Inventory management is the process of overseeing and controlling a company’s inventory. It involves the acquisition, storage, tracking, and optimisation of inventory to ensure that sufficient stock is available to meet customer demand while minimising costs and maximising profitability. Effective inventory management helps businesses maintain optimal inventory levels, reduce stockouts and overstock situations, and streamline their supply chain operations (Vatumalae, Rajagopal, Sundram, & Hua, 2022).

Inventory management plays a crucial role in the fashion retail industry. Here are some key reasons why effective inventory management is essential in this field:

1.   Meeting Customer Demand: The fashion retail industry is characterised by rapidly changing trends, seasonal variations, and evolving customer preferences. By managing inventory effectively, fashion retailers can ensure they have the right products in stock to meet customer demand and capitalise on market opportunities. This helps maximise sales and customer satisfaction.

2.  Minimising Stockouts and Lost Sales: Stockouts occur when a desired item is not available when a customer wants to make a purchase. In the fashion industry, where trends can change quickly, stockouts can result in lost sales and dissatisfied customers. Efficient inventory management helps minimise stockouts by ensuring optimal inventory levels and accurate demand forecasting.

3.  Managing Seasonality: Fashion retailers often deal with seasonal fluctuations in demand, with different product assortments required for each season. Effective inventory management allows retailers to plan and stock the appropriate items for each season, optimising sales, and minimising excess inventory during off-seasons.

4.  Mitigating Fashion Risk: Fashion trends can be unpredictable, and certain products may become less popular or go out of style quickly. Inventory management helps minimise fashion risk by closely monitoring sales performance and adjusting inventory levels accordingly. This helps prevent inventory obsolescence and reduces the financial risk associated with holding unsold products.

5.  Cost Control: Efficient inventory management helps control costs associated with inventory holding, storage, and handling. By optimising inventory levels and turnover rates, fashion retailers can reduce carrying costs, minimise the need for excessive storage space, and optimise cash flow.

6.  Markdown and Promotions Management: Inventory management systems enable fashion retailers to identify slow-moving or excess inventory, allowing them to implement timely markdowns or promotional strategies to clear out stock and maintain profitability. This helps prevent inventory build-up and supports effective inventory turnover.

7.  Supply Chain Optimisation: Inventory management is closely linked to supply chain efficiency. By effectively managing inventory, retailers can improve supply chain visibility, coordinate with suppliers, and enhance order fulfilment processes. This helps reduce lead times, streamline logistics, and ensure the availability of products in a timely manner.

8. Accurate Financial Reporting: Proper inventory management ensures the accuracy of financial statements and inventory valuations. This is particularly important for fashion retailers as inventory often represents a significant portion of their assets. Accurate inventory records help provide a clear picture of the business’s financial health and aid in making informed strategic decisions.

How to manage inventory?

Here are some key aspects and techniques involved in inventory management (Tyagi, Kumar, Naik, & Kumar, 2022)

Demand Forecasting

Accurately predicting customer demand is crucial for maintaining the right inventory levels. Businesses use historical data, market trends, sales projections, and other factors to forecast future demand and adjust their inventory accordingly.

Inventory Classification

Categorising inventory items based on their value, demand, and criticality helps prioritise management efforts. Popular methods include ABC analysis, where items are classified as A (high-value), B (medium-value), and C (low-value) based on their sales volume and value contribution.

Safety Stock

Safety stock is a buffer inventory held to mitigate the risks of stockouts due to unexpected demand fluctuations or supply chain disruptions. It acts as an insurance or cushion to ensure that there is sufficient stock available to meet customer demand even in unexpected situations. Safety stock is an essential component of inventory management and helps maintain high customer service levels.

Some common factors that may necessitate the use of safety stock include:

Demand Variability: Safety stock is used to accommodate fluctuations in customer demand that may exceed the expected or average demand. It helps prevent stockouts during peak periods, sudden surges in demand, or when demand is unpredictable.

Supply Variability: It helps manage unexpected delays, quality issues, transportation problems, or supplier disruptions. By having safety stock in place, businesses can continue operations even when faced with supply chain challenges.

