When planned for in advance, stored and organized for optimal movement, tracked, audited, strategically reviewed and refreshed, inventory provides a steady stream of precious working capital to fuel your business.
Non-moving inventory, on the other hand, blocks up working capital. This, in turn, prevents the retailer from being agile enough to catch on to the hot new trends. Not being able to match supply to customer demand is clearly hazardous to any retail business. Good inventory management is what allows businesses to comfortably scale up.
Fortunately, there are tried and tested inventory management techniques that help retailers manage their inventory as efficiently as possible. Follow this six-step process to get the most out of yours.
6 inventory management processes
In this article, we look at the process of managing inventory better. Chances are you already have some of these systems and practices in place. However, getting them to work together can give you even better results and streamline your retail operations. Here are the six inventory management process to follow.
1. Forecast your demand
Whether you’re a new retailer just entering the game or a seasoned seller, you need to have a good handle on your target demographic and your market. You need to predict how much initial demand is likely to be there for your product, and, should it take off, how rapidly you can source larger quantities to replenish your initial stock.
Retailers that have been established in the market for a while have a distinct advantage in the form of past sales data. You can use customer buying behavior indicators and seasonal shopping trends to help forecast future sales and make the most of your inventory budget.
The inventory turnover ratio, i.e. the rate at which inventory is “turned” into good solid cash flow, i.e. sold. A high inventory turnover means your inventory is selling well and bringing in revenue. A low one means you might have the stagnant stock problem on your hands, and measures must be taken to offload the non-movers.
Maximum and minimum stock levels which tell you what is the most, and the absolute least, amount of inventory you need of a certain product.
Reorder levels which indicate the volume of inventory at which you need to place an order for fresh stock. Reorder levels take into account vendor lead times, or the time it takes for your vendors to deliver goods.
While there are several other calculations that can paint a picture of your business’s health, these are good to get started with from an operational standpoint.
2. Master warehouse organization
Inventory management techniques also cover how you organize your warehouse for maximum efficiency. Warehouse design and layout are crucial to all aspects of order fulfillment at the fastest rate possible.
Order fulfillment includes storage, picking, handling, packing and shipping out products with maximum efficiency. Warehouse design takes into consideration how your storage and transit areas should be, even the walkways need to be laid out in a manner that presents minimal obstacles to the movement of your staff and goods.
There should be clearly demarcated receiving, collection, packaging and shipping sections with appropriate amounts of space allotted to each activity. There should be a separate bin or section to stow away damaged goods so that they don’t re-enter the mix.
The larger your inventory or warehouse, the more critical it is to be able to find items in storage with ease. Assigning shelf numbers to each section, using barcodes to track products and their location, and well-designed flows on when and how the items are to be picked are all great things to have. This minimizes confusion and significantly cuts short the time to order fulfillment.
3. Choose an inventory management technique
The kind of inventory management technique you may want to adopt for restocking greatly depends on the nature of your business, production, and sales cycles.
If you have products that are usually high in demand and tend to have variable sales by season, it is worth holding a pre-calculated amount of safety stock to protect against sales spikes. On the other hand, if you have highly reliable vendors and accurate forecasting on hand, just-in-time inventory management could work for you.
Just-in-time inventory management
Maybe the “just in time,” or JIT method works for you, where you can get away with minimal inventory, and have certain items delivered just in time to match your requirement. It goes without saying that for this system to work, your vendors must deliver exceptional service to you.
With JIT, you can get away with keeping just enough inventory in stock to meet your production or shipping needs. You can also save money on bulk discounts from your suppliers and reduced overhead costs.
A successful JIT model requires extreme planning, standardization of processes and a limited number of highly reliable suppliers. The payoff is smoother coordination, minimized lead time, and faster delivery time.
Having said that, you really don’t want to be kicking yourself for being understocked during prime shopping periods, like the holidays. This is where “safety stock” comes in. With the help of reorder points, and careful, regular evaluation of stock movement, you will never be caught out without something to sell.
