Inventory management looks simple. Just manage stock in, stock out and done. But when you actually run a business, managing it becomes the real headache.
When there’s too much stock? Money stuck.
And when it’s too little? Lost sales.
That’s why different Inventory Management System Types exist. And here’s the deal: no one-size-fits-all. A manure startup in Delhi won’t manage inventory like a pharma giant in Mumbai.
In this guide, we’ll walk you through 24 distinct types of inventory management systems. For each one, you’ll see:
- What it is (in plain words)
- Pros (at least 3)
- Cons (at least 2)
By the end, you’ll know which mix of systems fits your business best.
Let’s get started.
Types of Inventory Management System
Here’s the summary for those who are busy:
- Perpetual Inventory System: Inventory updated instantly after every sale or purchase.
- Periodic Inventory System: Best if you prefer checking stock monthly, quarterly, or yearly.
- Just-in-Time (JIT) Inventory: Keep only what you need, exactly when you need it.
- ABC Analysis: ABC sets stock priority by analysing them by value and control.
- Material Requirements Planning (MRP): Best for the manufacturing industry, where this inventory management system acts as a planner to decide what to order and when.
- Economic Order Quantity (EOQ): A math-driven method to find the perfect order size that minimises both holding and ordering costs.
- Radio Frequency Identification (RFID): Tracking items wirelessly without scanning barcodes manually through RFID sensors set at a distance.
- Barcode Tracking/Inventory System: Inventory management system through products’ barcodes.
- Cross-Docking: Goods go directly from incoming trucks to outgoing trucks. Almost no storage requirement.
- Dropshipping: You only take orders. The supplier packs and ships products to your end customer.
- First-In, First-Out (FIFO): Best for perishable goods where the oldest stock has to be sold first.
- Last-In, First-Out (LIFO): A method where the newest inventory items are sold first. NOT permitted in India.
- Vendor-Managed Inventory (VMI): You give keys to manage inventory to your supplier. They decide when and how much to restock. You just focus on your core work.
- Consignment Inventory: Goods stay with the retailer, but ownership stays with the supplier until sold.
- Batch Tracking: The company gives a unique batch ID to a product group and manages those groups instead of single products. Helpful for the medicine and automotive sectors, where they have to recall the product when a quality issue or defect is found.
- Bulk Shipment: As the name suggests, you ship in bulk for the sake of cost saving. Best for exporters.
- Days Sales of Inventory (DSI): How fast do you sell your inventory? DSI shows the average days.
- Backordering: You allow customers to order an out-of-stock item, and you can fulfil it later.
- Lean Inventory Management: This philosophy is to cut out waste and excess inventory as much as possible.
- Six Sigma Inventory Management: A data-driven approach that doesn’t just manage but gives you full inventory control.
- Demand Forecasting: Can you predict how much inventory is needed this Diwali? Demand forecasting can do it for you.
- Manual Inventory Management: An old-school way to manage inventory where staff track stock with paper, pen, or on Excel sheets.
- Cloud-Based Inventory Management: A modern way to manage inventory using online software.
- Hybrid Inventory Management: Teams combine manual and automated inventory processes. Hybrid inventory management systems bring balance.
Let’s deep down to know details:
Core Inventory Systems (Most Commonly Used)
Think of these as the foundational building blocks. Most businesses, big or small, use a version of one of these systems. They are the bread and butter of inventory management.
1. Perpetual Inventory System
This system updates inventory levels in real-time using tech like barcodes or RFID. Every sold, moved, or received item immediately reflects in your stock records.
This is like having a live cricket scoreboard for your stock. Use this method to know your exact stock levels constantly.
Pros
- Instant stock visibility
- Tech reduces manual effort
- Prevents surprise stockouts
Cons
- Costly initial setup
- Needs training
Also Read: AI-Powered Logistics Management Software
2. Periodic Inventory System
A more traditional inventory management approach in which you do a physical count of your inventory at set intervals instead of constant tracking. This could be weekly, monthly, or just once a year.
It’s like doing a census of your warehouse. You shut things down, count everything by hand, and then update your stock books.
Pros
- Low implementation cost
- Simple to manage
- Good for small stores
Cons
- Higher chance of errors
- Can be very disruptive
3. Just-in-Time (JIT) Inventory
Such an inventory management strategy aims to have a minimal amount of inventory on hand. Supplies arrive from vendors exactly when they are needed.