Lead Time Variability: Safety stock compensates for variations in lead time, which is the time it takes for an order to be fulfilled from the moment it is placed. If lead times fluctuate due to supplier delays, customs clearance issues, or other factors, safety stock ensures that inventory is available to bridge the gap and prevent stockouts.

The calculation of safety stock involves considering factors such as demand variability, lead time variability, and desired service level. There are various methods and formulas used to determine the appropriate level of safety stock, including statistical analysis, historical data analysis, and simulation techniques.

By having safety stock in place, businesses can:

Mitigate the risk of stockouts and maintain high customer service levels.

Reduce the impact of demand and supply fluctuations.

Enhance responsiveness to unforeseen changes in demand or supply.

Provide a buffer during lead time variations.

Manage unexpected events or disruptions in the supply chain.

However, it is important to regularly review and adjust safety stock levels based on changing market conditions, demand patterns, and supply chain dynamics to ensure optimal inventory management and minimise carrying costs.

Economic Order Quantity (EOQ)

EOQ is a formula used to determine the optimal order quantity that minimises inventory holding costs and ordering costs. It takes into account factors like demand, lead time, carrying costs, and ordering costs to find the balance between inventory carrying costs and replenishment costs (Jakfat, 2023).

The basic EOQ formula is as follows:

EOQ = √ ((2 * D * S) / H)


EOQ: Economic Order Quantity (optimal order quantity)

D: Annual demand (number of units sold or consumed in a year)

S: Ordering cost per order (cost to place an order with the supplier)

H: Carrying cost per unit per year (cost to hold one unit of inventory for a year, which includes costs like storage, insurance, obsolescence, and capital costs)

The EOQ formula assumes certain assumptions and conditions, including:

Demand is known and constant over time.

Lead time (time between placing an order and receiving it) is constant and known.

Ordering costs and carrying costs are known and do not change with the order quantity.

There are no quantity discounts or price breaks provided by the supplier.

By using the EOQ model, businesses can achieve the following benefits:

Cost Optimisation: Determine the order quantity that minimises the total costs associated with inventory, striking a balance between ordering costs and carrying costs.

Inventory Reduction: Avoid overstocking and excessive inventory levels, reducing storage costs and the risk of obsolete inventory.

Order Frequency: Provides insights into how often orders should be placed, helping businesses streamline their procurement processes and reduce administrative efforts.

Replenishment Planning: Assists in planning inventory replenishment, ensuring that stock is available when needed while avoiding stockouts.

It is important to note that while the EOQ model provides a useful starting point for inventory management decisions, it is based on certain assumptions and simplifications. Real-world inventory management often involves additional complexities, such as demand variability, stockouts, and supplier constraints, which may require further considerations and adjustments to the EOQ approach.

Just-in-Time (JIT)

JIT is an inventory management approach that aims to minimise inventory levels by receiving goods from suppliers just in time for production or customer delivery. It helps reduce storage costs and minimise the risk of obsolete inventory, but it requires a reliable supply chain and coordination with suppliers. (Kumari, Truong, & Kober, 2020).

Key principles and characteristics of JIT include:

Demand-driven: JIT is driven by customer demand. Products are produced or purchased based on actual orders or immediate needs rather than speculative forecasts. This helps avoid overproduction and excessive inventory.

Continuous Flow: Promotes a smooth and uninterrupted flow of materials, information, and activities throughout the production process. It aims to eliminate bottlenecks, delays, and idle time, enabling a more efficient and responsive production system.

Takt Time: Takt time refers to the pace at which products need to be completed to meet customer demand. In a JIT system, production is synchronised with takt time, ensuring that items are produced or received at the required rate to avoid unnecessary inventory buildup.

Pull System: Follows a pull-based system where materials or components are ‘pulled’ into production based on actual demand signals. This contrasts with a push system, where items are produced based on forecasts or predetermined schedules. With a pull system, inventory is replenished only when needed, reducing the risk of excess stock.

Small Lot Sizes: Emphasises producing or ordering small, manageable quantities at a time. This allows for more frequent deliveries and reduces the amount of inventory held in the system. Smaller lots enable quicker response time to change in demand and minimise the risk of obsolete inventory.

