Inventory Management: An Essential Guide for Every Business

Inventory Management Flow

February 12, 2021

Spencer Herder

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When you think of a successful business, do you picture a small shop or a large global brand? No matter how you measure success, these companies all have something crucial in common.

In order to run a lucrative business, you’ll need to master effective inventory management, which means you’ll always have the products that customers want in stock. If you sell goods in-store and online and still have enough in stock, then it’s clear you know how to manage inventories.

Inventory management is critical for a prosperous retail business. Using business inventory management systems, organizations can track their inventories’ lifecycle as items move in and out of their company.

In this post, we’ll introduce you to inventory management, discuss its value, how it works, and highlight some inventory best practices. We’ll also talk about some key inventory management terms, provide explanations, and define business jargon so you can gain clarity and understanding.

What is Inventory Management?

Inventory management is an aspect of supply chain management in which you aim to have the right products, in the right quantity, at the right time. When executed efficiently, inventory management helps businesses maximize their sales while eliminating the unnecessary cost of carrying excess stock.

Effective inventory management systems can help you to track your inventory in real-time, streamlining the process of stock management. Once your business successfully manages its inventory, you’ll always have the right products in the right quantity for your customers. You’ll avoid selling out of desirable items or wasting money on unwanted stock.

Additionally, you’ll be able to make sure all your products sell in time to prevent any spoilage or obsolescence while freeing up space in your storeroom or warehouse. Inventory management involves controlling and overseeing purchases from suppliers and customers, maintaining stock storage, and managing order fulfillment.

The Value of Inventory Management

Whether you focus on stock inventory management or store inventory management, it can make or break your business. Ask any business owner: inventory is frequently the largest item listed in their balance sheet’s current assets section.

Inventory issues can lead to business losses and even closures. On the other hand, efficient supply chain management can help a business to thrive. Good inventory management perfectly balances the amount of stock moving in and out of a business. You’ll control the costs and timing of non-capitalized assets and stock items, helping your company reach optimal profitability levels.

In business, inventory management is all about balance. Invest in more inventory than you can sell (overstock), and you’ll create a deficit in your budget. Order too little inventory, and you could seriously compromise customer service (and your potential earnings).

In most cases, a business will have to deduct excess inventory costs from its profits. If the extra items cannot be sold or refunded by the manufacturer, they will stay in storage, be disposed of, and be marked as losses.

If you fail to have enough inventory prepared to meet customer demands (stockout), your business may suffer. For example, you could lose a sale if you don’t have the stock available to complete a customer order. Additionally, if you regularly have to tell customers that you’re out of stock or that items are on backorder, they may approach other suppliers or purchase goods from your competitors.

How Does Inventory Management Work?

Inventory management systems help to assure that the correct level of stock is in the right place at the right time. However, new challenges for accurately managing inventory have arisen due to the recent popularity of omnichannel fulfillment, e-commerce, and expanding relationships between national and global trading partners.

Today, many inventory management techniques are available, ranging from traditional analog paper ledgers that have been used for hundreds of years to the latest autonomous smart systems and supply chain management software.

Although supply chain management software provides significant advantages over manual inventory management methods, thousands of companies manage their inventories using spreadsheets and archaic applications.

We’ll outline some of the most common inventory management systems below. But first, we’ll explain some key inventory management terms and techniques.

Key Inventory Management Terms and Techniques

While some inventory management strategies employ analysis and formulas to plan stock, others rely on tried and tested procedures. A common denominator across all methods is that they aim to improve accuracy. The inventory management techniques that a company uses largely depends on their needs and stock.

We’ll summarize some fundamental inventory techniques below:

  • ABC Analysis: This process works by identifying stock in accordance with its popularity.
  • Batch Tracking: This method groups together similar items to trace defective stock and track expiration dates.
  • Bulk Shipments: This method deals with unpacked materials that are loaded into trucks or ships by suppliers. It involves buying, shipping, and storing bulk quantities of inventory.
  • Consignment: When using a consignment inventory management technique, your company won’t pay off suppliers until certain products are sold. The supplier retains ownership of the inventory until it’s been sold by your company.
  • Cross-Docking: This process eliminates warehousing because goods are unloaded straight from a supply truck to a delivery truck.
  • Demand Forecasting: Demand forecasting is a form of predictive analytics that determines the amount of inventory required to meet customer demand.
  • Dropshipping: During the dropshipping process, the supplier ships items directly to the customer from their warehouse.
  • Economic Order Quantity (EOQ): This technique calculates the exact amount of inventory a company must order to reduce costs.
  • FIFO and LIFO: First-in, first-out (FIFO) relates to a process in which the oldest stock is sold first. Alternatively, last-in, first-out (LIFO) works on the assumption that prices always increase, so the most recently-purchased stock is the most expensive and should be sold first. Fifo vs Lifo boxes
  • Just-In-Time Inventory (JIT): Companies employ this stock inventory management technique as part of an effort to hold the lowest stock levels possible before ordering more items.
  • Lean Manufacturing: This inventory management methodology focuses on removing waste or unnecessary items from the manufacturing system.
  • Materials Requirements Planning (MRP): This system looks after scheduling, planning, and inventory control for the manufacturing industry.
  • Minimum Order Quantity: When a company depends on minimum order quantity, they order the minimal amounts of stock from their wholesalers in an effort to keep costs low.
  • Reorder Point Formula: A reorder point formula is used to calculate the minimum amount of stock a business should have before it reorders a product.
  • Perpetual Inventory Management: This technique involves monitoring and recording stock usage and sales in real-time.
  • Safety Stock: If your business prioritizes safety stock, you’ll always have additional items if your manufacturer can’t replenish stock when you sell out.
  • Six Sigma: Six Sigma is a data-based inventory management technique that helps businesses eliminate waste relating to their inventory.
  • Lean Six Sigma: This inventory management method combines Six Sigma practices with lean management to raise efficiency and eliminate waste.

