Inventories that are mismanaged can create significant financial problems for a business. The use of inventory management techniques can reduce the troubles of the supply chain. And a management solution can provide a better future for retail business.
Raj owns a retail store in Mumbai and last year he started selling on eCommerce marketplaces. He was very happy with the sales numbers until he started doing year-end reconciliation. Even though he managed to sell 200% more products than the previous year, he noticed that he actually made losses in that year.
Can you guess the reason?
It was the absence of an inventory control system. Inventory is one of the major assets of a business and it represents an investment that is tied up until the item is sold or used in the production. It also costs money to store, track and insure inventory.
Table of Content
- Identify responsible person
- Set Re-order levels
- Categorize your operating inventory
- Prioritize your valuable products
- Find out your carrying cost
- Consider Drop Shipping
- Action Plan for excess inventory management
- Regular Inventory Audit
- Contingency Planning
- Use a good inventory management software
1) Identify responsible person
First things first – Identify a dedicated person who can take up the role of an inventory manager. This will ensure you that someone has a clear overview of your inventory and can give quick answers about the management system. You might end up with a big mess, if there is no one responsible and several people are performing separate tasks.
Inventory control specialists manage all merchandise items that are on hand and in transit. They also perform adjustments, manage returns, validate received merchandise and implement inventory reporting strategies.
2) Set Re-order levels
Inventory management becomes much easier if we set ‘re-order levels’ for each of the items. In simple words, re-order levels are the minimum amount of items that must be in stock at all times. When your inventory stock dips below the predetermined levels, you know it’s time to order more.
Setting re-order levels will systematize the process of procuring the products. However, it requires some research. This decision will be based on how quickly the item sells, and how long it takes to get back in stock, etc.
You may not be able to set it during initial days of the business but eventually, it will become clear to you.
Best part is, your staff can make direct decisions about ordering on your behalf when you are not around.
Given the dynamic nature of some business like e-Commerce, conditions can change very often. Check on re-order levels and safety stock regularly throughout the year to confirm they are still relevant.
It will be a good idea to adjust your re-order levels up or down depending on the past sales data.
3) Categorize your operating inventory
It’s obvious that we are always focused on the high selling items. But while managing inventory efficiently, we need to give more attention to other inventory items as well.
For this, experts suggest using an ABC analysis to efficiently manage your inventory. This is basically categorizing products that require a lot of attention from those that don’t.
A simple way to do this is to go through the entire stock list and add each item to one of three categories:
A – high-value items with a low frequency of sales Items in this category require regular attention because their financial impact in terms of storage cost is significant but sales are unpredictable.
B – low-value items with a high frequency of sales Items in this category require relatively less attention as they have a smaller financial impact and they’re constantly moving.
C – moderate value items with a moderate frequency of sales Items in this category fall somewhere in-between and still require some attention and financial assessment.
4) Prioritize your valuable products
Prioritizing the product line is a free fall way within inventory management techniques. Use 80-20 principle and focus on the items that matter most. Generally, 80% of demand will be generated by 20% of your items.
Spend most of your effort on those top items, forecasting, reviewing the stock position, maintaining safety stock and reordering more frequently. The next highest-selling 30% of items will typically generate about 10% of sales. The slowest items account for half the items you stock, but only generate 10% of your sales.
Above percentage may vary but the uneven pattern will be the same. You need to identify this pattern and channelize your resources towards the products that fetch most sales.
FIFO stands for ‘First-in, first-out’. It’s an important concept of inventory management. It simply means that your oldest stock (that was first entered in the system) gets sold first (first-out), not your newest stock.
This is particularly important for perishable products so you don’t end up with unsalable dead stock.
Now the question is, can we apply FIFO principle for non-perishable products as well?
If the same stock is always sitting at the back, its more likely to get worn out. Apart from this, things like packaging, features, price often change over time. There is no point in stocking something obsolete that you can’t sell.
So, how to implement a FIFO management system in your business? For this, you’ll need to set up an organized warehouse. Then you’ll need to ensure that the new products are added from the back and old items always stay at the front.
There are warehousing and fulfillment companies that can help you do this easily.
6) Find out your carrying cost
Carrying costs are associated with holding or “carrying” inventories over time. In other words, the company has to pay more money on top of the purchase price for things such as storage, insurance, extra equipment, and personnel.
Add up other costs like raw material storage, damage, depreciation, processing, borrowing, and taxes and the carrying costs will be 18 to 25 percent above the value of the inventory.
Afraid of being under-stocked, some businesses tend to spend too much on inventory level, which can eat up working capital and erode profits.
Old inventory can be very hard to move. You may end up marking it down or selling it at discounts.
So, how do we fix this carrying cost issue? Start with some decent projections of how much supply you’ll need and when you’ll need it.
The best guiding point is what you’ve sold in the past. If you’ve sold 50 items per month for the past 12 months, chances are that you’ll need 50 this month.
