Inventory management is the process of organizing and overseeing inventory across the supply chain. The goal of inventory management is to minimize carrying costs while maintaining consistent inventory levels and quickly providing products to customers. Inventory management is at the heart of success in the retail business.
What is Inventory Management?
Inventory management is the process of effectively supervising and controlling the flow of goods within a company. It involves tracking inventory levels, monitoring inventory movement, and optimizing replenishment to ensure adequate stock availability, reduce costs, prevent stockouts, and streamline operations in the supply chain.
Types of Inventory Management
Inventory management differs from company to company, and there are different types to consider.
Retail Inventory Management
Retail inventory management refers to the management of inventory intended for sale to customers. As a retailer, your primary goal is to ensure sufficient inventory is available to meet customer demand and needs. However, storing inventory can be costly, so you also want to avoid overstocking your warehouse.
Multi-Location Inventory Management
Managing inventory across multiple locations increases complexity as you will need to manage inventory across multiple stores, warehouses, or sales channels. This type of inventory management goes beyond an overarching view of all your inventory and requires site-level management as well to ensure adequate inventory availability everywhere you sell.
Benefits of Inventory Management
Whether you own a small business or use an Enterprise Resource Planning (ERP) system, inventory management helps achieve many important things for your business:
- Avoid waste: If you sell a product that has an expiration date, like coffee or tea, there is a real chance it could spoil if not sold in time. Effective inventory management helps avoid unnecessary spoilage and improves inventory control.
- Avoid dead stock: Dead stock is inventory that can no longer be sold—not because it’s expired, but because it has gone out of style or become irrelevant in some way. By adopting a precise strategy, you can address this costly inventory mistake.
- Reduce storage costs: Storing products is a variable cost, meaning it changes based on the amount of product you store. When you store a large quantity of product at once, or end up with hard-to-sell items, your storage costs will increase. Avoiding that will save you money.
- Improve cash flow: Inventory directly impacts sales (by determining how much you can sell) and expenses (by determining what you need to purchase). Both of these elements play a significant role in the cash you have on hand. Improving inventory management leads to better cash flow management.
- Enhance order fulfillment: Good inventory management can improve order fulfillment in several beneficial ways. You can use tactics like inventory distribution, which involves having stock in multiple distribution centers to ensure your products are close to your customers. This speeds up delivery times while reducing shipping costs—two factors that help keep customers satisfied.
Challenges of Inventory Management
Although effective inventory management provides many benefits, you must overcome certain challenges 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 regarding product display and reordering.
- Changes
- Demand: Changes in demand can also lead to challenges in inventory management. For example, the COVID-19 pandemic caused drastic changes in demand almost immediately, resulting in 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 constraints will lead to stockouts in your store if you do not have sufficient safety stock.
- Difficult counting processes: The inventory counting process is challenging and time-consuming. Because the inventory counting process takes a long time, you may either need to close your store for a day or ask employees to come outside of working hours (resulting in paying overtime). Additionally, manual inventory counts are prone to errors that can cause other problems.
- Organized warehouse arrangement: Maintaining an organized warehouse is another challenge in inventory management. An unorganized warehouse will make it difficult for employees to find the inventory for customers when they need it, affecting the customer experience and potentially leading to inventory shrinkage.
- Implementing Six Sigma: Six Sigma is a methodology and set of tools for process improvement. It is used in inventory and supply chain management to reduce excess inventory and obsolete stock. Edwin Juran, founder of the PXS Excellence School, recommends a five-step process called DMAIC to address these issues using the Six Sigma model: Define the problem you intend to solve. It should have a clear measure. For example, if your problem is inconsistent tracking, the measure could be productivity. Measure the current state using simple statistics. How many inputs convert into useful outputs? This will give you insights into the root cause of the problem. Analyze the root causes and develop an action plan to eliminate them. From the above example, a root cause could be that tracking procedures are spread across different programs and spreadsheets. An action plan could be to create a centralized inventory tracking system. Implement your inventory management plan by running pilot tests to see if it resolves the issue. You might try a new inventory management tool or test a central point model to move products faster. Control the new process. Track a metric to verify that your inventory management process is functioning and that you see consistent results. Then celebrate!
