A Small Business Owner’s Guide To Effective Inventory Management

Did you know that, according to Finances Online, over half of companies (57%) think that supply chain management gives them a competitive edge in their industry that makes them able to develop their business? If you want a competitive edge, then you need to think about making supply chain management effective in your business.

A big part of managing your business’s supply chain is using the right strategies when it comes to inventory management. But this is easier said than done: inventory management is complex.

For this reason, you might be confused about where to start. You might be wondering about which inventory management techniques to implement or whether you should buy inventory management software. Because there’s so much information out there, you might be overwhelmed by it all, unsure of what to do.

That’s why we’ve put together this guide. Once you know all the best strategies for effective inventory management, you can implement them and run your business smoothly. Soon, you’ll have high customer satisfaction and run an even more successful business.

Read on to learn more.

What is Inventory Management?

Before we review the different strategies you can use to make your inventory management most effective, we’ll cover what inventory management is. Basically, this is what you do when you’re ensuring that your products are available at the right time and in the right quantity.

Inventory management falls under the larger umbrella of supply chain management. When you do inventory management right, the number of products you have available to buy matches up with the orders that your customers are putting in for them.

As you can imagine, this has several benefits. Generally speaking, doing inventory management well means happy customers because they’ll get their product ASAP. It also means that you won’t lose money storing too many products for a long time.

Now, we’ll review some of the more specific benefits you get from running your business inventory system well.

The Benefits of Inventory Management

There are two main benefits you get when you master inventory management. These are improving your business’s cash flow and saving you money in various ways. When it comes to the ways inventory management saves you money, these are saving on storage costs, being able to avoid dead stock, and avoiding spoilage. Let’s review these in detail now.

Saving on Storage Costs

If you have a large stock of products, then you’re going to need to store some of it in a warehouse. Warehouse costs can add up, especially if you’re storing a large number of products that aren’t selling. When you use inventory management correctly, you’ll have a better idea of how much you need to store.

For this reason, you’re only paying (mostly) for what ends up being shipped out.

Avoiding Dead Stock

“Dead stock” is the term for any type of product that’s seasonal or trends for a short amount of time. If you buy too much dead stock, having incorrectly predicted how much of it would sell, then you’ll have a ton leftover that you can’t sell.

Having purchased or created this dead stock is an investment, then, that you lost money on.

If you follow the right inventory management guidelines, you’ll have a better idea of how much stock you can sell according to trends and seasons. For this reason, you’ll save money.

Avoiding Spoilage

Depending on what business you run, you can also avoid spoilage of your products by using inventory management effectively. For example, if you sell makeup or food, these might have expiration dates. To avoid keeping them in storage and allowing them to expire, you can use inventory management to ensure they’re sold well before their expiration dates.

Improved Cash Flow

In addition to saving you money, inventory management makes it easier for you to manage cash flow. This is because you’ll have more money from your purchased products instead of the expectation of money once you’ve sold them. You may end up spending money you don’t have, at the end of the day.

If you use inventory management properly, then you’ll have more money in hand.

This makes it easier to keep track of the money you spend and save. Your cash flow will move more smoothly as a result.

The 5 Inventory Management Stages

Before we review the different strategies you can use to manage your inventory most effectively, we’ll review the five stages of inventory management. This way, you’ll know how the system works and will be aware of any areas you might need to focus on.

1: The Purchasing Stage

The first inventory management stage is the purchasing stage. In this stage, you purchase whatever it is you need to have products for your customers. This might mean investing in the materials you need to create your product or buying the product after which you sell it on to customers.

2: The Production Stage

Depending on your product, you might have a production stage. In addition to assembling or creating your product, this stage includes preparing your product for shipment. For example, putting makeup in a certain kind of plastic shell that represents your brand. If you don’t do much production, you can skip this stage and move onto…

3: The Holding Stock Stage

The holding stock stage can involve two types of storage. The first, for storing any of your materials before you turn them into your product. The second is storing your materials once they’re ready to be sold. A lot of money can be saved in this stage (such as the cost of storage units) if you handle inventory management well.

4: The Sales Stage

The sales stage is composed of your customer getting their product and you receiving payment. If you run an e-commerce business, then the payment part of the sales stage will actually occur before they receive their product.

