Your Essential Guide to Effective Inventory Management + 18 Techniques You Need to Know
Your Essential Guide to Effective Inventory Management + 18 Techniques You Need to Know
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Picture a successful retail business in your head. Maybe you’re picturing a small local shop, or a huge corporate business.
What do these two companies have in common?
Do they both consistently have the products in stock that you want?
Do they both carry goods in-store and online?
If the answers are yes, both retailers probably have a good handle on their physical inventories. And it’s even more likely they’re using inventory management software to do so.
Inventory management is the basis of a well-functioning retail business. Inventory management systems track the lifecycle of inventory and stock as it comes and goes out of your business.
When businesses don’t have a handle on the activity of their inventory, or worse, track it with outdated spreadsheets and data entry, the rest of the pieces, like order fulfilment, don’t fall into place.
When you don’t know how much inventory you have on hand, you can’t make smart reorder decisions
You can’t list items accurately online because you don’t have visibility into how much inventory you have to allocate to each channel. You get stuck with too much inventory or an incorrect amount of product. The list is endless.
Let’s take a look at a few stats from actual retailers who have experienced the hurdles of not using an inventory management software.
- 43% of retailers ranked inventory management as their number one day-to-day challenge
- Over 1,600 new warehouses were opened between 2013 and 2017
With new warehouses opening every day, the amount of people in need of proper inventory management processes grows in congruence with the amount of people who don’t know how to manage them. The importance of inventory management simply cannot be ignored.
What Is Inventory Management?
Inventory management is a step in the supply chain where inventory and stock quantities are tracked in and out of your warehouse.
The goal of inventory management systems is to know where your inventory is at any given time and how much of it you have in order to manage inventory levels correctly.
Some companies may opt to scan in inventory via a barcode scanner to increase efficiency along pick routes and accuracy.
Unlike an ERP system, an inventory management system focuses on one supply chain process. They often come with the ability to integrate with other software systems – point of sale, channel management, shipping – so you can build a personalized integration stack to the needs of your unique business.
Why Is Inventory Management Important
Inventory management is the fundamental building block to longevity. When your inventory is properly organized, the rest of your supply-chain management will fall into place. Without it, you risk a litany of mistakes like mis-shipments, out of stocks, overstocks, mis-picks, and so on.
Proper warehouse management is key. Mis-picks result from incorrect paper pick lists, disorganized shelf labels, or just a messy warehouse in general. Mis-shipments are a direct result of mis-picks at the beginning of the inventory process, and are also a result of a lack in quality control procedures.
Out of stocks and overstocks occur when a company uses manual methods to place orders without having a full grasp on the state of their inventory. This is a not a good predictor for inventory forecasting and results in too much stock or too little.
All of these mistakes will not only cost you money, but also cost you in wasted labor spent correcting the mistakes later. When you don’t implement management tools, your risk of human error mistakes goes up by the minute. And your customer reviews and loyalty take a negative hit as well.
Inventory Management Techniques
That being said, inventory management is only as powerful as the way you use it.
It’s well worth the extra time and money to have inventory management set up by the experts who made the software. Work with them to make sure you’re utilizing the proper techniques and features to get the most bang for your buck.
Let’s take a look at some inventory-control techniques you may choose to utilize in your own warehouse.
1. Economic order quantity.
Economic order quantity, or EOQ, is a formula for the ideal order quantity a company needs to purchase for its inventory with a set of variables like total costs of production, demand rate, and other factors.
The overall goal of EOQ is to minimize related costs. The formula is used to identify the greatest number of product units to order to minimize buying. The formula also takes the number of units in the delivery of and storing of inventory unit costs. This helps free up tied cash in inventory for most companies.
2. Minimum order quantity.
On the supplier side, minimum order quantity (MOQ) is the smallest amount of set stock a supplier is willing to sell. If retailers are unable to purchase the MOQ of a product, the supplier won’t sell it to you.
For example, inventory items that cost more to produce typically have a smaller MOQ as opposed to cheaper items that are easier and more cost effective to make.
3. ABC analysis.
This inventory categorization technique splits subjects into three categories to identify items that have a heavy impact on overall inventory cost.