- Identifying
- Following the First In, First Out principle: First In, First Out (FIFO) is used to determine the cost of goods sold. It means that older inventory (first in) is sold first (first out), not the newest stock. This is especially important for perishable products to avoid ending up with unsellable stock.
- Managing Relationships: Whether you need to return a slow-selling product to make room for a new item, quickly restock a fast-selling product, resolve manufacturing issues, or temporarily expand your storage space, it’s important to have a strong relationship with your suppliers. This way, they will be more willing to work with you to solve issues. With good relationships with suppliers, you can often negotiate a lower minimum order quantity. Don’t hesitate to request a low minimum so you don’t have to carry too much stock. A good relationship is not just friendly – it’s about clear and proactive communication. Inform your supplier when you expect a spike in sales or generate a lot of purchase orders so they can adjust production and lead times. Ask them to notify you when a product is delayed so you can halt promotions or look for a temporary substitute.
- Preparing Contingency Plans: Many inventory management problems can arise that can disrupt unprepared businesses: your sales unexpectedly surge, and you sell your stock faster than you have it. You face a cash flow shortage and can’t pay for the product you desperately need. Your warehouse doesn’t have enough space to accommodate increased seasonal sales. Incorrect inventory accounting means you have less product than you thought. A slow-moving product takes up all your storage space. Your product runs out from the manufacturer, and you have sales orders that must be filled. Anticipate problems and prepare 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 good relationships help you a lot here.
- Conducting Regular Audits: Periodic inventory balancing 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’s important to ensure that the facts match. There are many ways to do this. Physical Inventory. Conducting a physical inventory, or stock take, is the practice of counting all of your stock at once. Many businesses do this at the end of the year as it relates to accounting and filing taxes. Random Check. This means selecting a product, counting it, and comparing the count to what it should be. It is not done on a scheduled basis and is an addition to the physical inventory. Periodic Counting. Instead of doing a full count at year-end, periodic counting spreads throughout the year. A different SKU item is checked every day, week, or month on a rotating schedule.
- Priority
Using ABC: Classify your inventory using ABC analysis. Identifying product priorities helps understand which ones should be ordered frequently and how slowly they move from your inventory. You can use the ABC analysis report to classify your inventory value based on your revenue percentage: A = % of inventory that represents 80% of your revenues B = % of inventory that represents 15% of your revenues C = % of inventory that represents 5% of your revenues Inventory class A represents the most profitable and valuable products. You will want to ensure that you always have these products in stock so you don’t miss out on future sales. Class C inventory is the slow-moving inventory or the inventory that cannot be sold. This is the inventory you may want to sell at a discount to get rid of it and free up cash from your inventory. - Practice accurate forecasting: The bulk of good inventory management depends on accurate demand forecasting. There is no doubt that this is extremely difficult. There are many variables involved, and you won’t definitely know what will happen, but you can try to get close to the truth. Here are some things to consider when forecasting future sales: market trends last year’s sales during the same week this year’s growth rate guaranteed sales from contracts and subscriptions seasonal and general economy planned advertisements If there is anything else that will help you create a more accurate forecast, don’t hesitate to include it.
- Apply the Last In, First Out (LIFO) method: The Last In, First Out method assumes that the most recently purchased product is the first one sold. It assumes that the last purchased is the first sold. It is essentially the opposite of the FIFO method. This works on the assumption that prices are continuously rising, so the recently purchased inventory will be of higher cost. This means that higher inventory costs will lead to lower profits and consequently lower tax income, which is the only reason it makes sense to use the LIFO method.
- Try the “Just In Time” (JIT) approach: Just In Time inventory management is for those willing to take risks, although effective inventory management significantly reduces much of this risk. With JIT, you maintain the lowest possible inventory levels to meet demand and replenish before running out of the product. This requires careful planning and accurate forecasting, but it works well for rapidly growing brands with scheduled launches and product line expansions.
- Outsource inventory storage and fulfillment: One of the most common reasons for poor inventory management is simply a lack of resources to store and fulfill inventory. You may not have the time or workforce to ensure your inventory is properly distributed or to handle excess returns flow. This is why fulfillment outsourcing is a strategy of inventory management in itself. Although it might cost you, using a fulfillment partner can help you generate business and keep customers satisfied.