Popular Inventory Management Techniques

Now that you’ve read through an overview of key inventory management techniques and terminology, we’ll outline three popular inventory management strategies that all businesses should consider:

1.    Just-In-Time Delivery (JIT)

JIT is the preferred inventory management system of some of the world’s leading companies like Toyota and Dell Computers. The core objective of JIT is to reduce all waste in a business’s supply chain. JIT operates so that you only order and ship products as they are needed. This eliminates the need for companies to store inventory for service delivery to customers or manufacturing.

Ultimately, this removes the costs and risks associated with holding inventory, including under and overstocked inventory levels.

Using JIT delivery, businesses must operate highly-efficient supply chains in order to meet demand. Successful JIT companies significantly lower their operating costs, increase productivity, eliminate risk, and raise profitability.

Despite its benefits, the JIT inventory management model is notoriously challenging for businesses to implement successfully. For this reason, your business must have access to accurate information on customer buying patterns. Additionally, you’ll need to work with capable and reliable suppliers and forecast demand accurately.

2.    ABC Inventory Analysis

The ABC inventory analysis technique classifies inventory into three tiers based upon cost significance, inventory value, and turnover rate.

A: Items that are small in quantity and high in value. Group A items require the most attention as they are of significant value to a business. A-class inventory normally equates to 70% of the total inventory listed on a balance sheet, but around 10% of the items are physically held in stock.

B: Items of average or moderate value and average quantity: Generally, B-class inventory accounts for around 20% of the total inventory value on the balance sheet and 20% of the actual items in stock.

C: Items of low value or cost but high quantity: Class-C items generally account for 10% of the overall inventory on a balance sheet and 70% of the inventory in stock.

The ABC inventory management approach builds upon the 80/20 rule, otherwise known as the Pareto Principle. When applied to inventory, the Pareto Principle states that 80% of a company’s profits will be derived from sales of 20% of its inventory.

This strategy helps businesses to allocate and direct funds, labor, and resources towards efficient inventory management.

3.    Dropshipping

Dropshipping offers a profitable solution for businesses that don’t want to organize their own supply chain logistics. It also helps small businesses to get started without access to the capital to order bulk inventory, store items, and handle shipping.

Dropshipping allows businesses to focus their capital, resources, and expertise on growing their sales and marketing platform while outsourcing all backend logistics.

There are several key benefits to this inventory management technique, along with some disadvantages. Dropshipping allows businesses to stay cash-flow positive, as they do not have to purchase and maintain their own inventory.

However, one of this process’s pitfalls is that the outside suppliers’ actions affect customer service, while all accountability falls on the retailer’s shoulders. Additionally, while many wholesalers provide dropshipping services, businesses don’t necessarily pay wholesale prices for goods. Therefore, dropshipping can significantly shrink profit margins.

Inventory Management Best Practices

The following points will help you succeed in managing your inventory.

Leverage Automation

Try to automate the process of inventory management as much as you can. One of the most important things you can do as a retailer is to invest in a POS or supply chain management system that calculates your inventory management figures for you.

Be Customer-Centric Magnifying glass zoomed in on girls face

Your best customers are critical to your future success. They shop the most often, spend the most, and love your products. The products that they buy are the items most likely to attract more customers. These items represent market trends. As a result, make sure you consider the buying habits of your frequent customers when implementing inventory management processes.

Track Moving Inventory

Use software to access a singular view of all your inventory by location. This methodology helps you to create a seamless experience for customers and staff. If you have multiple stores and one is sold out, your employees can locate the stock and order it from another store. Once ordered, it can be shipped to their store or directly to the customer.

Additionally, you’ll need to track products that are ‘in transfer’ so that you can remove them from your ‘online shelves.’ This eliminates fulfillment nightmares and overselling.

Simplify Your Inventory Management with TradeBeyond

Inventory problems almost always lead to business losses. For this reason, all businesses should be passionate about inventory management. With efficient inventory management techniques, you can lower operational costs, optimize supply chain efficiency, boost profitability, and meet customer service targets.

At TradeBeyond, we created a sourcing community where private label suppliers and retailers locate and work together to develop innovative products. We have suppliers all over the world, specializing in a wide range of product categories. By registering with our service and browsing the private label manufacturers list, you significantly increase your chances of finding excellent suppliers. Plus, you can use our platform to start working directly with global suppliers today.

We have the purchasing software you need. Get started today to see just how easy it is to streamline collaboration between suppliers and retailers.

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