- Category A serves as your most valuable products that contribute the most to overall profit.
- Category B is the products that fall somewhere in between the most and least valuable.
- Category C is for the small transactions that are vital for overall profit but don’t matter much individually to the company altogether.
4. Just-in-time inventory management.
Just-in-time (JIT) inventory management is a technique that arranges raw material orders from suppliers in direct connection with production schedules.
JIT is a great way to reduce inventory costs. Companies receive inventory on an as-needed basis instead of ordering too much and risking dead stock. Dead stock is inventory that was never sold or used by customers before being removed from sale status.
5. Safety stock inventory.
Safety stock inventory management is extra inventory being ordered beyond expected demand. This technique is used to prevent stockouts typically caused by incorrect forecasting or unforeseen changes in customer demand.
7. FIFO and LIFO.
LIFO and FIFO are methods to determine the cost of inventory. FIFO, or First in, First out, assumes the older inventory is sold first. FIFO is a great way to keep inventory fresh.
LIFO, or Last-in, First-out, assumes the newer inventory is typically sold first. LIFO helps prevent inventory from going bad.
8. Reorder point formula.
The reorder point formula is an inventory management technique that’s based on a business’s own purchase and sales cycles that varies on a per-product basis. A reorder point is usually higher than a safety stock number to factor in lead time.
9. Batch tracking.
Batch tracking is a quality control inventory management technique wherein users can group and monitor a set of stock with similar traits. This method helps to track the expiration of inventory or trace defective items back to their original batch.
10. Consignment inventory.
If you’re thinking about your local consignment store here, you’re exactly right. Consignment inventory is a business deal when a consigner (vendor or wholesaler) agrees to give a consignee (retailer like your favorite consignment store) their goods without the consignee paying for the inventory upfront. The consigner offering the inventory still owns the goods and the consignee pays for them only when they sell.
11. Perpetual inventory management.
Perpetual inventory management is simply counting inventory as soon as it arrives. It’s the most basic inventory management technique and can be recorded manually on pen and paper or a spreadsheet.
Dropshipping is an inventory management fulfillment method in which a store doesn’t actually keep the products it sells in stock. When a store makes a sale, instead of picking it from their own inventory, they purchase the item from a third party and have it shipped to the consumer. The seller never sees our touches the product itself.
13. Lean Manufacturing.
Lean is a broad set of management practices that can be applied to any business practice. It’s goal is to improve efficiency by eliminating waste and any non value-adding activities from daily business.
14. Six Sigma.
Six Sigma is a brand of teaching that gives companies tools to improve the performance of their business (increase profits) and decrease the growth of excess inventory.
15. Lean Six Sigma.
Lean Six Sigma enhances the tools of Six Sigma, but instead focuses more on increasing word standardization and the flow of business.
16. Demand forecasting.
Demand forecasting should become a familiar inventory management technique to retailers. Demand forecasting is based on historical sales data to formulate an estimate of the expected forecast of customer demand. Essentially, it’s an estimate of the goods and services a company expects customers to purchase in the future.
Cross-docking is an inventory management technique whereby an incoming truck unloads materials directly into outbound trucks to create a JIT shipping process. There is little or no storage in between deliveries.
18. Bulk shipments.
Bulk shipments is a cost efficient method of shipping when you palletize inventory to ship more at once.
Examples of Successful Inventory Management
1. MB Klein
MB Klein, a historic retailer in Maryland of model trains, train sets, and railroad accessories, is a mutual client of SkuVault and BigCommerce. Mat Huffman, digital warehouse lead at MB Klein, told us about his experience using a SkuVault and BigCommerce integration to manage the company’s online store and brick-and-mortar store.
“After having implemented SkuVault’s system, the task of maintaining our inventory has become more straightforward and efficient. Our customer satisfaction has improved with accelerated shipping times and the ability to accurately represent our stock in real-time with the BigCommerce integration for our website,” said Huffman.
“The ease of only needing to upload new products into BigCommerce that migrate into SkuVault has been a tremendous advantage for dealing with workflow. One of the most beneficial aspects of utilizing SkuVault has been the ability to streamline, not only the inventory counts, but the ordering and receiving processes as well,” he said. “Overall, we have found the use of SkuVault to be invaluable, and the benefits have had an extensive impact on MB Klein’s growth during the past year.”
