In today’s fast-moving business environment, keeping track of your stock isn’t just about knowing what’s on your shelves, it’s about ensuring profitability, efficiency, and customer satisfaction.

The right inventory management method can save your business thousands of dollars in carrying costs, prevent lost sales, and streamline operations. But not every business needs the same approach.

In this guide, we’ll break down the 10 most common types of inventory management, explain when to use them, and share practical examples for businesses in Canada and the U.S.

What Are the Different Types of Inventory Management?

At its core, inventory management is about controlling how products move through your supply chain from raw materials to finished goods to customer delivery. Different methods focus on different goals: reducing costs, improving speed, or maximizing accuracy.

Let’s explore the 10 most important types of inventory management systems and how they work.

The 10 Types of Inventory Management Explained in Detail

1. Just-in-Time (JIT) Inventory Management

What it is:
JIT is a lean inventory strategy where stock is ordered or produced only when it’s needed for nothing extra. This minimizes storage but requires precise coordination with suppliers.

How it works in practice:

• A manufacturer doesn’t keep extra raw materials.
• When an order comes in, they request parts from suppliers, who deliver quickly.
• Production begins right away, and no excess inventory piles up. 

Why it matters:

• Cuts down on storage costs.
• Reduces waste from unused or obsolete products.
• Keeps operations lean.

2. First-In, First-Out (FIFO)

What it is:
The oldest inventory (first in) is sold first. This method ensures products don’t expire or go out of style.

How it works in practice:

• A grocery store receives milk deliveries twice a week.
• The cartons from Monday go at the front, so customers buy them before the Thursday batch. 

Why it matters:

• Essential for perishable goods like food, cosmetics, and pharmaceuticals.
• Prevents waste and lost profits.

3. Last-In, First-Out (LIFO)

What it is:
The most recent inventory received (last in) is sold first. This method is often used for accounting in industries where costs rise over time.

How it works in practice:

• A lumberyard in the U.S. buys wood at increasing prices.
• They sell the most expensive (newest) stock first, which matches rising sales prices and reduces taxable income. 

Why it matters:

• Helps businesses match rising costs with current sales.
• Lowers reported profits (and therefore taxes) during inflation. 

4. ABC Analysis

What it is:
An inventory categorization method that divides products into three groups:

• A items: High value, low quantity (must be managed tightly). 
• B items: Medium value and demand.
• C items: Low value, high quantity (like office supplies). 

How it works in practice:

• A retailer identifies that laptops (A items) make up 70% of profits, even though they represent only 10% of stock.
• Phone chargers (C items) are cheap but move in large volumes. 

Why it matters:

• Helps businesses focus on their most valuable inventory.
• Prevents tying up capital in low-value stock. 

5. Dropshipping

What it is:
A retail model where businesses don’t hold stock. Instead, when a customer orders, the supplier ships directly.

How it works in practice:

• An online clothing store lists items on its website.
• When a customer orders, the supplier (not the store) ships the product. 

Why it matters:

• No warehouse costs.
• Easy entry for startups and small businesses.
• But margins are often lower, and quality control depends on suppliers. 

6. Consignment Inventory

What it is:
Goods are placed in a retailer’s store, but ownership stays with the supplier until they’re sold.

How it works in practice:

• A Montreal boutique stocks designer handbags from a supplier.
• The boutique only pays for each bag after it’s sold. 

Why it matters:

• Retailers reduce risk since they don’t pay upfront.
• Suppliers get more visibility but carry more risk.

7. Perpetual Inventory System

What it is:
A digital system that tracks inventory levels in real time. Every sale, return, or restock updates the system automatically.

How it works in practice:

• A barcode scanner updates stock counts whenever items are sold.
• An RFID tag tracks items as they move in or out of a warehouse. 

Why it matters:

• Provides up-to-the-minute accuracy.
• Supports businesses with multiple sales channels (eCommerce + retail). 

8. Periodic Inventory System

What it is:
Stock is counted and updated at regular intervals (weekly, monthly, or yearly) instead of in real time.

How it works in practice:

• A small bakery takes stock at the end of every month.
• They manually count flour, sugar, and other ingredients before placing new orders. 

Why it matters:

• Cheap and simple for small businesses.
• But less accurate between counts, which can lead to stockouts or overstocking.

9. Economic Order Quantity (EOQ)

What it is:
A formula-driven approach that calculates the ideal order quantity to minimize the total cost of ordering and holding inventory.

How it works in practice:

• A packaging company calculates EOQ to balance bulk purchase discounts against warehouse space costs.
• It orders the exact amount that minimizes combined expenses. 

Why it matters:

• Saves money by avoiding over-ordering.
• Prevents tying up cash in slow-moving stock.

10. Vendor-Managed Inventory (VMI)

What it is:
Suppliers take responsibility for managing and replenishing stock in the retailer’s warehouse or store.

How it works in practice:

• A hardware chain lets its supplier handle all nuts and bolts inventory.
• The supplier monitors stock levels and refills automatically. 

Why it matters:

• Ensures availability of essential products.
• Reduces the retailer’s workload.
• Strengthens supplier partnerships. 

These 10 types of inventory management represent different strategies that businesses can adopt depending on their size, industry, and goals.

• Retailers often benefit from FIFO, dropshipping, or consignment.
• Manufacturers lean toward JIT, EOQ, or VMI.
• SMBs may start with periodic systems, then move to perpetual tracking as they scale.

The key takeaway: There’s no one-size-fits-all approach. The right system depends on your supply chain, customer expectations, and growth ambitions.

FAQs About Types of Inventory Management

Q1: What are the main types of inventory management?
The top methods include JIT, FIFO, LIFO, ABC analysis, dropshipping, consignment, perpetual and periodic systems, EOQ, and VMI.

Q2: Which type is best for small businesses?
Small businesses often use periodic systems, dropshipping, or consignment to reduce costs.

Q3: What is the difference between perpetual and periodic inventory systems?
Perpetual systems update stock in real time, while periodic systems update only during scheduled counts.

Q4: Why is FIFO better for food businesses?
Because it ensures the oldest items are sold first, reducing waste from expired products.

Q5: Can businesses combine multiple inventory management methods?
Yes, many do. For example, combining ABC analysis with perpetual tracking for maximum control.

Conclusion: Mastering Inventory Management for Growth

Choosing the right types of inventory management isn’t just an operational decision it’s a growth strategy. Whether you’re a Canadian startup using dropshipping, a U.S. retailer adopting FIFO, or a manufacturer relying on JIT, the right method saves money, reduces waste, and improves customer satisfaction.

Ready to optimize your inventory strategy? Partner with Six Side Logistics for expert warehousing, real-time tracking, and scalable solutions tailored to Canadian and U.S. businesses.