6 tips for better inventory management
As a small business owner, your business can only succeed when there's a product or service to sell. If you're selling a physical product, few things can derail your business as quickly as poor inventory management.
With the right inventory management process, you can maintain healthy stock levels, or inventory control, with ease. Let's take a look at inventory management, why it's important, and how you can maintain the right stock levels at all times.
What is inventory management?
Inventory management is the practice of optimizing your inventory space. The inventory management process involves utilizing your space in an efficient manner, and carrying only items that sell. Inventory management also means implementing a system to reduce errors and streamline the shipping and receiving process, ultimately lowering your spending and increasing your free cash flow.
Why is inventory management important?
Inventory management has a few obvious perks, the most important of which is reducing the chance that you’ll run out of valuable products. But this isn't the only upside of inventory management.
When you're engaging in effective inventory management, you're optimizing your use of warehouse space by reducing unnecessary inventory counts.
For example, if you're practicing good inventory management, you'll know what's not selling well, and can avoid carrying too much of that item moving forward. This also means you can avoid renting or purchasing space you don't need, which cuts down on real estate spending.
Inventory management allows you to maintain a healthier cash flow by ensuring you're carrying products with high customer demand. It's hard to make a profit when you don’t have the product customers want to buy.
Good inventory management also entails storing the right amount of raw materials. When you know the amount of raw materials your business needs over a period of time, you can buy in bulk and save on per-unit cost. This ultimately drives inventory costs down and allows you to make a higher profit.
Improving your inventory management now
There's no single solution to every inventory management problem, as businesses have different structures and needs. But there are some universal inventory management techniques that will help virtually any business avoid an inventory nightmare.
1. Live and breathe the ABC analysis
The first step is to have an inventory management process in place before you start optimizing and tweaking it. One of the easiest inventory management systems to implement and build upon is based on ABC analysis, which separates your warehouse items into three categories:
- A: Your A items are a top priority to your business. Think of A items as the ones that drive the most profit, directly or indirectly. This includes raw materials, as these items are essential for creating your products, and are ones you can't afford to run out of.
- B: Your B items are generally not as valuable as the A items, but they're still important. These could be things like less-expensive or less-utilized raw materials, or items that don't sell as often or with as high a margin. You'll likely want to maintain some stock of B items.
- C: The C items are worth very little, but still play a role in your company's success. These inventory items could be finished products, or they could be an incredibly inexpensive raw material. You'll likely have a lot of C items, although their actual value is low.
The types of inventory that fall into the above categories can vary from low-cost finished products to raw materials to high-dollar, low-quantity items. Think about your physical inventory space. Then consider how your business would be impacted if you had too much or too little of an item in each category. This will help you determine into which category each item should fall.
2. Cut human error with an inventory management system
Humans are, well, human. Being human means making mistakes. While mistakes are fine and inevitable, they're also a point of concern when it comes to inventory management. Inventory management software can reduce human error.
The right inventory tracking software system will help you remove the manual labor of tracking inventory on paper. Look for inventory software that's intuitive. Ensure your team is trained, and soon you'll find inventory management is faster and easier.
Inventory tracking software should also sync with your store SKUs (unique numerical identifiers for items in a store), allowing you to seamlessly track the inventory between your physical location and online store. This is typically done with a barcode scanner and online order system.
The barcode scanner will register a sale in your unified system, while an online order will register in the same inventory system. This means you can track inventory regardless of sales channel or point of sale. This, along with other eCommerce best practices, will help your business in the long and short term.
3. Do some warehouse management housekeeping
A dirty warehouse is a poorly managed warehouse. Proper housekeeping and warehouse management are key to inventory management.
Keep your warehousing orderly and tidy to avoid costly mistakes, slow shipment times, and similar errors. Designate an area for sales orders, receiving, shipping, and order fulfillment. Consider color-coding shelves or taping off staging areas for certain product types. And have a cleaning schedule that ensures your warehouse is constantly cleaned and maintained.
4. Implement supply chain management
All the inventory management strategies in the world won't help you if your supply chain is a mess. This is where supply chain management comes into play.
Supply chain management is the practice of optimizing and monitoring your relationship with materials providers, shipping or drop shipping partners, and any other parties that come into play in your inventory lifecycle.
When it comes to supply chain management, pay attention to the lead time between when you place an order or initiate a process with any of your supply chain partners, and when the action is completed. If you notice a bottleneck in your shipping, receiving, or production process, be sure to reach out to that partner to remedy the situation.
5. Avoid and liquidate excess inventory
Every inch of your business and storage space is valuable. So you want to keep only the amount of product necessary, plus safety stock to avoid a complete stockout of high-demand items.
Perform inventory audits and pay attention to your sales logs to see which items are selling and which are sitting long enough to be dead stock, or stock that's simply taking up room.
It's also a good idea to practice just-in-time (JIT) production. This means you keep the minimum amount of raw materials necessary, and order more when you need it to complete production. This allows you to cut down carrying costs and reduce wasted space.
6. Set a reorder point
A reorder point is the point at which you order more of a product or material. With a reorder point, you can maintain healthy inventory levels without having to constantly monitor your inventory. If you get the right inventory management software, you can typically set a reorder point that triggers automatically.
That said, you will need to adjust your reorder point over time. Customer demands will shift over time, and a hot product from a year ago may be dead stock tomorrow. Don't set a reorder point and forget it. Regularly check your stock levels to see if certain items are no longer selling or not selling as well. If this is the case, you can likely loosen up the reorder point and allow that storage space to be used for something more valuable.
Manage your inventory, succeed in business
Properly managed inventory will allow you to cut operating costs, provide your customers with the products they need, and ultimately run a more successful business. While it may not show you the immediate return on investment that advertising or new products will, it will lay the foundation for a healthier company moving forward.
Many models will come and go out of style, but inventory management will always be a smart move for your business. And that's something you never have to take stock of.