The key to mastering inventory management is a reliable system for tracking stock trends. Without a good system in place, companies often run into trouble with either too little or too much inventory.
Running out of inventory drives customers away, while excess stock ties up cash. Both problems are avoidable with a well-organized warehouse and a reliable system for tracking inventory.
Know Your Inventory
Inventory management is about maintaining a delicate balance between how much stock to have on hand and when it needs to be reordered. This requires a set of systems and procedures that are not easy to master for businesses of any size.
The most important factor is establishing and regularly reviewing your “par levels,” which are predetermined minimum amounts of each product that you need to keep on hand. These will help you to avoid running out of stock and the subsequent after-effects that include lost sales, unhappy customers, damaged reputation and wasted money.
Promptly receiving your stock shipments is another key element to successful inventory control. When a shipment arrives, it must be checked in correctly against the purchase order and opened and checked against the supplier’s packing slip. Incorrect or unreliable receipt procedures can cause errors in your product QOH that lead to over-ordering, false backorders and unsold inventory. It is also wise to set policies for how and where to store your stock, including a first in, last out (FIFO) method to maximize the lifespan of your goods. Clearly naming and labeling storage locations and using item numbers that are short, consistent and unique helps to eliminate mistakes in tracking your inventory.
Know Your Customers
Inventory management involves tracking raw materials and work-in-process, finished goods, and customer returns. This data enables you to better understand consumer demand and improve forecasting. It also helps you reduce costs by lowering the likelihood of inventory storage, phantom and dead inventory, and mispicks during shipment processing.
Keeping track of inventory levels and determining when to restock inventory is crucial for your business. Small businesses may keep inventory counts manually or use spreadsheet formulas, while larger companies may utilize specialized enterprise resource planning (ERP) software.
Some inventory management styles, such as reorder point and economic order quantity (EOQ), help companies save money by reducing the frequency of orders and avoiding excess inventory. However, these models assume that customer demand and holding costs remain the same, which is not always the case. The other major concern is the risk of stock-outs, which can damage brand reputation and lead to lost revenue. This is where having a buffer stock in place comes into play.
Know Your Suppliers
A supplier is a person or company that supplies your business with goods and services. Finding a competitively priced, reliable and well-managed supplier is vital to your supply chain success.
A high level of supplier visibility allows your team to respond quickly to changes in the supply chain environment. For example, if inflation causes a price increase on certain key ingredients you can work with your suppliers to renegotiate contracts and hedge against future price increases.
It’s important to be proactive with your supplier relationships and set clear expectations for performance. This can include a regular supply chain lunch, trade show meetings or even a quick check-in email now and then. Promptly receiving inventory shipments and promptly checking-in stock can help you prevent inaccurate product QOH (Quantity on Hand) data, false backorders and unsellable products. It also helps to perform periodic cycle counts to detect errors in storage, ordering, picking and tracking that can negatively impact your bottom line.
Know Your Costs
Inventory management involves deciding when to restock, how much to buy or produce and at what price, and how to store the products. It requires companies to examine past sales data to forecast customer demand and future sales trends. This is important for both physical stores and online sellers who need to make smart decisions about storing inventory, shipping, and delivering their products.
Frequent inventory write-offs can indicate that a business is having trouble selling its finished goods or that its inventory is aging too quickly, and this can affect profitability. It’s also expensive to have too much inventory on hand because of storage fees and it may be difficult to find room for new products or promotions.
Good inventory management techniques help businesses to minimize supply chain disruptions by analyzing stock levels and using best practices such as FIFO (first-in, first-out) and ABC analysis. This will help them avoid costly stockouts, which can be caused by incorrect forecasting and unforeseen changes in demand.