Inventory management is the process of organizing and managing inventory across the supply chain. The goal of inventory management is to reduce the cost of carrying inventory while maintaining stable inventory levels and delivering products quickly to customers. Inventory management is the heart of a successful business.
What is Inventory Management?
Inventory management is the process of effective oversight and control of the flow of goods within a company. This includes tracking inventory levels, monitoring inventory movement, and optimizing replenishment to ensure adequate inventory availability, reduce costs, prevent stockouts, and streamline operations in the supply chain.
Types of Inventory Management
Inventory management varies from company to company, and there are different types to consider.
Retail Inventory Management
Retail inventory management refers to managing the inventory that you intend to sell to customers. As a retailer, your primary goal is to ensure that you have enough inventory to meet customer demand and needs. However, storing inventory costs a lot of money, so you also want to avoid overstocking in your warehouse.
Multi-Location Inventory Management
Multi-location inventory management increases complexity as you will need to manage inventory across multiple stores, warehouses, or sales channels. This type of inventory management goes beyond a holistic view of all your inventory and also requires site-level management to ensure that there is enough inventory in every location where you sell.
Benefits of Inventory Management
Whether you are running a small business or using an Enterprise Resource Planning (ERP) system, inventory management helps achieve several important things:
- Avoid spoilage: If you sell a product that has an expiration date, such as coffee or tea, there is a real chance that it could spoil if you don’t sell it in time. Effective inventory management helps you avoid unnecessary spoilage and improve inventory control.
- Avoid unsold inventory: Unsold inventory is inventory that can no longer be sold – not because it has expired, but because it has gone out of style or become irrelevant in one way or another. By adopting a precise strategy, you can deal with this costly inventory mistake.
- Save on storage costs: Storing products is a variable cost, meaning it changes based on the quantity of product you are storing. When you store a large amount of product at once, or end up with a hard-to-sell item, your storage costs will increase. Avoiding this will save you money.
- Improve cash flow: Inventory directly affects sales (by determining how much you can sell) and expenses (by determining what you have to purchase). Both of these elements play a big role in the amount of cash you have on hand. Good inventory management leads to better cash flow management.
- Enhance order fulfillment: Good inventory management can help improve order fulfillment in useful ways. You can use tactics such as inventory distribution, which involves having inventory at multiple distribution centers to ensure that your products are close to your customers. This speeds up delivery times while reducing shipping costs – both of which help keep customers satisfied.
Challenges of Inventory Management
Although effective inventory management offers many benefits, there are some challenges that must be overcome to achieve efficiency.
- Phantom inventory: One of the main challenges of inventory management is dealing with phantom inventory. Phantom inventory refers to a situation where the point-of-sale system reports available inventory that is not actually in the store. This situation can be costly, as it leads to inaccurate inventory levels that can affect your decisions on product display and reordering.
- Changes in
- Demand: Changes in demand can create other challenges in inventory management. For example, the pandemic caused drastic changes in demand almost immediately, leading to product shortages in many stores quickly.
- Supply Chain Issues: Another external factor that can significantly affect inventory management is the global supply chain. Supply chain restrictions will lead to stockouts in your store if you do not have sufficient safety stock.
- Difficult Counting Processes: The process of counting inventory is challenging and time-consuming. Since the inventory counting process takes a long time, you may either need to close your store for a day or ask employees to come in outside of working hours (resulting in paying overtime). Additionally, manual inventory counts are prone to errors that can cause other problems.
- Unorganized Stock Rooms: Maintaining an organized stock room is another challenge in inventory management. An unorganized stock room will make it difficult for employees to find stock for customers when they need it – impacting customer experience – and can even lead to shrinkage.
- Implement Six Sigma: Six Sigma is a methodology and toolkit for improving business processes. It is used in inventory management and supply chain to reduce excess inventory and obsolete stock. Edwin Jara, founder of the PXS School of Excellence, recommends a five-step process he calls DMAIC to solve these problems using the Six Sigma framework: Define the problem you intend to solve. It should have a clear metric. For example, if your problem is inconsistent tracking, the metric could be productivity. Measure the current state using simple statistics. How much of the inputs turn into useful outputs? This will give you insight into the root cause of the problem. Analyze the root causes and create an action plan to eliminate them. From the above example, a root cause could be that tracking procedures are scattered across different software and spreadsheets. The actionable plan could be to create a centralized system for tracking inventory. Implement your inventory management plan by running pilot tests to see if it eliminates the problem. Perhaps you can try a new inventory management tool or test a spotlight model to move products faster. Control the new process. Track a metric to verify that your inventory management process is working and that you are seeing consistent results. Then celebrate!