Close Supplier Relationships: Relies on close collaboration and partnerships with suppliers. Suppliers are expected to deliver materials or components on time, in the required quantities, and with consistent quality. This helps minimise inventory holding costs and ensures a reliable supply chain.

Benefits of implementing JIT include: (Jakfat, 2023).

Inventory Reduction: JIT eliminates excess inventory and reduces carrying costs associated with storage, obsolescence, and capital tied up in inventory.

Cost Savings: By reducing inventory levels and waste, JIT helps lower costs associated with holding inventory, space utilisation, and production inefficiencies.

Improved Quality: With a focus on continuous improvement and waste elimination, quality issues can be identified and addressed promptly.

Enhanced Efficiency: Streamlines production processes, reduces lead times, and eliminates non-value-added activities, resulting in improved efficiency and resource utilisation.

Flexibility and Responsiveness: Enables quick response to changes in customer demand and market conditions, facilitating agility and adaptability in production and supply chain operations.

It is important to note that implementing JIT requires careful planning, coordination, and a stable and reliable supply chain. It may not be suitable for all industries or situations, particularly those with highly variable demand, long lead times, or limited supplier capabilities.

Technology and Automation

Inventory management software and systems play a vital role in streamlining operations. They automate processes like tracking inventory levels, generating purchase orders, monitoring stock movements, and providing real-time visibility into inventory data.

Supplier Management

Building strong relationships with suppliers is essential for efficient inventory management. Effective communication, negotiating favourable terms, and collaborating on demand forecasting can lead to improved lead times, cost savings, and better inventory control.

Continuous Monitoring and Analysis

Regularly monitoring inventory metrics, such as stock turnover, fill rates, and carrying costs, helps identify areas for improvement. Analysing data and making data-driven decisions can lead to optimised inventory levels, reduced stockouts, and improved profitability.

Inventory Audits

Inventory audits are systematic and comprehensive evaluations of a company’s inventory to ensure accuracy, completeness, and adherence to established procedures. They involve physical counting, verification of inventory records, and reconciliation of any discrepancies. Inventory audits are essential for maintaining control over inventory, preventing losses, and ensuring the accuracy of financial statements (Tyagi, Kumar, Naik, & Kumar, 2022).

Overview of the inventory audit process:

Planning: Define the scope and objectives of the inventory audit. Determine the timeframe, locations, and specific items or categories to be audited. Establish audit procedures and identify the resources needed.

Preparing Documentation: Gather relevant documentation, such as inventory records, purchase orders, sales records, and other supporting documents. Review and reconcile these records to identify any discrepancies or irregularities.

Physical Count: This involves physically counting and verifying the quantity of each item in stock. The count may be done manually, using barcode scanners, or through automated inventory management systems.

Reconciliation: Compare the results of the physical count with the recorded inventory levels. Identify and investigate any discrepancies or differences between the physical count and the recorded quantities. This includes examining issues such as missing items, damaged goods, or inaccuracies in stock records.

Valuation: Assign a value to the inventory based on the appropriate accounting method, such as first-in-first-out (FIFO) or average cost. Calculate the total inventory value based on the physical count and valuation method.

Documentation and Reporting: Document the findings of the inventory audit, including any discrepancies or observations. Prepare audit reports that provide a summary of the audit procedures, results, and recommendations for improving inventory control and accuracy.

Corrective Actions: If discrepancies or irregularities are identified, take appropriate corrective actions. This may involve adjusting inventory records, investigating root causes, implementing process improvements, or conducting further investigations if there are suspicions of fraud or theft.

Follow-Up: Monitor and follow up on the implementation of corrective actions to ensure that inventory control measures are strengthened, and any identified issues are resolved.

Inventory audits should be conducted periodically, with the frequency depending on factors such as the industry, nature of the inventory, and internal control environment. Regular audits help identify weaknesses in inventory management processes, prevent inventory shrinkage, identify potential fraud, and ensure compliance with regulations and accounting standards.


Effective inventory management is vital in the fashion retail industry to meet customer demand, minimise stockouts, optimise costs, adapt to changing trends, and improve overall operational efficiency. It enables retailers to maintain a competitive edge, enhance customer satisfaction, and drive profitability in a dynamic and fast-paced industry.