This is like running a kitchen where the chef needs fresh ingredients every time.
That’s JIT. And it’s all about extreme efficiency and reducing waste.
Pros
- Lower holding cost
- Less material waste
- Reduces warehouse need
Cons
- Risky if suppliers fail
- Difficult to manage demand spikes
4. ABC Analysis
Not all your stock has equal value. Some items are worth crores, while others are worth a few rupees.
ABC inventory management analysis helps you categorise your inventory based on its value and importance. You divide inventory into 3 groups:
- A: High-value, strict control (e.g., iPhones in an electronics store)
- B: Mid-value, moderate control
- C: Low-value, loose control (e.g., phone cases)
This way, you focus your energy where it matters most.
Pros
- Focus on key items
- Better cost control
- Optimises warehouse layout
Cons
- Takes time to set up
- Needs frequent review
5. Material Requirements Planning (MRP)
An MRP system is your manufacturing brain. It’s a computer-based planning system that looks at your sales forecasts and your bill of materials (what goes into making a product). Then, it figures out exactly what raw materials you need and when you need to order them.
In short, it oversees sales forecasts + production schedules to decide what stock is needed and when.
Pros
- Prevents material shortages
- Benefit of demand forecasting
- Optimises production schedules
Cons
- Needs accurate historical data
- Complex system to setup & manage
6. Economic Order Quantity (EOQ)
You might be wondering:
“What’s the perfect amount of stock to order at one time?“
So EOQ has the answer. This is a math-formula-driven method to find the perfect order size. The EOQ formula is:
EOQ = √ (2DS / H)
Where D represents demand (total units required over a specific period), S is setup costs, and H is holding costs.
The goal is to figure out the order quantity that minimises the total cost of both ordering the goods and holding them in your warehouse.
If calculated correctly, EOQ finds the perfect balance between order and inventory management.
Pros
- Easy to calculate
- Minimises total inventory costs
- Prevents overstocking and stockouts
Cons
- Assumes constant demand
- Doesn’t suit seasonal products
7. Barcode Tracking/Inventory System
This is the system we all know and see every day, from the local Kirana store to big supermarkets like Reliance Fresh.
Every product gets a unique barcode. You scan it when it arrives, when it’s moved, and when it’s sold. The system has the ability to record this barcode scanning and manages inventory automatically.
It’s a massive leap from manual tracking and is the backbone of most modern retail and warehouse operations.
Pros
- Affordable tech
- No-to-easy training
- Drastically reduces human error
Cons
- Manual scanning needed
- Labels can get damaged
8. Radio Frequency Identification (RFID)
Wireless tech that tracks items with RFID tags.
It uses radio waves to track items. Each product gets a small tag with a microchip. A reader can scan hundreds of these tags in seconds from a distance, without needing a direct line of sight.
Think of it like the FASTag system for your inventory. Super fast and efficient, even from a distance.
Pros
- Extremely fast scanning
- Tracks individual items
- Reduces theft risks
Cons
- Expensive than barcodes
- Needs specialised gear
Specialised Inventory Methods
Once you’ve got the basics down, you can start using these specialised methods. These aren’t for everyone, but for the right business, they can be a game-changer.
9. Cross-Docking
This inventory management type removes or minimises the need for a warehouse. With cross-docking, goods go directly from incoming trucks to outgoing trucks, which requires almost no storage.
It’s a logistics strategy designed for speed. The goal is to keep products moving constantly. Big e-commerce players like Flipkart and Amazon use this heavily at their distribution centres.
Pros
- Saves warehousing cost
- Faster delivery
- Reduces handling
Cons
- Needs coordination
- Not for all products
10. Dropshipping
Want to run an e-commerce store without ever touching the inventory?
Dropshipping is for you.
In this model, you list products for sale on your website. When a customer places an order, you pass it on to your supplier, who then ships the product directly to the customer.
That means you never hold the physical stock yourself. Suppliers directly ship to customers, and you only market and take orders.
Pros
- No inventory hassle
- Low capital needed
- No restrictions on selling goods across categories
Cons
- Low profit margins
- Tough competition
11. First-In, First-Out (FIFO)
This one is simple logic.