- Determine Minimum Levels: Minimum levels are the minimum quantity of a product that should be available at all times. When your inventory falls below these predetermined levels, you know it’s time to reorder. Ideally, you will order the minimum quantity that will return you to the desired level. Minimum levels vary by product and depend on the speed of sale of the item and the time it takes to restock it.
- Follow
- Relationship Management: Whether you need to return a slow-moving item to make room for a new product, quickly restock a fast-selling item, resolve manufacturing issues, or temporarily expand your storage space, it is important to have a strong relationship with your suppliers. This way, they will be more willing to work with you to solve problems.
- Establish Contingency Plans: Many inventory management-related problems can arise that can disrupt unprepared businesses: a sudden increase in sales and selling your inventory. You face a cash flow shortage and cannot afford the product you desperately need. Your warehouse does not have enough space to accommodate the quarterly sales increase. An inventory count error means you have less product than you thought. Slow-moving products take up all your storage space. Your product is out from the manufacturer, and you have sales orders to fill. The manufacturer stopped producing your product without notice. It is not a matter of if problems will occur, but when. Identify where your risks lie and set up a contingency plan. How will you act? What steps will you take to resolve the issue? How will these steps affect other parts of your business? Remember that strong relationships help you a lot here.
- Conduct Regular Audits: Periodic inventory reconciliation is essential. In most cases, you will rely on software and reports from your warehouse management system to know how much product you have in stock. However, it is important to ensure that facts align. There are many ways to do this.
- Prioritize Using ABC: Classify your inventory using ABC analysis. Prioritizing products helps understand which ones should be ordered frequently and how slowly they move from your inventory. You can use an ABC analysis report to classify the value of your inventory based on a percentage of your total revenue.
- Practice Accurate Forecasting: A large part of good inventory management relies on accurately forecasting demand. There is no doubt that this is extremely challenging. Many variables are involved, and you will certainly not know what will happen – but you can try to get close to accuracy.
- Apply the Last In, First Out (LIFO) Method: The Last In, First Out (LIFO) method of inventory management assumes that the product you bought most recently is the first to be sold. It is assumed that the last purchased is the first to go. It is essentially the opposite of FIFO. This operates under the assumption that prices continuously rise, so the recently purchased inventory will be the most expensive. This means that higher inventory costs will lead to lower profits, and thus a lower tax rate, which is the only reason why using LIFO makes sense.
- Try the Just-In-Time (JIT) Approach: Just-In-Time inventory management requires some risk, although good inventory management reduces much of that risk. With JIT, you maintain the lowest possible inventory levels to meet demand and restock before running out of products. This requires careful planning and forecasting, but it works well for rapidly growing brands with scheduled releases and product line expansions.
- Provide Inventory Storage and Fulfillment: One of the most common reasons for poor inventory management is simply a lack of resources to store inventory and fulfill orders. You might not have the time or workforce to ensure your inventory is distributed correctly or handle excessive return flows. For this reason, outsourcing fulfillment is a management strategy in itself. Although it may cost you, using a fulfillment partner can help you generate business and keep customers satisfied.
Inventory Management Systems
An Inventory Management System (IMS) is the software (typically software) that monitors and organizes all items involved in inventory management. This includes tracking orders from suppliers to customers. A perpetual inventory system
Perpetual Inventory System
The perpetual inventory system is considered the most accurate option for inventory management. It is the most accurate because it continuously tracks inventory in real time, usually supported by powerful software.
Periodic Inventory System
In a periodic inventory system, you perform physical counts of inventory at the beginning and end of a specific period. Although this system is not as accurate as a perpetual inventory system, it can be done without the need to purchase software.
Manual Inventory System
The manual inventory system is the traditional approach using pen and paper. While this may be a viable option if your monthly sales are in single digits, most businesses need something more robust.
Inventory Management Techniques
Regardless of the system you use, the following will improve your inventory management and cash flow.
The First In, First Out Principle: The First In, First Out (FIFO) principle is used to determine the cost of goods sold (COGS). It means that the oldest inventory (which enters first) is sold first (first out), not the newest inventory. This is particularly important for perishable products so that you do not end up with unsellable inventory.
Applications
Inventory Management
Stocky
Stocky is a Shopify app that helps you manage your store’s inventory. It provides powerful and detailed real-time inventory tracking, an organized product database, and easy access to analytics.