5: The Reporting Stage

Finally, there’s the reporting stage. In the reporting stage, you’ll analyze the information related to your sales. You can get numbers on how much you’re selling and who to. Additionally, you can calculate how much you’ve spent on the product, whether that’s the cost of materials or storage.

The reporting stage is an important part of the inventory management process. By getting this information, you can eventually predict the amount of stock you need and for how much time you’ll need to store it.

Speaking of that, let’s move on to the next section, where you can learn about the best business inventory tools and techniques.

Inventory Management Strategies and Tools

Now that we’ve reviewed what inventory management is, how it works, and what benefits there are to your business if you implement it effectively, we’ll provide you with inventory management strategies and tools. That way, you can manage your inventory effectively.

Get Good at Forecasting

The better you are at forecasting how things are going to go in your industry and for your business, the better you’ll manage your inventory. To do this well, we recommend getting a good grasp on predicted growth, market trends, and the economy. You’ll also want to take a look at your own sales so you can project sales based on your sales history.

Use Par Levels

Instead of constantly shifting the amount of inventory you have, which can make you feel incredibly disorganized when it comes to managing your inventory, you should use par levels. A “par level” is the industry term for the minimum amount you plan to have of a product.

Set your par levels for every product, setting them higher for popular products. If you keep track of your sales history, this shouldn’t be too difficult. Check-in monthly or quarterly to see if you have to shift your par levels.

Use the EOQ Formula

EOQ stands for economic order quantity. When you’re using the EOQ formula, you’re coming up with the ideal quantity you should be keeping in your inventory so that you end up saving money on related costs such as demand rate and production. This makes it possible for you to save money instead of wasting it by storing your products for too long.

The EOQ formula looks like this: Q = √ (2 D S/H)

When calculating, Q stands for the economic order quantity (EOQ). D stands for the demand in units (usually this is yearly demand), S stands for the order cost per unit, and H stands for the holding costs (for each unit per year).

By using this formula, you can come up with a fast answer for how much of your product you need to save the most money.

Do Inventory Prioritization

If you’re buying the same amount of every product, or simply buying a lot of one item if it seems like it’s currently popular, this is a disorganized way of managing your inventory. To make things more streamlined, we recommend doing inventory prioritization.

To prioritize your inventory, create three groups: A, B, C.

In Group A, list the expensive products that you only need a few of. In Group C, list your products that are cheaper and popular. In Group B, list any of the products that fall somewhere in the middle.

Doing this will help you know how much of each type of group to keep in storage.

Use the Right Tools and Software

There are many tools and software that will do a lot of inventory management work for you. They will handle much of the analysis needed to know how much you need to sell and store a specific product in the future. To do this, they take different factors into account, such as:

  • Replenishment parameters
  • Supply variability
  • Demand variability

You could always do this yourself, but the right tools and software will save you time. They manage the more complicated calculations and analytics that need to be used for efficient inventory management so that you don’t have to. Instead, you can focus on running your business efficiently.

Using the FIFO Method

The first in, first out (FIFO) method is used by many business owners, especially those who are worried about the spoilage of products with an expiration date. This approach works exactly as it sounds: the first product that you create or buy to sell should be the first that you sell.

Even though this is especially important for perishable products, it’s a great way to save money with any product. By aiming to get these products out first, you’ll be paying less for the amount of time they’re in storage.

Plan for Contingencies

However much you prepare, things can always go differently than expected. That’s why it’s so important to plan for contingencies. A product may not be as popular as you expected it to be, for example, or your warehouse might suddenly not have room for a new product you’ve just ordered or created.

These things happen, and there’s no way of avoiding them completely, no matter how much you plan. But what you can do is to plan for what to do if they do happen. That way, you can manage the situation as best as possible, saving time and money.

Need More Information?

Do you need more information on inventory management? Maybe you’re looking for the right tools and software for your business. Maybe you need to think about your business’s budget and how it relates to inventory management costs.

Whatever you need more information on, we’re here to help. At Find a Business That…, we’re experts when it comes to anything business-related. Check out our Business Resources section of our website to find all the information you need.