Common Inventory Management Questions
Below are frequently asked questions regarding inventory management.
What are necessary goals of inventory management?
The main goal of inventory management is to increase the visibility and organization of inventory activity via automated and streamlined pick/pack/ship features.
This kind of change empowers your small business to grow with confidence and puts you in front of the kind of customers you want.
Your business should run like a well-oiled machine upon implementing smart inventory management techniques. And if you really want to do it right, implement inventory management software with the software’s in-house support team. Let the experts lead you in the right direction.
How do you measure to see if you are successfully managing inventory?
The proof is in the numbers when measuring the success rate of inventory management. After you have implemented new inventory management techniques, compare the data from before and after.
Have your level of mis-shipments, mis-picks, or out of stocks decreased? What about dead stock? Have you eliminated the dead piles of inventory around the perimeter of the warehouse?
If you can answer yes to these, you’ve successfully conducted inventory management. As a result, you can expect to see better customer reviews, improved customer loyalty, and even a boost in Amazon Seller Rating Performance.
Who should be accountable for inventory management effectiveness?
It’s an all hands on deck approach when it comes to inventory management effectiveness. Several teams are responsible for different pieces of the pie.
The purchasing team is accountable for making sure they are not over or under purchasing, and are closely monitoring each purchase order.
The merchandising team is tasked to ensure the inventory is properly listed, promoted, and priced to move.
The warehouse team, warehouse manager, and inventory specialists are responsible for handling all inventory from FIFO to delegating proper stock levels in each location. This ensures less shelf wear on packaging.
The warehouse team is also accountable for the obvious inventory management tasks – managing proper receiving, correct picks, and correct shipments to create an ease of movement throughout the pick/pack/ship process.
How do you determine if your inventory manager is spread too thin?
There’s a few alarming signs around a warehouse that signal your inventory manager cannot do their job properly. And they all have to do with improper inventory management.
Here are a few signs:
- You have undersold inventory; meaning, there’s a hot item somewhere hidden in the backstock you didn’t list in time for the season.
- Inventory levels are creeping up, but aren’t in line with sales levels. This is a sign of dead stock.
- The amount of shelf wear on packages forces you to mark down the price. This is a result of stocking inventory incorrectly or sitting too long and becoming dead stock.
- The inventory manager is still using a manual spreadsheet. This method of inventory management leads to huge amounts of manual error like mis-shipments and mis-picks.
What should determine ordering frequency?
Reporting, reporting, reporting.
It can’t be stressed enough how important reports are to inventory management processes during peak season.
Historical sales reports from peak seasons past, and throughout the current year, should be used to determine order frequency during peak season. Look back on what you sold the most and the least in tandem with what items are popular this year to make more accurate purchasing decisions.
Sales reports can be broken down by sales channels so you get a better understanding of what items sold on each channel. This gives you a clear idea of the kind of order demand to expect and right order frequency to establish.
How should I prepare for peak seasons?
Peak season for a business is arguably the most important time of the year. It’s the time of year when most businesses make the bulk of their revenue, so it’s pivotal that you have proper inventory management in place in order to succeed.
If you’re heading into your first peak season, here’s what you can do to prepare.
- Conduct a cycle count to make sure all inventory levels are correct.
- Ensure shipping supplies are properly stocked and ready to use. By the way, shipping supplies should be inventoried as well.
- Hire temporary staff to account for a higher demand in orders.
- Utilize history reports to make sure you’ve ordered the right amount of inventory.
- Make sure all inventory, including backstock and picking, is in the proper locations.
And last, but not least, implement inventory management software. Inventory management streamlines all the points above and better accommodates for high demand and fluctuation throughout peak season better than a spreadsheet ever could.
Inventory is the biggest asset to your company, so in order to save money and make money, you need to protect that asset and nurture it in the right direction. Without implementing inventory management techniques, you’ll never get ahead.
Sign up with an inventory management software that masters the basics of inventory management. The fundamentals are key to a sustainable business. Software should be a catalyst for your growth, not a hindrance.
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