We strongly recommend a combination of both. For higher value items that block up too much cash, look for a reliable vendor and use the JIT method combined with powerful forecasting. For faster-moving items with highly variable demand, it is better than you hold sufficient safety stock.
4. Use an inventory management system
Automating your inventory management is by far the most significant change you can make to your retail operations quickly. While most other techniques take time to begin working smoothly and showing results, an inventory management system can become a retail assistant, warehouse management tool and omnichannel support system from the get-go.
The best systems automate every single aspect of the retail process, from auto-generating POs when stock levels of fast-moving items are low, to updating sales, purchases, and exchanges in real-time, managing multiple currencies, multiple locations, and sales channels.
Automated inventory management techniques facilitate a standardized system for naming SKUs and generating barcodes, which makes it so much easier to fulfill orders across channels.
If you are an omnichannel retailer or are considering becoming one, you simply cannot do without a system that helps you track, fulfill and ship online orders while also enabling POS transactions offline. For every growing business, we recommend investing in a versatile inventory management system for hassle-free operations.
5. Audit stock at regular intervals
Are you paying enough attention to stock reconciliation? In other words, do you count your stock often enough?
Combine your automated inventory management system with regularly scheduled stock audits for the greatest accuracy in tracking your SKUs. Matching your actual stock figures with book values helps you see what you’ve lost and why. There can be many reasons for stock loss ranging from spoilage and not knowing where it has been placed to actually having it stolen.
The stock audit exercise
For your very first count, you may need to halt other business operations. Count all of the stock for every item in a designated counting area. Do not put any item back before all similar ones have been accounted for. Use barcoding to identify where the products are going to be placed.
Subsequent counts then become simpler. You can conduct audits in parts of the warehouse on different days of the week. Choose timings that will least hinder regular business, say after the last shipment has gone. There may be some overtime to pay, but it will be worth it in the end.
The ABC counting method is good if you have several items that move at different rates. In this system, you count the fastest moving items most often, and the slowest moving items the least often.
In retail stores that also have storage areas, counting may be necessary every week, or even every day for groceries and other fast-moving supplies. Once you have your book and actual values with you, offset the losses and figure out your most significant source of stock loss. This helps you take relevant measures and reduce the amount of stock, and money, you lose.
6. Review your processes from time to time
It is a fact that buyer trends change over time, and so do relationships with vendors. Use retail reports to find out how your business is doing and to identify problem areas before they become pain points.
The same goes for stock levels. If you find that a fast-moving item is losing favor among your clientele, it is time to recalibrate your reorder level. We see this most often with ‘fad’ purchases that are often set off following a social media frenzy- they lose favor just as soon as the next trend comes along.
Do a regular pulse-check on your vendor and shipping partner relationships as well. Evaluate if moving to different partners for a price benefit is worth losing good relationships. At the same time, if you have vendors who just cannot deliver on time, you don't want to be left holding the metaphorical crying baby.
Have clear-cut agreements and unambiguous contracts with all your partners. Ensure dependable supplier support across all your business locations so that order fulfillment does not suffer.
A final word on handling returns
There could also be instances when a certain product is being returned too frequently to be a coincidence. Use your inventory management system to flag such items, zero-in on defects and plug the defect before you lose too much money over a dud. You can even contact the customers from your database and collect feedback on their reasons for returning the items.
Nip problems like this in the bud by setting up a quality check to filter out defective items even before they make it to your shelves. A great time for doing this is when you receive shipments from your suppliers. Still, a few may fall through the cracks.
So a second checkpoint would be when they are picked up to fulfill an order, prior to packing and shipping. This seems basic, but implementing this practice will minimize return rates due to poor quality products, and help you streamline your vendor list to work only with the best.
Mohammed Ali is the Founder and CEO of Primaseller, a multichannel inventory management software that helps sellers manage inventory better and fulfil orders on time. When not running a startup, Ali is often caught lapping up the latest book in fantasy fiction.