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Must Do’s for Smart Inventory Management

In 2013, WalMart lost $3bn due to poor inventory management, leading to frequent stockouts. Not to be hyperbolic, but you can imagine how a mega corporation can be affected by poor inventory management. So think how it can impact your business.

Inventory management is an integral part of running any business. And the inventory is the most valuable resource for any retailer or business owner. Inventory management is having the right number of products at the right time in the right place. If your inventory isn’t handled properly, you will witness the following symptoms.

1. Storage costs

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Owning a warehouse costs significantly along with its maintenance. Plus, warehouse costs include the floor space and added storage facility cost, and the time for which stock stays in the warehouse. If a business has great number of orders, little or no debt, and a warehouse with quick rotation of its inventory, then its cost of storing inventory will be low and vice versa.

2. Spoilage

For a business that deals with perishable items like food, medicines, cosmetics, or any other item that comes with expiration dates, they can get spoiled if they cannot be sold on time. And once products are unusable it means that money goes down the drain.

3. Dead or obsolete stock

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Products like gadgets, fashion apparel, or hi-tech electronics with model specifications have the tendency to become outdated or obsolete. They’re likely to enjoy sitting on your shelves for months. In that case you end up losing a large sum of money in the form of storage costs and opportunity cost to store items that would sell better.

4. Reduced cash flow

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Once you’ve paid for the inventory, it sits in your warehouse, and you can only hope to sell those products soon. If you have too much of a particular product and they don’t move fast enough ,then you end up accumulating spoilage or dead stock. Ultimately the more products you hold as inventory, the more money you’re pushing into storing it or letting it die. And this affects your cash flow management. Instead, by knowing how much you have on hand and how much inventory you need, you can control your cash flow. With more cash on hand, you can save it or invest in other business operations.

5. Under-stocking or overstocking

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Inefficient inventory management can lead to overstocking or understocking of products. You risk displeasing your customers if you don’t have enough stock of their preferred items. On the other hand, if you store too much then there is added pressure of selling those items faster.

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We’ve looked into some of the problems that are inevitable if your inventory management isn't in place. Now don’t you worry. Every problem has a solution. We have come up with some effective antidotes for these symptoms.

1. Set Par Levels

One of the toughest decisions to make in inventory management is determining how much inventory you need to have available on-hand at all times. Setting a par level could be a possible solution. A par level helps you gauge the minimum amount of stock you always need to have. If a stock level drops below a par level, then you know that you need to order more stock of that particular item or else risk failing to fulfill customer orders.

2. Demand forecasting

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Demand forecasting is a central piece in the inventory management puzzle. The main motive is to make predictions and estimations for the future demand of a product and also to find potential markets for it. A demand forecast specifies the needed inventory that will help to combat fluctuations in demand. Demand forecasting can be determined by factors such as competition, historical data about past sales, changing customer preferences etc.

3. First-in-first-out (FIFO)

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First in first out method assumes that the oldest items put on the shelf will be sold first. This method is especially beneficial if the business deals with perishable items such as food, medicines, cosmetics, etc. FIFO could also be a good idea for non-perishable items. If a product is always sitting on the shelves, it may eventually get worn out, expire or become outdated. However LIFO (Last-in-first-out) or HIFO (Highest-in-first-out) are quite apt for certain market or sales scenarios.

4. Use Barcodes for greater speed and accuracy

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Barcodes give every item a unique number which becomes an identification mark for that product. They are a series of black & white lines, that can be printed on each item and easily scanned by an electronic device called a barcode scanner. Barcodes help in reducing error through manually entered data. Data availability is immediate since as soon as the barcode is scanned , it gets fed into the system in real time.

5. Inventory Risk Management

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There a number of risks involved in supply chain and inventory management process. Some of the common types of risks involved are theft, wastage, damage to goods, shrinkage, sudden spike or drop in a product’s demand, among others. Prior planning for these contingencies can be useful. Key move is to gather all essential data in real time from every point in the supply chain in order to identify areas of weaknesses and loss. While you also need to accurately update inventory levels, sales & stock replenishment data, supply chain etc with a back-up plan as part of contingency planning.  

6. Maintaining good relations with suppliers

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Like the risks we talked about, in case the demand for a particular items rises, especially during season sales, and you seem to be running out of stock, then your only hope of swiftly replenishing it is your supplier or manufacturer. In many such cases, having a good relationship with your suppliers is beneficial.

7. Auditing and Cycle counting

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Every piece of your inventory has an economic value. Even the smallest error in keeping a count of and tracking inventory can lead to considerable losses. Regular large-scale audits of your entire inventory is important. The audit goes through each item in the warehouse; how much of a product you say you have should match the information in your stock books. In case of discrepancies, you can do spot-checking of incoming & outgoing orders and available inventory. This will help you catch smaller errors faster before they turn into big mistakes.

Cycle counting is a quicker, small-scale alternative to a full audit. Also known as a partial audit, cycle count is an inventory auditing method wherein the warehouse is divided into smaller sections and the inventory is counted. With smaller areas, cycle counting occurs more frequently and provides a more clear picture about the accuracy of a warehouse.

8. Inventory management software

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In this digital world, the pen isn’t mightier anymore. The simple reason being that with the huge amount of data generated every day, it’s next to impossible to manually enter data and maintain records in Excel sheets and accounts books. While human error is only natural, an inventory management software reduces manual data entry and ensures that accurate information is entered into the computer system.

In addition to this, an inventory management software will arm you with real-time data so you know exactly how much or how little inventory you need. With the help of an inventory management software, every piece of your inventory will be accounted for. It will also track your goods right from the moment an order is received, its journey through the supply chain till it leaves the warehouse for shipping. A good inventory management software having integrations with online marketplaces and stores, and one that is adaptable to new technologies could prove to be the ultimate solution to your inventory management woes.

In conclusion

The inventory is the most valuable asset for any business. Naturally then, keeping track of every item that you own is equally important. Thus, here I highlighted a few problems that might crop up while handling and controlling your inventory. While its okay to face challenges, however, keeping some tips handy to overcome those hurdles can prepare you better for the future.


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