In today’s economy, small to medium sized businesses are competing with global conglomerates. Efficient inventory and order management is one way for solopreneurs, entrepreneurs, and small business managers to level the playing field and grow their brand.
Inventory management functionality is what fast-growing businesses need to stay competitive. This article is your definitive guide to inventory management to scale your business efficiently and effectively.
What is inventory management?
Inventory management is the process of ordering, storing, using, and selling business inventory. It is a system that tracks raw materials, components, and finished products to ensure enough supplies are on hand to meet the purchasing demands of the customer.
Inventory management is measured as inventory turnover. It reflects how often your products are sold within a specified time period. A measure of business health is maintaining adequate inventory turnover where your business does not have more products than sells – or excess inventory. Poor inventory turnover leads to deadstock or unsold stock/product.
Retail inventory management
Retail is a general term used to describe businesses selling physical products to consumers. Although not exclusive to retail, inventory management plays a more critical role in this industry over others.
There are a growing number of ways to sell products including the following:
- Offline. A company uses a physical brick-and-mortar location to sell its products.
- Online. A company sells its products over the internet using an ecommerce website or marketplace.
- Multichannel. This employs multiple ways a company sells to its customers including an online store or marketplace or a physical location. Increasingly, companies also use social media sites to sell products. With multichannel selling, each channel operates independently of each other.
- Omnichannel. This way of selling creates a unified, integrated experience for customers across all offline and online channels. Where multichannel selling operates independently, omnichannel is focused on a seamless experience for the customer.
Wholesale distributors sell products to other businesses rather than individual consumers. This form of selling is referred to as business-to-business (B2B) or B2B ecommerce. B2B selling can include any of the above methods.
Regardless of how a company chooses to sell its products, inventory must be managed. However, inventory management is different depending on the constraints of how products are sold.
Importance of inventory management
Good inventory management is an essential part of running a successful retail business. It provides a seamless customer experience, maximizes profits, and improves cash flow. A company’s inventory management system should optimize fulfillment and avoid shrinkage and waste. Without an effective system in place to manage inventory, retailers risk running out of products during peak demands from their customers.
Good inventory management includes the following:
- Enterprise resource planning (ERP). ERP software manages key business operations including human resources, accounting, procurement, warehousing, production, marketing, and sales. ERP systems optimized for inventory management help maintain optimal levels of stock by combining the inventory needs of staff, customers, and suppliers.
- Proper warehouse management. The barcode system, first-in-first-out (FIFO), and last-in-first-out (LIFO) techniques offer a clear picture of present and past inventory available with the company and optimize warehouse functions.
- Managed sales operations. Sales is a continuous process that depends on manufacturers for goods or services. Efficient inventory management minimizes the risks of unavailability of raw materials needed in manufacturing.
- Customer experience. Understanding the customer buying journey mitigates risks associated with insufficient stock to fulfill orders.
- Shrinkage avoidance. Shrinkage results in inventory loss attributed to employee and customer theft, administrative or cashier error, vendor fraud, damage, and spoiling.
- Cash flow. Inventory levels are key to maintaining a good cash flow that ensures all aspects of the business run smoothly. Excess inventory ties up cash in products that could rather be spent on operations including salaries and other fixed costs.
- Fulfillment. Product availability is essential for fulfilling orders quickly. A good inventory system delineates where products are along the supply chain.
Types of inventory management
There are numerous types of inventory management systems. Which is best for your organization depends on budget, cost, utility, and accessibility.
Barcode inventory management
The barcode system is an automated and simplified way to manage inventory. A unique number or barcode is assigned to each product. Data points assigned to that number can include information about the supplier, the product, and the inventory or stock. When a product is sold, the barcode is scanned and inventory adjusted automatically. Additionally, management can find key inventory metrics by scanning the barcode to bring up the item on a computer database.
Continuous/perpetual inventory management
A continuous or perpetual system manages inventory in real time, recording changes in inventory at the time of the transaction. It uses radio frequency identification (RFID) to passively identify tagged objects (inventory) for tracking along a supply chain.
Periodic inventory management
This is a manual process used to determine the inventory at a particular time point such as end-of-day or year’s end. This form of inventory management is most time-consuming as it involves physically counting the products on the shelves. Periodic inventory management is used primarily for inventory valuation and accounting purposes.
Inventory management process
Below is the step-by-step method to improve an organization’s inventory management system.
1. Determine the loopholes
Identify actual stock on hand and the inventory requirements for the goods sold to determine if gaps exist between demand and supply, and reasons for those gaps.
2. Analyze spending patterns and consumer demand
Market demand forecasting helps organizations estimate production quantity to determine what is needed to maintain adequate inventory.
3. Evaluate the cost involved
Cost of goods sold includes different expenses like warehousing, maintenance, bulk discounts, transport, and supply chain costs. Each of these needs to be well analyzed.
4. Identify the extent of process automation
It is not possible for each organization to completely automate the inventory management process. However, it’s important to identify those particular areas where automation is possible.
5. Inspect supplier’s performance and practices
The supply chain is critical for maintaining adequate inventory. Identifying any holes in the supply chain or supplier’s performance is necessary. And, if needed, identify additional or alternative suppliers.
6. Classify inventories into various categories
Products must be segregated into categories based on the product type, maintenance cost, customer class, or profit margin.
7. Set objectives for all inventory categories
Set benchmark objectives and goals to efficiently track and manage the performance of all inventory categories. This can identify any issues within each of the categories.
8. Prioritize the areas of improvement
Analyzing goals and objectives allows companies to prioritize improvement needs. Improvement prioritization should be based on the impact of problems identified. Implement a hierarchy to address those areas.
9. Take advice from experts
Designing a proper inventory management system cannot be overemphasized. Employing consultants or experts will ensure the inventory management system meets the company’s needs and stays within their desired budget.
10. Frame suitable inventory management policy
The final step in implementing a good inventory management strategy is consistent and timely evaluation to determine what changes and improvements are necessary to add value and create an improved customer experience. These changes can be based on a number of factors, most notably supply and demand.
Choosing an inventory management system
Which inventory management system is right for your business depends on a number of factors. Here are just a few things to keep in mind.
There are various signs you have outgrown a standard inventory system including inventory errors and constant over stocking. When you find you’re spending more time on manual, operational tasks than growth, it is likely time to automate your inventory process.
Prepare a list of “must-haves” for your inventory management system. Do you ship orders or use digital packing? Does your company process both wholesale and retail orders? Are you manufacturing your products? All of these affect which type of inventory management system is best for your company.
Customer support is essential for set-up as well as troubleshooting should things go wrong. Support includes phone, chat, and/or email contact. Consider support hours – is the support team available when you need support?
Ease of use
Determine your staffing needs and the technical prowess of your staff. Will the inventory management system meet those needs and ability levels? The system you choose needs to be easy to use as well as transferable between departments.
Prepare a list of must-have integrations, e.g., ecommerce platform, accounting, shipping, marketplace, POS, 3PL, etc. It’s essential that the new inventory system integrates directly without requiring additional applications, middleware providers, or software managed by third parties.
Your inventory management system will manage a critical part of your business. Finding innovation-driven software using the latest technology is vital.
Ready for even more in-depth inventory management coaching? Download our complete guide on inventory management here.
Cin7’s inventory management solution for multichannel selling
Cin7 was built with modern businesses in mind. Its inventory and order management software offers a cloud-based solution that integrates all your sales channels into a single platform. Cin7 provides advanced automation processes to create seamless transactions centered around a positive customer experience.
Ditch the spreadsheets and stop manual data entry. Reach new markets with Cin7’s inventory and order management system.