Inventory management is not the most exciting retail topic but it is crucial for all business. It can make or break your bottom line. By having too little inventory on hand, you risk losing customers as products quickly sell out. However, having too much inventory ties up valuable cashflow and costs more to store and track. Effective inventory management sits between these two extremes. While it takes more work and planning, your profits will reflect the effort you put in. Thankfully, there are proven best practices for effective inventory management.
1: Focus on Your Customers First
When looking at inventory management, it is important to focus on your best customers. They are key to your future success. “Best customers” are those who shop often, spent the most, and already love your products. By keeping them happy, they will keep coming back. It is part of the important 80:20 rule. This rule states that 20% of your customers are responsible for 80% of your profits.
Look at the products these customers are buying. Products that sell well with these dedicated customers are likely to attract new customers. Consider them a representation of market trends – by analysing what your best customers buy will keep you ahead of the pack.
Consistent quality and product categories also helps strengthen your band. The more you can deliver on high quality, recognisable and branded products that appeal to your “best customers”, the better these products will sell.
2: Audit and Categorise Your Inventory
It is important to categorise your inventory into priority groups so you know what you need to order more of and how frequently you order. Not all items in your inventory are equally important. ABC analysis is the best way to categorise your inventory. In fact, many industry leading inventory management programs utilise ABC analysis.
Items in your A group are the high ticket items that you generally need fewer on hand. Group C items are lower cost items with quick inventory turn over times. And Group B is everything else, the moderately priced items that sell slower than Group C but faster than Group A. This allows you to analyse and optimise the use of warehouse space.
It also allows you to ensure the most important items are always available. You should be using the most space for items that are in demand, and less space is dedicated to less important stock.
You should audit your inventory weekly or monthly, though some companies do a comprehensive review once a year. No matter how frequently you do it, you should make a point to count your inventory regularly to make sure it matches what you think you have.
3: Develop an Effective Inventory Management Plan
After studying, auditing and categorising your products, it is important to develop a proper inventory management plan. This may require the efforts of many departments in your business, including marketing, catalogue, merchandising, sales, and eCommerce. You need to work with these departments to move your Group C products, especially.
Having a management plan also allows you to control costs and preserve your profit. For example, customers don’t want to pay full price for end of season stock, and you don’t want to spend extra money managing and storing slow-selling stock. This is why you need residual inventory management. You can analyse what remains at the end of the season and is being carried into the next season. And you can then put those items on sale, as a result. For example, putting winter knitwear on sale in spring.
You can manage residual stock by creating season codes with style numbers as you add products to your inventory. This makes analysing stock vastly easier.
Establishing inventory KPIs can also help you measure your performance in particular categories over a specific amount of time. This helps eliminate guesswork by giving you clear milestones to hit weekly, quarterly and/or yearly. With the data you create from KPIs, you can make the best strategic decisions for your business.
4: Track Your Product Information
It is important to keep good records on your products including SKUs, barcode data, countries of origin, lot numbers, and suppliers. It is also a good idea to track the cost of each item over time so you know what factors may change – like cost, seasonality, and scarcity.
You could, for example, use batch tracking, also known as lot tracking. It is a process for efficiently tracing goods along the distribution chain by utilising batch numbers. Batch refers to a particular set of goods that are produced together and use the same materials. This is helpful to pinpoint any quality issues as they can be quickly isolated to particular batches, should you need to recall.
By having an effective inventory management plan also allows you to track moving inventory. This creates an easy, seamless experience for staff and customers. If one location has sold out of a product, staff can easily find a location with it in stock, request it, and have it sent to the store or customer. Tracking inventory also means you can track products in transfer so you don’t have issues with overselling and fulfillment.
5: Consistent Supplier and Restocking Systems
An unreliable supplier or restocking system can make inventory management extremely difficult. Unreliable suppliers cause headaches when it comes to inventory. If you have a particular supplier who is always late with deliveries, or frequently shorts you on stock, you need to take action. Discuss the issues with the supplier in question and find out what the problem is. You may have to choose to switch partners, or continue on with unreliable service.
Consistency in receiving stock and restocking is also important. You need a standard process that everyone on your team follows to avoid discrepancies. Even the smallest discrepancies can cause issues with restocking and fulfilling orders.
6: Inventory Management Technology
There is, of course, more than one way to manage your inventory. This includes vendor-managed inventory, inventory management technology, and cloud-based technology. By utilising these options, you can effectively automate your inventory management processes, making it easier to maintain accurate inventory counts. Automating your process means you can leave the paper process behind, and utilise a simple handheld device to manage stock. Leveraging software and inventory management software you can gather better data on product sales and popularity.
While many small businesses can easily manage their inventory manually, using notebooks and spreadsheets, as your business grows this is no longer viable. You end up spending more time on managing inventory than doing anything else with your business. Effective inventory management technology makes inventory management easier and taking the stress off your shoulders. It is important, though that you choose a software solution that works with what you need, is easy to use, and provides you with the right analytics.
You also need to ensure your chosen software integrates well with your business and processes. Your software should properly communicate with your POS systems, for example, so there are no discrepancies in inventory levels.
If you are wanting to discuss inventory management technology options for your business, click here