular auditing schedule – Set a consistent schedule for audits, preferably at times that don’t lead to temporary sales floor closures that impact customers.
  • Keep thorough documentation – Maintain detailed records of audit results, deviations, and corrective actions. Remember, investors love clean, reliable numbers – as does the IRS!  
  • Undertake root cause analysis – Investigate the reasons behind discrepancies and implement preventive measures to eliminate inventory shrinkage.

Essential retail inventory management KPIs

Pharmacist doing retail inventory management

In the vast ocean of retail inventory management, key performance indicators (KPIs) act as your guiding compass. They offer essential insights into how well your inventory processes are performing, helping you steer clear of stormy waters and guide your business toward success.

When working with inventory management software, defining KPIs isn’t just important – it’s a complete game-changer. Why? Because KPIs provide you with a tangible measure of operational effectiveness and help you to develop a culture of continuous improvement based on real-time information – rather than relying on gut feelings or guesswork.

Of course, some KPIs are more valuable to retail inventory managers than others. Here are a few that we suggest should take center stage:

  • Customer order fill rate
  • Stockout rate
  • Days of inventory on hand
  • Order fulfillment cycle time
  • Inventory carrying costs
  • Lead time

Finding the right inventory turnover rate for your retail enterprise

You can’t improve inventory management processes without considering your inventory turnover rate (the rate at which inventory stock is sold and replaced).

Of course, optimum rates vary depending on the specific products you sell and your business strategy. However, a higher inventory turnover rate is generally considered favorable, whereas a lower rate may reflect issues in your sales strategy or indicate low market demand for your products.

A turnover rate of 2 – 6 times per year is healthy in the retail sector, although between 2 – 4 is widely considered optimal. This rate signifies that products are moving efficiently through your inventory cycle, reducing carrying costs and minimizing the risk of obsolescence.

Investing in the proper inventory management software for your business 

Choosing the right inventory management software is a strategic investment that can propel your retail business to dizzying new heights. It makes you slick and sets you up for growth. But, how do you justify the cost?

The bottom line, don’t just see it as a bill. Remember, the upfront investment pales in comparison to the long-term gains, like being able to:

  • Grow like a boss – Your business won’t stay small forever, so choose software that grows with you and saves you the headache of repeating the process down the road.
  • Work smarter, not harder – Imagine less manual slog, fewer mistakes, and more time for fun stuff. Those are the rewards you’ll reap from a sound investment.
  • Make better calls – With retail inventory software providing all the juicy insights you need, critical decisions become slam dunks every time.
  • Grow a loyal tribe – No more “Where’s my order?” meltdowns. Ever! The best retail inventory management solutions facilitate swift order fulfillment, meaning more happy customers. 
  • Predict the Future – AI-powered analytics predict which products will sell like hotcakes and which will flop. No crystal ball, elves, or guesswork needed!
  • Stay ahead of the game – Agility is everything. With the right features at your disposal, you can spot changes and pivot like a pro.
  • Keep more dollars in your pocket – Less excess inventory and fewer storage costs equate to significant savings. Cha-ching! Your wallet says thanks.

Pricing guideline

Price ranges vary wildly based on the number of users, integrations with other software, multi-location support, and the depth of analytics and reporting tools. However, here’s a general overview of what you can expect from various pricing plans:

  • Starter packs – Entry-level plans for small businesses with limited requirements start at around $50 to $100 per month.
  • The middle ground – For businesses with more advanced needs, mid-tier subscriptions with more features typically range from $100 to $300 per month.
  • The big leagues – Established industry players requiring extensive functionality should expect to pay between $300 to $1,000+ per month for a comprehensive enterprise plan.

Retail inventory management FAQs

Business owner packing ecommerce orders

How do retail stores maintain inventory?

Retail stores maintain inventory through a combination of manual counts, barcode scanning, inventory management software, and periodic audits to ensure stock levels match records.

What is the best retail inventory method?

The best method varies by business needs, but common ones include First-In-First-Out (FIFO), Last-In-First-Out (LIFO), and Average Cost Method. Many retailers prefer FIFO as it reflects the natural flow of stock.

How do you maintain retail inventory effectively?

To maintain inventory effectively, regularly review stock levels, use inventory management software, analyze historical sales trends to forecast demand, and conduct periodic physical counts to reconcile with recorded inventory.

What is the 80 20 rule of inventory?

The 80/20 rule, also known as the Pareto Principle, states that 80% of the effects come from 20% of the causes. In inventory, it means that roughly 80% of a company’s sales may come from 20% of its products.

What is the golden rule for inventory?

The golden rule for inventory is to balance stock levels to ensure there’s enough to meet demand without tying up excessive capital in unsold goods. It emphasizes the importance of efficient inventory turnover.

What is just-in-time (JIT) retail inventory management?

Just-in-time or JIT inventory management is where products are ordered and received as needed, right before they’re required for production or sale. The goal is to minimize excess inventory and reduce carrying costs by keeping inventory levels as lean as possible. A JIT inventory management approach can help retail businesses to optimize operational efficiency, minimize storage costs, and respond swiftly to changing demand.

What is ABC inventory analysis?

ABC inventory analysis is a method of categorizing inventory items based on their importance. ‘A’ items are the most valuable, often making up 70-80% of inventory value with the least volume. ‘B’ items are mid-tier in both value and volume. ‘C’ items are the least valuable, with the highest volume but the lowest overall value.

Retail inventory management summarized: key takeaways

Here concludes our whistle-stop tour across the retail inventory landscape. And what have we learned? Well, hopefully, you’re now fully aware that:

  • Retail inventory management is a delicate balancing act between meeting customer demands and minimizing excess stock.
  • To run a successful retail business, you must embrace data-driven KPIs to enhance decision-making and operational efficiency.
  • Inventory software is your secret weapon in optimizing stock levels, streamlining processes, and boosting efficiency.
  • Dedicated retail inventory software helps you align operations across your entire supply chain, from procurement and shipping to warehouse and fulfillment operations.
  • Investing in the right inventory management software pays off. It cuts costs, saves time, and sets the stage for a flourishing retail journey.

Embark on your journey toward effective inventory management

The Linnworks team is here to guide you on your mission and provide all the support you need. Get started today by working through the following action points:

Claire Rhodes


Enthusiastic tech translator. Ecommerce storyteller. Claire has worked in the B2B SaaS and tech space for the last 6+ years. With a love for words, grammar and tech, she prides herself on her product know-how and the inner workings of the complex solutions her clients offer. When not crafting B2B tech content, Claire spends her time traveling around the world, freediving, scuba diving, and making friends with the local critters.