It’s important to evaluate your business on a regular basis to ensure that you’re on track to succeed. One of the most integral parts of your business is inventory management.
How has your small business’s inventory management panned out? Have you had the right products available when you needed them? Did you lose out on business when items were out of stock? Or did you lose money due to excess stock?
In this article we discuss basic inventory management techniques, explain what to look for in good inventory management software, and go over some best practices for managing inventory.
What is inventory management?
Inventory management is the part of supply chain management that aims to always have the right products in the right quantity for sale, at the right time. When done effectively, businesses reduce the costs of carrying excess inventory while maximizing sales. Good inventory management can help you track your inventory in real time to streamline this process.
By effectively managing your inventory you can have the right products in the right quantity on hand and avoid products being out of stock and funds being tied up in excess stock. You can also ensure your products are sold in time to avoid spoilage or obsolescence, or spending too much money on stock that’s taking up space in a warehouse or stockroom.
Good inventory management software should:
- Reduce costs, improve cash flow, and boost your business’s bottom line
- Keep track of your inventory in real time
- Help you forecast demand
- Prevent product and production shortages
- Prevent excess stock and too many raw materials
- Allow for easy inventory analysis on any device
- Be accessible right from your retail point-of-sale
- Optimize warehouse organization and precious employee time
- Offer quick and painless bar code scanning to speed up intake
- Allow for multilocation management, tracking inventory across several locations or warehouses
Inventory management techniques and best practices for small business
Here are some of the techniques that many small businesses use to manage inventory:
- Fine-tune your forecasting. Accurate forecasting is vital. Your projected sales calculations should be based on factors such as historical sales figures (if you sell with Square, look to your online Dashboard for this info), market trends, predicted growth and the economy, promotions, marketing efforts, etc.
- Use the FIFO approach (first in, first out). Goods should be sold in the same chronological order as they were purchased or created. This is especially important for perishable products like food, flowers, and makeup. A bar owner, for example, has to be cognizant of the materials behind the bar and apply FIFO methods to improve bar inventory. It’s also a good idea for nonperishable goods since items sitting around for too long might become damaged, or otherwise out of date and unsellable. The best way to apply FIFO in a storeroom or warehouse is to add new items from the back so the older products are at the front.
- Identify low-turn stock. If you have stock that hasn’t sold at all in the last six to 12 months, it’s probably time to stop stocking that item. You might also consider different strategies for getting rid of that stock — like a special discount or promotion — since excess stock wastes both your space and capital.
- Audit your stock. Even with good inventory management software, periodically you still need to actually count your inventory to make sure what you have in stock matches what you think you have. Businesses use different techniques, including an annual, year-end physical inventory that counts every single item and ongoing spot-checking, which can be most useful for products that are moving fast or have stocking issues.
- Use cloud-based inventory management software. Look for software with real-time sales analytics. Square’s software connects directly to your point of sale, so your stock levels are automatically adjusted every time you make a sale. Receive daily stock alert emails so you always know which items are low or out of stock so you can order more in time.
- Track your stock levels at all times. Have a solid system in place for tracking your stock levels, prioritizing the most expensive products. Effective software saves you time and money by doing much of the heavy lifting for you.
- Reduce equipment repair times. Essential machinery isn’t always in working order, so it’s important to manage those assets. A broken piece of machinery can be costly. Monitoring your machinery and its parts is crucial to understanding its life cycle, so you can be prepared before issues arise.
- Don’t forget quality control. No matter your specialty, it’s important to ensure that all your products look great and are working well. It could be as simple as having employees do a quick examination during stock audits that includes a checklist for signs of damage and correct product labeling.
- Hire a stock controller. Stock control is used to show the amount of inventory you have at a given time and applies to all items from raw materials to finished goods. If you have a lot of inventory, you might need one person who is responsible for it. A stock controller processes all purchase orders, receives deliveries, and makes sure that everything coming in matches what was ordered.
- Remember your ABCs. Many businesses find it helpful to have tighter controls over higher-value items by grouping inventory items into A, B, and C categories.
- Consider drop shipping. If your business adopts drop shipping methods, you can sell products without actually holding the inventory yourself. Instead, a wholesaler or manufacturer is responsible for carrying the inventory and shipping the products when a consumer buys from your store. That way, you don’t worry about inventory holding, storage, or fulfillment. Many owners who start an online store adopt drop shipping methods, but this supply chain fulfillment strategy can be adopted by many types of businesses across all industries.
Products classified as A — big-ticket items — make up the smallest percentage of inventory and have the largest annual consumption value. Products grouped into the C category — the least expensive items — make up the largest percentage of inventory and have the lowest annual consumption value. B products are in between. Annual consumption value is annual demand multiplied by an item’s cost.
The chart below shows (based on recommendations from Lokad) how businesses can break this down:
|ABC Inventory Analysis Example|
|Classification||Percentage of inventory||Annual consumption value|