In this article, we will be revealing the techniques required for the effective management of your inventory. The article will help you understand why Inventory Management is important for the growth of your business and how taking steps to effectively manage your inventory is what positions your business for profit-making.
What is Inventory Management?
Inventory management encompasses all the processes involved in the ordering and storing of raw materials and finished products. It involves the warehousing and processing of such items. Primarily, the goal of inventory management is to minimize the cost of holding goods by helping business owners know the right time to stock or restock on their goods.
Why Is Inventory Management important?
Effective inventory management is essential because it requires you to keep tabs on goods by monitoring their weight, amount, and even location.
Here are some reasons why inventory management is important:
- Helps to ensure you never run out of stock: One of the key roles inventory management plays is figuring out how much inventory your store should always have on hand. Too much will leave you at the risk of storing “Dead Stock” i.e. outdated stocks. Too little and you run the risk of running out of stock, thereby failing to meet customers’ demands and thus missing out on potential opportunities.
- It helps you avoid spoilage: Stocking on products that have short expiry dates (such as consumables or makeup) leaves you with the possibility of having a lot of expired products that you won’t be able to sell. Proper inventory management will ensure you never get into this situation.
- It shows a variance in your customer’s behavior: Keeping track of what inventory sells the fastest versus what sells the least can share vital insights on your customers’ buying pattern. You can also gauge the effectiveness of some product promotion and launches by accessing inventory levels before and after the promotion period.
- Helps you spend less on storage: Warehousing is often a variable cost, meaning it fluctuates based on how much product you’re storing. When you store too much product at once, your storage costs will go up. Avoiding this will save you money.
- Inventory management improves cash flow: When you have a concrete inventory system, you’ll know exactly how much product you have and based on sales you can project when you’ll run out thereby making sure you replace it on time. Not only does this help ensure you don’t lose sales, but it also lets you plan for buying more so you can ensure you have enough cash set aside.
Inventory Management Techniques
Inventory management often differs for different businesses. So it should essentially be modified and customized to suit each business.
Businesses should strive to remove human error from inventory management as much as possible. This means taking advantage of Inventory management software like the Omega Software or ICG Software.
The following techniques will help you improve your inventory management:
1. First-In-First-Out (FIFO)
“First-in first-out” or FIFO simply means your oldest stock (first-in) gets sold first (first-out), as opposed to your newest stock. This is especially important for perishable and expirable products, so you do not end up with spoilt products. Practicing FIFO for non-perishable products is also advisable because packaging designs often change over time. You do not want to end up with goods you can not sell because it has gone obsolete.
2. Set Par levels/Reorder Points:
Par level is the minimum quantity of each product that must be on hand at all times. When your stock drops below the par level, you know it is time for you to reorder. This technique makes inventory management easier. Inventory reorder vary by products and is essentially based on how quickly the items sell. Setting a par level requires some upfront analysis such as the time it takes for your supplier to deliver your products. It is advisable to check your par level from time to time especially before peak times like holidays. During peak times, it is recommended to hold a safety-stock in the event of a heavy spike in demand or unforeseen circumstances.
3. Manage relationships:
Creating a business relationship with suppliers and manufacturers helps you communicate your needs. Great relationships with suppliers will make them more than willing to work with you to solve problems that may arise with ordering or delivery. When this kind of relationship exists, suppliers will be willing to collect slow-selling items and replace them for other fast-moving items.
4. Regular Auditing:
Regular stock reconciliation is vital. In most cases, businesses rely on their software to know how much product you have in stock. However, it’s important to make sure the facts match up. It is recommended to take a physical count of all stocks periodically such as once a year. You can also consider spot-checking i.e. choosing a specific product, counting it and comparing the number to what it is supposed to be. It is, however, advisable to spot check fast-moving products.
5. Accurate forecasting:
The ability to accurately predict future demands plays a huge part in a good inventory management system. Understanding market trends, knowing what promotions will draw customers in, etc., will help you in accessing your future sales accurately.
6. Use of software:
Get software (such as ICG) that is designed to help manage your inventory. This helps you avoid losing money, drop in stock levels or having unsold products. It can also help automate some of the techniques above, saving you time and potential human error.
In conclusion, an effective inventory management system will help
- reduce costs
- keep the profitability of your business high
- help analyze sales patterns
- predict future sales
- and prepare your business for unpredicted challenges
Take charge of your inventory management by using the above techniques and watch your business grow remarkably.