Here’s a Definitive Guide to Inventory Management

Inventory Management
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When you think of a successful retailer, what do you think of? It might be a large chain doing vast numbers of sales like Amazon, or a small local business that always has the goods you need in stock, whatever day it is. These two examples may seem very different, but there’s one thing that they have the same to be successful, and that’s always having a good supply of what they are selling. If you’ve never worked in retail, you may be surprised to know that inventory management is the backbone of any company that sells physical goods, and the management of these goods can make or break a business.

A successful retail business will have a combination of finely tuned inventory management systems and processes, most likely backed by a sophisticated inventory management software, to keep track of everything. If a company uses dated inventory management software like spreadsheets and doesn’t have any thought behind when they buy stock, they will most likely fall into one of the many issues that poor stock-taking can lead to. This may include not having enough inventory when demand is high, or having to throw away hundreds or thousands of dollars’ worth of stock that has perished.

Studies have shown that when asked about their most significant challenge day-to-day, 43% of retailers said that inventory management ranked the highest.

What’s inventory management?

At its most fundamental level, inventory management is the process of tracking how many items a company has in stock and how much space it’s taking up. This information is then used to make strategic business decisions like when to order additional stock and when to purchase additional storage units or warehouses. This is done with a variety of sophistication, all the way from automated systems that scan and track everything, to more manual processes that need a member of staff to scan items into the system manually. There are many different options when it comes to the software that you should choose for your business, so click here to see more.

What makes inventory management so important?

Proper inventory management means that you can respond quickly and effectively to changes in demand and circumstance as a business. Without it, you’re at the risk of making decisions based on guesswork, which can lead to overstocking, understocking, and ultimately cash flow issues that may put the company out of business. These errors can be minimized or avoided altogether with the proper techniques and data to allow you to adjust in order timing and quantity, as the landscape of your demand changes. In addition, mistakes, while costly in the first place, become even more time-consuming and draining on finances when you need to fix them, instead of you and employees delivering orders.

Techniques for inventory management

Inventory systems can be both expensive and time-consuming to set up for a business that hasn’t used them in the past, which may be off-putting and stop a company from implementing them. You may need to buy an expensive piece of software, for example, or even change the way your whole operation works to make the system integrate correctly. These are worth the time and effort, though, and once you have a well-running inventory management system, you won’t want to look back.

Economic order quantity

EOQ for short, economic order quantity, is how you work out the ideal amount of stock, taking into account factors like production costs, rate of demand, and additional factors. The objective is to reduce expenses by aiming to minimize total buying by ordering just enough to meet demand. The price of storage is an integral part of this equation as having too much stock, and having to pay to store it, can be one of the highest variable costs a retail business can have. By using this equation, you’ll usually end up with increased available cash and less inventory that isn’t being sold.

Minimum order quantity

MOQ, which stands for minimum order quantity, is the minimum number of a specific item a supplier is willing to sell. This is important for you to know as an inventory manager as you’ll often be wanting to make smaller orders to continue to meet demand, but to minimize storage costs as described by the economic order quantity rule. This will be particularly important for new businesses or retailers with a smaller operation, as you don’t want to order 1000 units of a product if you’re only selling a handful each day. Supplier relations are vital to helping negotiate minimum order quantity rates and should be seen as a core part of your role.

ABC analysis

The ABC analysis is a classic inventory management technique which has you split inventory into three distinct categories:

A: These are the most important products that bring you the most overall profit.

B: Products that sell well, but don’t make up the core of your order book.

C: Smaller product lines that don’t make a significant contribution to profit individually, but when added up, help your bottom line.

This analysis helps you to prioritize what items always need to be in stock, and the most time should be spent ensuring that there are no issues. You can then put most of your time into these products as you’re getting the best return on investment here. B and C products can’t be ignored, but if there’s an issue, you’re in a better position to make a call as to how you react and if it’s your best use of time.

Just in time

Similar to the economic order quantity, this is an inventory management technique that focuses on marrying up purchases of your product with the purchase of additional supply. This means that stock should be arriving at the warehouse and moving to the customer as quickly as possible with the minimum need for storage. The result is that storage costs reduce considerably, as well as minimizes excess stock that can’t be sold, as purchases are linked directly to the number of orders you’re receiving. This takes a very sophisticated management system, but is very profitable when done right.

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