You can ask a few questions about the enterprise you are considering, regardless of whether it’s a small boutique in your area or a large enterprise.
- Are they able to keep the products you need in stock?
- Are they able to sell goods in-store as well as online?
If they answered yes, they likely have a good handle on their inventory.
What is Inventory Management?
Supply chain management is a key component. Inventory management involves tracking stock levels and the movement of goods. This includes delivering raw materials to the manufacturer or fulfilling orders for finished products.
The foundation of longevity is inventory management. It helps businesses reduce costs, increase cash flow, and improve profitability.
Your supply chain will flow smoothly if your inventory is well-organized. You risk making mistakes such as mis-shipments, shortages, or out-of-stocks.
Despite this, 43% of small businesses don’t keep track of their inventory. On average, U.S. retail operations are only 63% accurate in their supply chain accuracy. This means that many retailers aren’t using inventory management software.
An inventory management system, unlike an enterprise resource plan (ERP) system, focuses only on one supply chain process. Many inventory management systems can be integrated with other software systems, such as POS (point-of-sale), sales channel management, and shipment. This allows you to create a customized integration stack that meets your business’s unique requirements.
The process of inventory management
You will need to be able to understand each step of the inventory management process before you can create an inventory management plan. This will help you avoid errors and choose the best inventory management software for your company.
- Delivered goods are brought to your location. This is the moment raw materials, subcomponents, and finished goods for customers enter your warehouse.
- Sort, inspect and store the goods. This is whether you are using drop shipping, cross docking, or another warehouse management system. Inventory must be reviewed, sorted, and stored in the appropriate stock areas.
- Monitoring inventory levels. This can be done via physical inventory counts or perpetual inventory software. It helps to minimize the possibility of errors.
- Orders are made in stock. Orders can be placed online or in-store by customers.
- Stock orders can be approved. This is when the order is approved.
- You can take goods from stock. You can find the SKU number of the required goods and take them from stock to ship to the customer or manufacturer.
- Maintain inventory levels. You can update your inventory automatically and share it with the necessary stakeholders by using a perpetual inventory system.
- Low stock levels trigger purchasing/reordering. Restock stock as necessary.
You can visualize the eight steps by creating an inventory process map, such as this one. To minimize inventory that is out of stock or overstocked, track and review each step.
Inventory management can be complicated, especially for large apps that have many moving parts. This makes it difficult to use multiple strategies and techniques. Let’s look at some inventory control methods you might use in your warehouse.
Inventory Management Techniques
Economic order quantity.
The economic order quantity (EOQ), is a formula that determines how much inventory a company should buy using several variables such as total production costs, demand rate, and other factors. This formula determines which units are most cost-effective to purchase, hold and reduce other costs.
Minimum order quantity.
To keep costs down, minimum order quantity (MOQ), is the minimum amount of inventory that a retail company will buy. Keep in mind, however, that inventory items that are more expensive to produce tend to have a lower MOQ than items that are cheaper and easier to make.
ABC analysis.
This method divides the goods into three categories to identify those items that have a significant impact on overall inventory costs.
- Category A refers to your most valuable products and contributes the most towards overall profit.
- Category B refers to products that are between the most valuable and the least valuable.
- Category C is for transactions that are small but important for overall profit, but not for each transaction.
Inventory management that is just-in-time
Just-in-time inventory management (JIT) is a method that allows companies to receive inventory as needed, rather than ordering too many and risking dead stock. This refers to inventory that has never been sold or used by customers before being removed from sale.
The stock of safety stock
To ensure that the stock is always available for replenishment, safety stock inventory management refers to extra inventory that is ordered. This helps to prevent stock-outs that are often caused by inaccurate forecasting or unanticipated changes in customer demand.
FIFO and LIFO.
LIFO and FIFO can be used to calculate the cost of goods. FIFO (first-in, first-out) assumes that older inventory is sold first to maintain fresh inventory.
LIFO (or last-in,first-out) assumes that the older inventory is sold first to prevent it from going bad.
The formula for reordering points
The reorder point formula determines how much stock a company should have before reordering. To factor in lead times, a reorder point will be higher than a safety number.
Batch tracking
Batch tracking is a method of quality control that allows users to group similar goods and track expiration dates or trace defective products back to the original batch.
Consignment inventory.
You’re right if you think about your local consignment shop here.
Consignment inventory refers to when a vendor or wholesaler agrees to sell their inventory to a retailer without having to pay upfront. The goods are still owned by the consignor who is offering them, but the consignee only pays for them when they sell.
Management of perpetual inventory.
Perpetual inventory management simply means that inventory is counted as soon as it arrives to provide real-time insight.
This is the most basic form of the inventory management system. It can be manually recorded on pen and paper, or in Excel. You can also use handheld devices to scan barcodes or RFID tags to automate inventory balances, allowing you to track stock movement, sales, and discard.
Dropshipping.
Dropshipping allows the supplier to ship products directly to the customer. Instead of buying the item directly from the store, dropshipping allows them to purchase it from third parties and ship it to the customer.
Lean Manufacturing.
Lean manufacturing refers to a wide range of management techniques that can be applied to all business practices. Its purpose is to reduce waste and eliminate non-value-adding activities in daily business operations.
Six Sigma
Six Sigma gives companies the tools to increase their performance (increase profits, decrease inventory) and improve their bottom line.
Lean Six Sigma
Lean Six Sigma improves Six Sigma’s tools but instead focuses on improving word standardization and business flow.
Forecasting the demand
Forecasting customer demand is done using historical sales data. It’s essentially a forecast of what goods and services customers will purchase in the future.
Cross-docking.
Cross-docking refers to a method where a supplier truck loads materials directly onto outbound trucks to create a JIT shipping procedure. This eliminates the need for warehousing and allows for minimal storage between deliveries.
Bulk shipping
Bulk shipping is an efficient way to ship. A business can palletize inventory in bulk to ship more items at once. You can see examples of efficient inventory management at work on our Kobe Digital Case Studies page. There you will find success stories from both business-to-business and retail merchants.
The Last Word
Inventory management is essential if you are a brick-and-mortar, online, or multichannel retailer. It will help you compete in the market and provide your customers with the best experience. You won’t be able to compete if you don’t implement inventory management strategies.
You can either sign up for inventory software that teaches you the basics of inventory management, and then act as a catalyst to your growth, or opt for an ecommerce platform such as Kobe Digital which allows you to centralize inventory management across all channels.