Use Stocky to achieve the following:
- Reduce the risk of over-selling
- Improve cost savings
- Avoid overstocking and stockouts
- Enhance inventory accuracy
- Provide greater insights into your business
With Stocky, you can track inventory from multiple locations, stores, and warehouses, and set custom alerts when inventory levels reach a certain point. It also helps you see which products are out of stock and need to be reordered.
Thrive by Shopventory
Thrive by Shopventory is another Shopify app for inventory management. It offers real-time inventory updates and centralized inventory management for multi-location Shopify merchants and e-commerce. You can connect multiple Shopify accounts, automatically receive purchase orders, and access rich data reports by location and sales channel.
ShipHero
ShipHero is an inventory management software that provides a comprehensive suite of tools to help you manage inventory. It helps automate tedious and time-consuming tasks related to inventory management, allowing you to save time for other activities in your business.
Zoho Inventory
Zoho Inventory, a cloud-based inventory management software, helps retailers track inventory, manage orders, and fulfill shipments. You can monitor order statuses, inventory levels, and receive alerts when stock levels drop to a low point using a customized dashboard and inventory tracking tools.
Inventory Management on Shopify
Every business should strive to remove as much human error as possible from inventory management, which means leveraging inventory management software. If you run your business using Shopify, inventory management is already built-in.
You can set up inventory tracking, view your stock, and adjust your inventory levels in the inventory section of your Shopify dashboard. You can also view the inventory change history and transfers for the variants being tracked by Shopify.
Shopify also provides inventory reports that give you a monthly snapshot of your stock. You can access various reports such as:
- Average inventory sold per day
- Inventory sold percentage
- ABC analysis by product
- Product sell-through rate
- Days of inventory remaining
To access these reports:
- From your Shopify dashboard, go to Analytics > Reports.
- Click on Categories.
- Click on Inventory to filter the reports to show only inventory reports.
Inventory Management Tips for Retail
Whether you are running a new business or opening another retail storefront, keep these tips in mind for managing inventory:
- Update inventory records in real-time. Accessing fresh and accurate inventory data is crucial for moving products quickly and efficiently.
- Conduct regular inventory audits. Perform monthly and annual audits to ensure accuracy between your inventory quantity and financial records.
- Review supplier performance. Identify areas for improvement with suppliers or when to cut ties with them.
- Assign one person to be responsible for inventory management. Hire a dedicated inventory manager to oversee reordering, negotiating with suppliers, and paying bills.
- Invest in inventory management software. Look for a program that can integrate with your business tools and handle your future multi-sale needs.
The Future of Inventory Management
Technology continues to grow and evolve at an astonishing pace, and it has applications in inventory management. RFID technology
RFID Technology
Radio frequency identification or RFID technology has a place in the future of inventory management. In fact, RFID tags are already being used by many companies to track and locate inventory, and can be used to combat phantom inventory and reduce overstock.
Artificial Intelligence
Artificial intelligence continues to evolve and gain new applications in inventory management. Self-correcting AI solutions can enable companies to automate inventory decisions and respond to customer demands in real-time.
Devices
Connected to the Internet
Internet-connected devices or IoT can reduce the time employees spend finding inventory by providing real-time location data. This data can also help make better inventory decisions by knowing exactly how much inventory you have and where it is.
Conclusion
Remember that with the proper inventory management system, you can help reduce carrying costs, improve profits, analyze sales patterns, forecast future sales, and prepare for surprises. With proper inventory management, a company has a better chance of achieving profitability and staying in the market.
It’s time to take control of your inventory management and stop losing money. Choose the right inventory management technologies for your company and start implementing them today.
Frequently Asked Questions about Inventory Management
What does inventory management mean?
Inventory management is the process of tracking and controlling the ordering, storage, and use of parts, materials, and finished products within an organization. It ensures that businesses have the right products in the right quantities at the right time and in the right place.
What are the four types of inventory?
The four main types of inventory are raw materials, work-in-progress products, maintenance, repair and operations (MRO) materials, and finished goods.
What is an example of inventory management?
Inventory management involves tracking stock levels and the movement of goods in the supply chain. It should track the quantity of available inventory, the time and cost associated with each order, and the location of each item at any given time.
An example of inventory management is a retail store using a barcode scanning system to track product stock levels. The store uses demand forecasting to anticipate sales trends and determine optimal inventory levels. An automatic replenishment system is used to reorder products when inventory reaches a predefined threshold.
Source: https://www.shopify.com/retail/scalable-inventory-management-system
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