Inventory management is more than the act of tracking your company's inventory. It makes or breaks your bottom line. The goal of inventory management is to minimize inventory holding costs by knowing when it is time to replenish products or purchase more materials to make products.
Solid inventory management is the key to a healthy business cash flow. With proper inventory management, business owners can figure out how much inventory they need to keep to make profits. Otherwise, they will end up risking their money instead, by keeping too little or too much inventory.
In this article, you will learn the importance of inventory management as well as a few techniques that you can leverage to save money.
Why inventory management matters
Effective inventory management (also called inventory control) is essential to ensure your business has enough stock to meet customer demands. If your inventory is not handled properly, it can result in significant financial loss to your business.
Inventory shortages make you unable to meet customer demands. This will cause you to lose customers as well as your future sales. And if you keep this going, you won’t be able to increase your profit margins.
However, having too much inventory can also give you trouble because you will end up having obsolete, out-of-date, expired products that you can’t sell. Not to mention higher storage costs.
10 Money-saving inventory management techniques
Optimal inventory management practices vary from company to company, but there are several general strategies any business can use to avoid human error in managing their inventory.
1. Centralize your inventory
Selling products on multiple channels without a centralized system can get your inventory messy. You run the risk of making mistakes and over-selling if you track your inventory separately for each channel. The more your stock grows, the more room for human error in your inventory management.
Therefore, you need to manage your inventory in one central place. By monitoring your stock from a single point, you can quickly determine when you need to replenish your inventory to fill orders across all channels.
The easiest way to centralize your inventory is to use multi-channel inventory management software, such as ScaleOcean. It lets you easily track, forecast, analyze, calculate, and control your stock in real-time, across all of your warehouses and channels. With this platform, your inventory is adjusted automatically within minutes of each sale so you don't accidentally oversell.
2. Forecast your inventory needs
One of the most significant ways to optimize inventory control is through the ability to forecast demand as accurately as possible. Although many variables make accurate forecasting difficult, there are several areas to consider when projecting future sales.
1. Past sales: Identify order patterns at different times of the year to determine how much inventory you will need to buy to fill future orders. Pay close attention to seasonal changes in sales as they can drastically change.
2. Planned marketing strategies: Predict the impact of your planned promotions and marketing campaigns on sales, then adjust your inventory accordingly.
3. Economic trends: Based on the current state of the economy, you can predict how demand will increase or decrease for your industry and products.
Accurate forecasting saves money by reducing the risk of excessive inventory that ties up working capital, increases holding costs, and takes up valuable storage space that could be used for more popular, best-selling items.
3. Have a contingency plan
Various issues can arise related to inventory management. These issues can cripple an unprepared business. If you don't have a contingency plan for when things go wrong, there can be dire consequences.
Some of the most common issues that can pop up are:
1. Unexpected sales spikes leading up to overselling
2. Cash flow shortfalls making you unable to buy products you need
3. Lack of warehouse space to accommodate your sales spikes
4. Miscalculations and inaccuracies in inventory
5. Slow-moving products taking up all of your storage space
6. Your manufacturer runs out of your product
7. Your manufacturer discontinues your product without warning
How you prepare for this potential problem depends on your business model and your unique situation. As a business owner, it is your responsibility to consider what could go wrong and make sure you are prepared for the worst.
4. Set minimum stock levels
Improve inventory control by setting a minimum level for each inventory item that should always be on hand. When your stock inventory drops below this predetermined level, you know it's time to order more.
Ideally, you usually order the minimum amount that will set you back above the predetermined level. Minimum stock levels (also called par levels) vary by product and are based on how quickly the item sells and how long it takes to be available again.
Here are some tips for keeping your par levels accurate and your stocks at the right levels:
1. Evaluate your previous sales patterns. Look at your sales over the past year as a basis for determining where to set your minimum stock levels.
2. Consistently check on your par levels a few times a year. Your market and industry can change at different points. Thus, it is imperative to regularly re-evaluate your par levels to decide if you need to increase or decrease them to keep your stock sufficient.
