It’s important to regularly evaluate your business to make sure you’re on your way to success. One of the most integral sections of a retail business is inventory management. How has your small business’s inventory management been affected? Did you have the right products available when you needed them? Were you out of business when items were out of stock?
In this blog, we discuss basic inventory management best practices, explain what to look for in good inventory management software, and look at some best practices for managing inventory.
What is inventory management?
Inventory management is an essential part of the supply chain, which aims at always having the right products for sale in the correct quantity at the right time. When done effectively, businesses minimize the cost of carrying additional inventory while maximizing sales. Successful inventory management helps retail managers track their inventory in real-time to streamline this process.
With effective inventory management, you can have the right products available in the correct quantity and avoid products running out of stock and money in excess stock. Make sure the products are sold on time to prevent spoilage or obsolescence or spend much money on stock taking up space in a warehouse or stockroom.
Good Inventory Management Software Needs:
- Reduce costs, enhance cash flow, and boost your business’s bottom line
- Track your inventory in real-time
- Help you anticipate demand
- Prevent product and production shortages
- Prevent excess stock and too much raw material
- Allow easy inventory analysis on any device
- Be accessible from your retail outlet
- Optimize warehouse organization and valuable employee time
- Offer quick and simple bar code scanning to expedite the intake
- Allow multi-location management, tracking inventory across multiple locations
- Inventory management techniques and best practices for retail business
Here are some of the techniques many small businesses use to manage inventory:
1- Fix your forecast. Accurate forecasting is essential. Your estimated sales calculation should be based on factors. That includes historical sales figures, market trends, projected growth and economy, promotions, marketing efforts, and more.
2- Use the FIFO approach (first in, first out). Goods must sell in the same chronological order as they were purchased or made. This is especially important for perishable products such as food, flowers, and makeup.
For example, a bar owner must know the material behind the bar and apply FIFO methods to improve bar inventory. And it’s a wise idea for non-perishable goods. That’s because items sitting out for too long can become damaged or otherwise out of date and unsaleable. The best way to implement FIFO in a storeroom or warehouse is to add new items from behind so that older products are in front.
3- Identify low-turn stocks. If you have stock that hasn’t sold in the past year, it’s probably time to stop stocking that item. You can also consider different strategies to get rid of that stock, such as special discounts or promotions because excess stock wastes both your space and capital.
4- Audit your stock. Even with good inventory management software, from time to time, you need to calculate your inventory to check what you have in stock matches your idea. Businesses use various techniques, including an annual, year-end physical inventory that calculates every item and ongoing spot-checking, which may most benefit fast-forwarded products. Are you growing or have stocking problems?
5- Use cloud-based inventory management software. Look for software with real-time sales analysis. RMPro connects directly to your sales center, so your stock levels are automatically adjusted each time you make a sale. Receive daily stock alert emails to keep track of which items are low or out of stock so you can order more on time.
6- Constantly track your stock levels. Adapt a solid system for tracking your stock levels, prioritizing the high-end products. A well-designed software saves you time and money by doing a lot of the heavy lifting for you.
7- Reduce equipment repair time. Essential machinery isn’t always in working order, so it’s essential to manage those assets. A broken piece of machinery can be costly. Monitor your machinery and its parts to understand its life cycle, so you can be prepared before a problem occurs.
8- Don’t forget the quality control. No matter your specialty, it’s important to make sure all of your products look great and are working well. It can be as simple as during a stock audit. Employees do a quick exam that includes a checklist for damage and adequate product labeling.
9- Hire a stock controller. Stock control shows the amount of inventory you have at a given point in time. It applies to all items, from raw materials to finished goods. If you have a lot of inventory, you may need to have one person responsible for it. A stock controller processes all purchase orders that receive delivery and ensures that everything matches what was ordered.
10- Remember your ABCs. Grouping inventory items into categories A, B, and C helps many businesses keep tighter controls on high-value items.
11- Consider drop shipping. If your retail store adopts drop shipping methods, you can sell products without actually holding inventory yourself. Instead of that, a wholesaler or producer is responsible for carrying the inventory and shipping the products when consumers purchase from your store. This way, you don’t worry about inventory holding, storage, or fulfillment. Many owners starting online stores adopt drop shipping methods. Still, this supply chain fulfillment strategy can be adopted by various businesses across all industries.
Products classified as A — big-ticket items — make up the smallest percentage of inventory and have the most significant annual consumption value. Products grouped in category C – the least expensive items – make up the largest percentage of inventory and have the lowest annual consumption value. B products are in the middle. Annual consumption value is the annual demand multiplied by the cost of a commodity.
Tips for retail businesses
But even if you are not a multinational business, good retail inventory management can help your business save you a ton of money. It can be tempting to buy a lot from merchandise to take advantage of seller discounts and free shipping. But the extra stock isn’t always good for the bottom line.
Excess stock is very troublesome for a few reasons. To begin with, you do not want a large portion of your business’s funds to be wasted on merchandise, and you risk losing money if you cannot sell the products on time. This is especially true for seasonal products. Ask any retailer that tries to sell Christmas ornaments after the 25th. Consumers naturally expect huge discounts and discounts if you sell the item.) You can sell at a loss.) Additionally, there are costs associated with storing the excess stock.
On the other hand, having too few items on hand can put potential customers at a disadvantage. Imagine that customers visit your brick-and-mortar store only to find that their favorite product is out of stock. If you thought they would return when the product was in stock, think again. A study in Germany by GT Nexus found that 63% of buyers faced with out-of-stock inventory chose to buy a product from a competitor or didn’t buy it at all.
Matching lost, damaged, or stolen items.
A decrease in inventory in a retail store is often referred to as shrinkage. The average shrinkage percentage in the retail industry is two percent. And according to the National Retail Security Survey on Retail Theft in 2016, shrink cost retailers more than $49 million in losses.
There are four main categories of inventory shrinkage regarding loss and theft. Studies have shown that retail shrinkage accounts for 38 percent, employee theft accounts for 34.5 percent, paperwork errors account for 16%, and supplier or vendor fraud accounts for 7%. Some experts also suggest a fifth category covering all unknown causes of inventory loss, making up 6% of all inventory shrinkage.
They are also part of shrinkage when goods are damaged. Damage can happen on the way to your retail store.
Shrinkage is an expensive problem for retailers that can result in loss of profit. And it’s a double hit — you can’t offset the cost of inventory, and you can’t sell the inventory to make revenue.
To cover these likely losses, you might increase the prices of your goods, passing the cost on to your customers. But if customers are price-sensitive, it can have the opposite effect. You may also need to increase procedures that prevent theft and loss — such as security — which improves your overall budget.
While shrinkage is something you need to factor into your bottom line, you don’t need to absorb it simply as a cost of doing business. It’s worth talking to your tax advisor to understand whether you can deduct inventory-related casualty and theft losses on your personal or corporate tax return.