- Average inventory sold per day
- Inventory sold ratio
- ABC analysis by product
- Product sell-through rate
- Days of remaining inventory
- From your Shopify dashboard, go to “Analytics” then “Reports.”
- Click on “Categories.”
- Click on “Inventory” to filter reports to view only inventory reports.
- Update inventory records in real time. Access to fresh and accurate inventory data is important for moving products swiftly and efficiently.
- Regularly audit inventory. Conduct monthly and yearly audits to ensure accuracy between inventory quantity and your financial records.
- Review supplier performance. Identify areas for improvement with suppliers or when to cut ties with them.
- Assign one person responsible for inventory management. Hire an inventory manager to be the primary person for reorder requests, negotiating with suppliers, and processing bills.
- Invest in inventory management software. Look for a program that can integrate with your business tools and handle your multi-channel sales in the future.
Inventory Management Systems
An Inventory Management System (IMS) is the software (usually programs) that monitors and organizes all items involved in inventory management. This includes tracking orders from suppliers to customers. There are continuous inventory management systems, periodic inventory management systems, and manual inventory management systems.
Continuous Inventory System
The continuous inventory system is considered the most accurate option for inventory management. It is the most accurate because it continuously tracks inventory in real-time and is usually supported by robust 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 the continuous inventory system, it can be implemented 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 suitable option if your monthly sales are in single digits, most businesses need something more robust.
Inventory Management Techniques
No matter what system you use, the following techniques can improve inventory management and cash flow:
Minimum Levels: Minimum levels are the minimum quantity of a product that must be available at all times. When your stock drops below these predetermined levels, you know it’s time to order more. Ideally, you’ll order the minimum quantity that will restore you to the desired level. Minimum levels vary by product and depend on the item’s sales velocity and the time taken to replenish stock. (Discover this data in your Shopify retail sales reports.) Review minimum levels several times throughout the year to ensure they still make sense. If something changes during the time interval, don’t hesitate to adjust minimum levels up or down. This way, you can set reorder points that keep your store’s inventory at the right level.
Applications for Inventory Management
Here are some applications that can be used for inventory management:
Stocky
Stocky is a Shopify app that helps you manage your store’s inventory. It provides strong and detailed real-time inventory tracking, an organized product database, and easy access to analytics.
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 and e-commerce Shopify sellers. You can link multiple Shopify accounts and automatically receive purchase orders while accessing rich data reports by location and sales channel.
ShipHero
ShipHero
It is an inventory management program that provides a comprehensive set of tools to help you manage inventory. It helps automate tedious, time-consuming processes related to inventory management, allowing you to save time for other activities at work.
Zoho Inventory
The cloud-based inventory management software Zoho Inventory helps retail traders track inventory, manage orders, and fulfill shipments. You can monitor order statuses, inventory levels, and receive alerts when inventory drops to low levels using the customized dashboard and inventory tracking tools.
Inventory Management on Shopify
Every business should strive to eliminate as many human errors from inventory management as possible, which means leveraging inventory management software. If you run your business using Shopify, inventory management is already integrated.
You can set up inventory tracking, view your inventory, and adjust your inventory levels in the inventory area of your Shopify dashboard. You can also view the inventory adjustments and transfers history for the variants tracked by Shopify.
Shopify also provides inventory reports that give you a monthly snapshot of your inventory. You can access various reports such as:
To find these reports:
Inventory Management Tips for Retail
Whether you are running a new business or opening another retail location, keep these inventory management tips in mind:
The Future of Inventory Management
Technology continues to grow and evolve at an astonishing pace, with new and emerging applications for inventory management. There are new and emerging technologies that could have applications in inventory management. Some of these technologies include:
RFID
Radio Frequency Identification technology or RFID 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 they can be used to combat phantom inventory and reduce overstock.
Artificial Intelligence
Artificial intelligence continues to evolve and gain new applications within inventory management. Correctable AI solutions can enable companies to automate inventory decisions and respond to customer demands in real time.
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