3. Reorder on time. When your inventory reaches the par level or goes below it, then it is time to reorder. Waiting longer will cause your inventory to drop to an unhealthy, extremely low amount.
5. Set up reorder alerts
After determining the par level for each product, you will also need to set up reorder alerts to ensure that you don't forget to replenish your stock. Create daily reminders to check if your stock has reached par levels and needs to be reordered.
Once you know the safety stock levels, you can consider lead times with your suppliers to determine the ideal point when ordering.
6. Schedule your inventory auditing
Regular audits of your inventory and the entire operation are essential to optimize inventory control and reduce costs. In most cases, you will be relying on software to find out how much inventory you have. However, it is important to make sure the facts match.
There are several techniques for auditing your inventory:
1. Physical inventory: Physical inventory, or stock-taking, is the practice of counting all of your inventory at once. Many businesses do this at the end of their year because it is related to accounting and filing income taxes.
2. Cycle counting: Instead of doing full inventory counting at the end of the year, some businesses use cycle counting that spreads reconciliation throughout the year. Each day, week, or month, a different product is checked on a rotating schedule.
3. Spot checking: Spot checking is when the company selects a particular product, calculates it, and compares the amount to what your record should fit. Spot checks are very useful for products that sell quickly.
7. Maintain good relationships with suppliers
It is important to maintain good relationships with your suppliers so you can solve any issues related to your inventory. To build good relationships, clear and proactive communication is essential.
For example, notifying a supplier when you expect an increase in sales gives them time to adjust production to meet increased demand. Likewise, a supplier that alerts you when a product is behind schedule or low in stock allows you to delay advertising and promotions or even look for a temporary replacement product.
In particular, having good relationships with suppliers will be of great benefit. The minimum order amount is often negotiable. Don't be afraid to ask for a lower minimum so you don't have to carry a lot of inventory.
8. Perform the FIFO method
First-in, first-out (FIFO) is a strategy that focuses on getting your oldest (first-in) stock sold first (first-out). This is especially important if you run a business selling perishable goods so you don’t end up with unsellable spoilage.
You don't want to store items and expire them before they even leave the shelf. You also don't want your perishable items sitting there collecting dust or risking damage while waiting to be sold.
To successfully perform the FIFO method, you need an organized warehouse. This usually means adding new items from the back or making sure the old ones stay at the front. If you work with a warehousing and fulfillment company, they probably already use this method, but it's best to confirm.
9. Try just-in-time (JIT) inventory
The just-in-time inventory method is used by risk-taking sellers to avoid overstocking fees. With this method, you keep your inventory levels as low as possible to keep up with demand and replenish before products run out of stock.
Using the JIT method has the potential to save your business a lot of money, but it also comes with risks. Here is the pro and con of this practice:
Pro: You save money. Since you don't keep a lot of inventory using the JIT approach, you save money on storage and also reduce the risk of losing a lot of money if the demand for your product drops. With the extra money, you can then reinvest it in other parts of your business, such as marketing tools, which in turn will help your sales.
Con: Distribution can be easily distracted. The success of this approach depends on a stable and predictable supplier of raw materials. If there is a problem with one of your suppliers (i.e., they increased their prices unexpectedly or experienced a natural shortage), you will not be able to fulfill customer orders on time because you are short on spare inventory.
This method requires careful, accurate planning and forecasting, but it works well for a fast-growing brand with a calculated launch and an expanding product line.
10. Consider dropshipping
If handling and storing your own inventory is too expensive for your current needs, dropshipping may be the right option for you. This technique means that rather than carrying the inventory yourself, the manufacturer stores and ships the inventory for you, thus allowing you to cut the costs associated with storing inventory.
You can ask the manufacturer of your product if they have a dropshipping option. This can save you a lot of time and money because it can reduce inventory management tasks from your business operations.
With effective inventory management, you can help reduce costs, keep your business profitable, analyze sales patterns and predict future sales, and prepare for the unexpected. Test and repeat different techniques to see which one is most effective at saving you money.
We hope you’re doing your best to avoid costly inventory mistakes. But if you’re new to inventory management, we’re more than happy to help. Contact us to get more information about how an inventory management system can greatly help you in increasing profitability.