Many people working in businesses dread the word inventory. From the workers to the business owners themselves.
Inventory involves lots of counting, adding up and this is done regularly. This is tedious for big businesses that have a lot of inventory on the shelves, in the store, warehouses and even factories.
Many small businesses owners don’t have much inventory and this leaves some business owners not bothered about inventory management and inventory control. They stock up items, they sell and that’s it. They don’t bother to know if they are stocking up little or too much.
Holding up inventory, whether little or too much ties a lot of cash and this can cost your business.
Thus, if you are working towards business growth, managing and controlling your inventory is very crucial. And just like cash flow, it can make or break your business.
Inventory management is how you track and control your business’ inventory as you acquire it or manufacture, process and use it. It controls the entire flow of goods, from buying right through to selling, ensuring that you always have the correct amounts of the right item in the right place.
With inventory management, you keep track of what goods you have stocked, how much of the goods you have stocked and where they are (location).
The aim of inventory management is to reduce inventory keeping costs by helping business owners realize when it is time to replenish goods or purchase more supplies to produce them.
Why inventory management is important
Essentially, inventory management is to ensure your business has enough stock on hand to satisfy consumer demand.
If inventory management is not done correctly, you risk losing money either on future sales that can not be filled or wasting money by stocking too much inventory.
Good/Correct inventory management will help you to:
Give Customers a good experience.
Imagine not having enough stock to satisfy orders for which you have already paid.
It is easier and faster to pick, package and send off inventory that is properly stored to your customers.
Boost Cash Flow.
Cash flow and your inventory go hand in hand . Putting money in so much stock at once means that for other items, such as payroll or marketing, finances may not be available.
When you are selling a product that has an expiry date, such as food or makeup, if you do not sell it in time, there is a very real risk that it will go bad. Buying too much stock may lead to it being, rotten, or stolen if not stored correctly.
Efficient inventory management allows you to eliminate excessive spoilage.
Avoid dead inventory.
Dead stock is stock that can no longer be sold, but not necessarily because it has expired; it may have gone out of season, out of style, or otherwise become obsolete. You will fix this expensive inventory error by managing and controlling inventory.
Inventory management Techniques
A highly customizable aspect of doing business is inventory management. For each business, the optimal inventory management approach is different.
Thus you can use whatever approach that works best for you.
However, you should try as much as possible to avoid human error in your inventory management. Thus, you can take advantage of inventory management software and apps.
These techniques will help you improve your inventory management and ultimately, your cash flow.
1.First out, first in, first out
First-in, first-out is an effective inventory management principle. This means that your oldest stock (first in) is first sold (first out). Don’t sell your new stock before your old stock.
This is particularly important for perishable goods. You don’t want to end up with unsealable spoilage.
Practising this principle for non-perishable goods is also a good idea. They’re more likely to get worn out if the same boxes are still sitting on the back. Plus, over time, packaging design and features also change. You don’t want to end up with anything you can’t sell that’s outdated.
2.Set par levels for your products
Make inventory management simpler for each of your items by setting par levels. Par levels are the minimum product quantity that must be on hand at all times. You know it’s time to order more when your inventory dips below these predetermined levels. You only need to buy the remaining quantity to reach the set level.
Par level will differ by product and will depend on how fast the item sells and how long it takes to return to stock.
Not only will it be easier for you to quickly make choices, it will allow your employees to make decisions on your behalf.
Know that, over time, things change and you should regularly check to see whether your set par levels still work.
3. Prioritizing your inventory
This depends on how your products sell. You definitely have products that sell fast, others sell at a moderate rate and others go slow.
These products represent different percentages of your revenue.
For proper inventory management, cluster your stock according to the revenue they bring. You can use the ABC method. Inventory A represents 80% of your revenue. Inventory B represents 15% of your revenue and Inventory C represents 5% of your revenue.
Your A represents your most profitable and valuable goods. Therefore, you will want to make sure that you still have these items on hand, so that potential sales are not skipped. Your slow-moving or dead stock is your C stock. You may want to sell this stock at a discount, so you can get it off your shelves and free up money from your inventory.
Unforeseen things related to inventory management pop up and these issues cripple many unprepared businesses.
Your sales are suddenly spiking and you are overselling your stock.
You are running into a deficit in cash flow and can’t pay for the commodity you really need.
An inventory miscalculation means you’ve got less stock than you thought.
All your storage space is taken up by a slow-moving commodity.
Your supplier is running out of your product, and you have orders to fill out.
Without warning, your manufacturer discontinues your product.
Don’t think in terms of if an issue arises but think of when it arises. What will you do when an issue arises?
Think of all the places your risks lie and come up with a contingency plan to be ready.
What steps are you going to take to fix the issue? How can other aspects of your company affect this?
5.Auditing your inventory regularly
You need to regularly know how much inventory you have in your storage and shelves to make sure things match up.
You can do this by;
Physical inventory where you physically count your stock at once. This can be tedious but very crucial.
Spot checking where you choose to count each product separately and compare the number to what it’s supposed to be. You can do if you are trying to solve a problem or when a product is moving too fast.
Cycle counting throughout the year. This is by spreading your audit or count throughout the year instead of once a year. A different product is checked over a period of time.
All your products are checked on rotation and by the end of year, you have audited every product in your inventory.
Safety stock is like an emergency fund. It is essentially an inventory that you “set aside” for emergency use.
It serves as something of a threshold for when you need to reorder supplies before dipping into your allocation of emergency stock.
In case your supply chain is interrupted, your goods are damaged, or some other unforeseen circumstance prevents your ability to receive or handle merchandise, it is a good idea to work safety stock into your inventory management strategy.
7.Point of re-order
The point of reorder informs you the level at which your stock is to be replenished.
You should consider lead time with your supply chain until you know your safety stock level, to decide the optimal point at which it is time to position your order.
Inventory management system – software
Many small businesses start with the old-school pen-and-paper system, and this can get out of hand pretty fast if you have growth goals.
Not to mention, it makes you more prone to human mistakes, which can lead to costly business errors.
An inventory management system software will make the work easier for you. You will get access to extra features that ensure that your inventory management is effective and efficient.
With an inventory management system software;
you will keep track of your stock
The software will give you stock alerts
You will benefit from automated purchase orders
Importantly, you will receive year-end inventory reporting.
You will have a clearer picture of your inventory from your suppliers, to your business and to your customers.
With proper inventory management, you will help reduce costs, and keep your business stable.
You will be able to evaluate market trends and forecast potential sales, and plan for the unexpected.
Proper inventory management gives your business a greater potential for profitability and sustainability