The first items that come into your warehouse are the first ones you sell and ship out. This means you sell the oldest stock first.
This is absolutely essential for businesses dealing with anything with an expiry date. You don’t want to be selling expired food, medicines, or Amul butter, do you?
Pros
- Prevents spoilage
- Easy-to-understand model
- Easy to apply
Cons
- Higher tax bills
- Needs shelf control
12. Last-In, First-Out (LIFO)
LIFO is the exact opposite of FIFO.
Here, the newest item goes on sale first.
Note: LIFO is not permitted under Indian accounting standards (Ind AS).
Pros
- Lower tax in inflation
- Matches current costs
- Simple for some goods
Cons
- Not allowed in India
- Can understate profits
13. Vendor-Managed Inventory (VMI)
With VMI, you hand over the keys to your inventory to your supplier.
The vendor takes responsibility for monitoring your stock levels and automatically sending replenishments when you’re running low. They basically manage their products on your shelf.
This requires a huge amount of trust and collaboration.
Pros
- Less stockout risk
- Strong supplier ties
- Reduces admin work
Cons
- Loss of some control
- Needs a strong trust factor
14. Consignment Inventory
This is one of the interesting inventory management types.
Your supplier gives you their products, but they still own them. You only pay for the goods after you’ve sold them to a customer.
One common example we can give is India’s automotive business. Automotive parts suppliers provide spare parts to dealerships or service centres, which keep these parts in their inventory but do not pay for them until they are used for vehicle repairs or sold to customers. Till then, the supplier retains ownership of the parts until the sale occurs.
Pros
- Low capital need
- Reduces retailer risk
- No stress of unsold items
Cons
- Supplier controls terms
- Can be complex to track
15. Batch Tracking
You may have heard of the news saying that Hyundai is calling back all May-manufactured cars because of quality issues. How is it done?
This is through the batch tracking inventory management type. It is also known as lot tracking.
This system groups products that were made at the same time, using the same materials, into a “batch” or “lot”. Each batch gets a unique number.
Why is this important?
If there’s a quality issue or a recall, you can trace the problem back to the exact batch instead of having to recall every single product. It’s critical in industries like pharmaceuticals, automotive and food processing.
Pros
- Easy traceability
- Good for pharma/food
- Helps in recalling specific products
Cons
- Adds an extra layer of record management
- Higher admin work due to increased record-keeping
Advanced and Specialised Systems
Alright, now we’re getting into the pro-level stuff. These systems and metrics are used by larger companies to fine-tune their operations and squeeze out every last drop of efficiency.
16. Bulk Shipment
This is exactly what its name is.
Instead of sending many small shipments, you send large quantities of a product in a single go. This is usually done to get cheaper transportation rates and reduce handling costs.
Think of it like buying groceries from a wholesale market versus your local shop. Everybody knows buying in bulk saves money.
Pros
- Lower shipping cost per unit
- Less paperwork, packaging and handling
- Best for exporters
Cons
- Needs big storage
- Higher risk of damage
17. Days Sales of Inventory (DSI)
DSI is a financial metric, not an inventory management system, but it’s crucial for management.
You do the simple math to know the average number of days it takes for your business to turn its inventory into sales.
The simplest formula: DSI = (Average Inventory / Cost of Goods Sold) × 365.
Now, understand the components:
- Average Inventory = (Beginning Inventory + Ending Inventory) / 2
- Cost of Goods Sold (COGS) = Beginning Inventory + Purchases − Ending Inventory
Use this formula and see the valuable insight of your inventory.
A lower DSI is generally better. This is because it indicates that you’re selling your stock quickly and your cash isn’t tied up in the warehouse for too long.
Pros
- Easy calculation
- Aids cash planning
- Counts inventory efficiency
Cons
- Can mislead trends
- Varies widely by industry
18. Backordering
What happens when a customer wants a product that’s out of stock?
With a backordering inventory management system, you can still take the order and fulfil the order later. This way, you promise the customer you’ll ship the product as soon as it’s back in stock.
This can be a great way to save a sale, but you have to be careful.
Pros
- Keeps sales alive
- Less storage needed
- Manages demand spikes
Cons
- Delayed deliveries
- May upset customers
19. Lean Inventory Management
Modern businesses love this inventory management system.