You also need to consider seasonality like month-end spikes or holiday sales.
7) Consider Drop Shipping
Drop Shipping simply means direct delivery of goods from the manufacturer to the retailer or customer. It is really the ideal scenario from an inventory management perspective.
Instead of having to carry inventory and ship products yourself through sales channel, internally, or through third-party logistics the manufacturer or wholesaler takes care of it for you.
Basically, you completely remove inventory from the process!
You earn your profits gaining on the difference amount between the wholesale price and retail price. If you are able to work out the processes well, you can go ahead and increase your sales from a number of products you get from your drop-shippers.
Although products cost more this way than they do in bulk orders, you remove expenses related to holding inventory, storage, and fulfillment.
Google is your best friend if you want to search for drop shippers in your area.
8) Action Plan for excess inventory management
Excess and obsolete stock are the results of ineffective sales forecasting, planning, or using a business model that fails to factor in product complexity and life cycles correctly.
Companies with efficient inventory management systems create two task forces with linked action plans. The first task force identifies the root causes and determines ways to reduce the creation of new excess and obsolete stock.
The second focuses on ways to sell off the excess stock more effectively. It provides the sales team with a list of top excess or obsolete products to push to ensure that they’re discounting specified excess products. Thus, an action plan forms a quintessential part of these inventory management techniques.
9) Regular Inventory Audit
What gets tracked, gets managed! Regular inventory tracking is vital for a growing business. If you are using any good inventory management software, you’ll be getting reports about inventory levels in warehouses or in stores.
However, it’s important to make sure that those numbers match with the actual data. There are mainly 3 simple ways to do inventory tracking.
Physical Inventory System- It is a practice of counting all your inventory at once. Many businesses prefer to do this at their year-end because it ties in with accounting and tax filing. This process is surely tedious but undoubtedly important.
One problem with this method is that, if you manage to find any discrepancy, it becomes almost impossible to pinpoint the issue when you’re looking back at an entire year.
Spot Checking – Businesses that manage a lot of products, normally do spot checking throughout the year. This simply means choosing a product, counting it, and comparing the number to what it’s supposed to be.
There is no fixed schedule to do it and its normally done for high value or fast-moving products.
Cycle Counting -The process of cycle counting spreads inventory reconciliation throughout the year. Each day, week, or month a different product is checked on a rotating schedule. Different methods are used for determining which items to count when.
Opportunities for miscounts are everywhere: during receiving, during order fulfillment, and the all-too-common pilferage (theft of part of the contents of a package). In manufacturing, you also need to account for yield or scrap during production.
Nowadays, almost all businesses use barcode scanning to speed up things.
The one and most important function of good inventory management techniques is accurately predicting demand. But it’s not as simple as it sounds, perhaps this is the hardest to do. There are so many variables involved and things can get quite unpredictable.
Here are a few things that can help you project sales numbers better:
- Previous year’s sales during the same week/month
- Current year’s weekly/monthly/quarterly growth rate
- Confirmed sales from contracts and subscriptions
- Seasonality and holidays
- Planned promotions
- Current trends in the market
Add previous years’ sales forecasts to your inventory calendar to be even more prepared for the future demand.
11) Contingency Planning
It’s always good to be prepared to handle an unforeseen event. Some inventory management issues can take you by surprise and you won’t much time to respond.
Below are some of the examples of such problems :
- Sales spike unexpectedly and the stock is oversold
- Unexpected damage of raw materials
- Cash flow turns negative and you are unable to pay for the product you desperately need
- A least selling product takes up all your warehouse storage space & you don’t have enough space to accommodate your fast moving items
- You rely on one manufacturer and he they run out of products, but you have orders to fill
- Or a manufacturer discontinues a product without giving you a warning
- You suddenly find out that you have less stock levels than you thought & you have no clue about the miscalculation
It’s highly recommended to identify risks while doing inventory management and prepare a contingency plan. This plan should have the name of people responsible for a particular area, how they will respond to certain situations, communication hierarchy, etc.
12) Use a good inventory management software
Inventory management is a continuous, concentrated effort – and a process that shouldn’t be handled solely at the operations level. In order to run your business smoothly, you must have a well-functioning inventory management system. If you don’t have one, it might cause a lot of trouble and start to disturb the execution of orders and day-to-day business.
Well-functioning inventory control system is a process of overseeing the flow of items into and out of your business. It’s a balance of having just enough products in the warehouse. A good inventory management software can help you reduce manual errors and cut the losses. This is a must in subordinate to virtuous inventory management techniques.
It’s time to take control of your inventory management and stop losing money. By paying close attention to the key factors mentioned above, inventory managers can build and sustain an efficient inventory management system that saves time and money. Choose the right inventory management techniques for your business, and start implementing them today.
How do you manage inventory at your business? Please feel free to share your inventory management techniques in the comments section below.