7 essential inventory management techniques
Inventory management is a highly-customizable part of doing business, and the optimal system is different for each company. Regardless of the system you use, the following seven techniques to will help you improve your inventory management — and cash flow.
1. Set par levels
Make inventory management easier by setting “par levels” for each of your products. Par levels are the minimum amount of product that must be on hand at all times. When your inventory stock dips below the predetermined levels, you know it’s time to reorder.
Ideally, you’ll typically order the minimum quantity that will get you back above par. Par levels vary by product and are based on how quickly the item sells and how long it takes to get back in stock. Although setting par levels requires some research and decision-making up front, having them set will systemize the process of ordering. Not only will it make it easier for you to make decisions quickly, it will allow staff to make decisions on your behalf.
Remember that conditions change over time. Check on par levels a few times throughout the year to confirm they still make sense. If something changes in the meantime, don’t be afraid to adjust your par levels up or down.
2. First-In First-Out (FIFO)
“First-in, first-out” is an important principle of inventory management. It means your oldest stock (first-in) gets sold first (first-out), not your newest stock. This is especially important for perishable products.
It’s also a good idea to practice FIFO for non-perishable products. If the same boxes are always sitting at the back, they’re more likely to get worn out. Plus, packaging and labeling requirements are continuously being updated in our industry, which means designs and features often change over time. You don’t want to end up with something obsolete that you can’t sell.
In order to manage a FIFO system, you’ll need an organized warehouse or storage system. This typically means adding new products from the back, or otherwise making sure old product stays at the front.
3. Manage relationships
Part of successful inventory management is being able to adapt quickly. Whether you need to return a slow selling item to make room for a new product, restock a fast seller very quickly, troubleshoot manufacturing issues, or temporarily expand your storage space, it’s important to have a strong relationship with your suppliers.
In particular, having a good relationship with your product suppliers goes a long way. Minimum order quantities are often negotiable. Don’t be afraid to ask for a lower minimum so you don’t have to carry as much inventory.
A good relationship isn’t just about being friendly. It’s about clear, proactive communication. Let your supplier know when you’re expecting an increase in sales so they can adjust production. Have them let you know when a product is running behind schedule so you can pause promotions or look for a temporary substitute.
4. Contingency planning
A lot of issues can pop up related to inventory management. These types of problems can cripple unprepared businesses. For example:
- Your sales spike unexpectedly and you oversell your stock
- You run into a cash flow shortfall and can’t pay for product you desperately need
- Your storage area doesn’t have enough room to accommodate your seasonal spike in sales
- A miscalculation in inventory means you have less product than you thought
- A slow-moving product takes up all your storage space
- Your manufacturer runs out of your product and you have orders to fill
- Your manufacturer discontinues your product without warning
It’s not a matter of if problems arise, but when. Figure out where your risks are and prepare a contingency plan. How will you react? What steps will you take to solve the problem? How will this impact other parts of your business? Remember that solid relationships go a long way here.
5. Regular auditing
Regular reconciliation is vital. In most cases, you’ll be relying on software and reports to know how much product you have stock. However, it’s important to make sure the facts match up. There are several methods for doing this.
- Physical inventory
A physical inventory is the practice is counting all your inventory at once. Many businesses do this at their year-end because it ties in with accounting and filing income tax. Although physical inventories are typically only done once a year, it can be incredibly disruptive to the business, and it’s tedious. If you do find a discrepancy, it can be difficult to pinpoint the issue when you’re looking back at an entire year.
- Spot checking
If you do a full physical inventory at the end of the year and you often run into problems, or you have a lot of products, you may want to start spot checking throughout the year. This simply means choosing a product, counting it, and comparing the number to what it’s supposed to be. This isn’t done on a schedule and is supplemental to physical inventory. In particular, you may want to spot check problematic or fast-moving products.
- Cycle counting
Instead of doing a full physical inventory, some businesses use cycle counting to audit their inventory. Rather than a full count at year-end, cycle counting spreads reconciliation throughout the year. Each day, week, or month a different product is checked on a rotating schedule. There are different methods of determining which items to count when, but, generally speaking, higher-value items will be counted more frequently.
6. Prioritize with ABC
Certain products need more attention than others. Using an ABC analysis lets you prioritize your inventory management by separating out products that require a lot of attention from those that don’t. Do this by going through your product list and adding each product to one of three categories:
A) High-value products with a low frequency of sales
B) Moderate value products with a moderate frequency of sales
C) Low-value products with a high frequency of sales
Items in category A require regular attention because their financial impact is significant but sales are unpredictable. Items in category C require less oversight because they have a smaller financial impact and they’re constantly turning over. Items in category B fall somewhere in-between.
7. Accurate forecasting
A huge part of good inventory management comes down to accurately predicting demand. Make no mistake, this is incredibly hard to do. There are countless variables involved and you’ll never know for sure exactly what’s coming—but you can try to get close. Here are a few things to look at when projecting your future sales:
- Trends in the market
- Last year’s sales during the same week
- This year’s growth rate
- Seasonality and the overall economy
- Upcoming promotions/events
- Planned ad spend
If there’s something else that will help you create a more accurate forecast, be sure to include it.
Take control of your inventory
Remember that with an effective inventory management system in place, you can help reduce costs, keep your business profitable, analyze sales patterns and predict future sales, and prepare the business for the unexpected. With proper inventory management systems in place, a business has a better chance for profitability and survival. Choose the right inventory management techniques for your business, and start implementing them today.
This article is courtesy of our friends at Shopify. For the original article, see the following link (click here). Shopify’s website offers a wealth of information and ideas on how to run a store successfully.