Popularised by Toyota, the core idea is to eliminate all waste from your inventory process. This means holding the absolute minimum amount of stock needed to operate smoothly. JIT is a type of lean management. The goal is a super-efficient, waste-free operation.
The bottom line? Lean isn’t just a system; it’s a whole philosophy.
Pros
- Massively reduces holding costs
- Improves overall efficiency
- Quick cash turnover
Cons
- Needs strong planning
- Vulnerable to supply disruptions
20. Six Sigma Inventory Management
This is a data-driven approach for perfectionists.
Six Sigma uses statistical analysis to find and eliminate defects or errors in your inventory process. The goal is to get as close to perfection as possible (statistically, 3.4 defects per million opportunities, for example).
This inventory management type systematically improves your processes to make them more consistent and reliable.
Pros
- Reduces process errors
- Data-driven decisions
- Improves customer satisfaction
Cons
- Can be very complex
- Requires statistical expertise
21. Demand Forecasting
This is about predicting the future of inventory demand.
Demand forecasting uses historical sales data, market trends, and predictive analytics to estimate how much of a product customers will want to buy in the future.
The forecast needs to be accurate as it helps you decide what to buy, how much to buy, and when to buy it.
Pros
- Avoids shortages
- Guides purchasing
- Supports growth
Cons
- Forecasts are never 100% accurate
- Needs heavy historical data
Technology-Based Systems
These aren’t methods as much as the technological platforms that power all the other systems we’ve talked about.
22. Manual Inventory Management
Notebooks, Excel sheets, basic software. Old-school but still used as an inventory management system.
It’s simple and cheap, but it’s also incredibly prone to human error and gets unmanageable as your business grows.
Pros
- Very low cost
- Simple for very small stock
- No training needed
Cons
- High human error
- Time-consuming
23. Cloud-Based Inventory Management
This is the modern standard.
Your inventory software and data are hosted on the internet (“the cloud“). You can access the inventory information from anywhere, on any device, at any time and in just a few clicks. You don’t have to worry about maintaining servers.
Pros
- Access from anywhere
- Scalable easily
- Secured remote access
Cons
- Needs internet
- Subscription cost
24. Hybrid Inventory Management System
Last but not least. A hybrid system is a mix of both a manual and a cloud-based one.
For example, you might use a cloud system for your high-value ‘A-Items’ but stick to a simple spreadsheet for your low-value ‘C-Items’. It allows businesses to adopt technology at their own pace.
And a more modern hybrid system means you control your inventory data in your data centres instead of on the internet. This gives you total control.
Pros
- Flexible adoption
- Lower upfront cost
- Works for SMEs
Cons
- Can be complex to integrate
- Needs dual training
How to Choose the RIGHT System for Your Business
So, how do you pick from this massive list?
The truth is, there’s no single “best” system. The right choice depends entirely on YOUR business.
When choosing from different types of inventory management systems, you should consider:
- Business size and complexity: A local sweet shop has different needs than a national electronics chain.
- Industry requirements: Do you need complete tracking or would you go for speed?
- Budget restriction: Can you afford the upfront cost of RFID, or is a subscription model better?
- Integration needs: Do your inventory management system need to connect with your POS, ERP, accounting software or your e-commerce website?
- Scalability requirements: Will this system grow with you over the next 5 years?
- Staff expertise: How comfortable is your team with new technology? Can your team handle tech?
Often, the best inventory management system is a mix. For example, a retailer might use barcode + cloud-based + FIFO all together. Choose carefully.
Try the NYGGS Inventory Management System
Modern inventory isn’t about one single method. It’s about blending smart systems with tech.
That’s what the NYGGS Inventory Management System does:
- Cloud-Based: Access anywhere and integrate with NYGGS ERP modules.
- IoT Integration: GPS trackers and fuel sensors give real-time fleet monitoring.
- AI & ML: Implemented AI to provide better demand forecasting and predictive analytics and ML to teach the inventory management system to automate repetitive situations through trial and error.
It’s a complete solution for businesses that want less chaos and more control and to stay on budget.
Now I’d Like to Turn It Over to You
There you have it: 24 different types of inventory management systems.
Now your turn:
Which system do you use right now?
Or which method you are going to implement first to manage your inventory.