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June 27, 2023 | 6 minute read
Smart inventory management can help ensure you have stock and raw materials when you need them, even in the face of supply chain constraints. Being proactive can give you a competitive advantage in today’s business environment, where shortages and shipping delays are common. A Bank of America 2023 Small Business Owner Report found that 57% of small business owners are coping with supply chain problems.
Inventory management is a process of pinpointing the type and amount of raw materials and stock needed for your business — and when it’s best to order those items. Actively managing your inventory allows you to track goods and supplies from the initial purchase to final sale, letting you monitor demand trends and make sure you have sufficient stock on hand.
By ensuring you have the right amount of stock, you can consistently meet orders — and build customer loyalty. Plus, by carefully monitoring what you have in stock, you can order inventory more efficiently to prevent waste and avoid disruptions. When done properly, it can also improve cash flow and profitability.
Inventory falls into a variety of categories, such as:
A variety of metrics are available to help you measure the success of your inventory management practices. Most commonly used is inventory turnover, which measures the movement of stock. To calculate inventory turnover, divide the cost of goods sold by the average cost of inventory.
This technique involves placing products into categories ranked A to C according to their value to the business. Using this approach allows you to determine which products, purchased parts and customers contribute the most to the company’s revenue or add the most to overhead.
With barcodes, each product’s information is encoded into bars and alphanumeric characters, making it easier to track inventory in a warehouse. You can use barcodes to assign a number to the individual products you sell, linking several pieces of information to the code, such as the supplier, the product’s dimensions and weight, and the number of items in stock. You can also use them to record a product’s location in your warehouse. Using a barcode system can help with inventory management by making it easier to ship items quickly, giving you a real-time count of inventory on hand and helping you avoid waste.
This is a system that allows you to trace materials and products using batch numbers. You can use batch tracking to group together similar inventory in one batch. It can also be used to keep tabs on products that are approaching their expiration date or to determine which units contain batches that have been flagged as defective.
Bulk shipping is the transportation of goods in larger units, such as pallets. Because buying and shipping goods in large volume is typically the least expensive choice, bulk shipping is a preferred approach to inventory management, particularly for items in high demand. Typically, with bulk shipping, a large quantity of goods is delivered and stored at ports. Businesses then arrange for the goods to be picked up and transported by truck or train. Bulk shipping ultimately makes it easier for businesses to access a large quantity of products and sell them nationally.
Suppliers deliver goods to individual retailers but retain ownership until the products are sold. The retailers have the right to return leftover stock without a financial penalty. Retailers can save money on inventory storage, test products without too much financial risk and simplify their supply chain by relying on consignment inventory. However, if the supplier is not reliable in delivering the stock on time, it can lead to stock outages and dissatisfied customers.
With this technique, incoming trucks or railroad cars unload goods and materials onto outbound vehicles, reducing the need for warehousing and lowering distribution costs. Successful cross-docking requires careful coordination between receiving and delivery activities.
This shipping method works by allowing retailers to transfer their customers’ orders to a wholesaler that, in turn, ships the sold items to their final destinations. The benefit for the retailers is they don’t have to own the inventory. Instead, they focus on marketing and selling. Many e-commerce stores use this method because it saves them from a potentially expensive upfront investment in inventory.
This is the lowest quantity of items you can order from a manufacturer at one time. Manufacturers often set a minimum order quantity so they can produce an item cost effectively and make a profit.
This is extra inventory meant to provide a cushion in case of situations such as excess demand, supplier delays and inaccurate forecasting. Keeping safety stock can help businesses avoid the added costs of placing rush orders or running out of stock and losing sales.
Most point of sale (POS) systems go beyond just accepting payments. Some even offer inventory management tools that can run reports, show current inventory levels and offer a snapshot of inventory across multiple locations. And as POS solutions have become more sophisticated, so have the tools they offer. Some now offer a complete solution, helping log stock as it comes in, running reports and providing up-to-the-minute data across multiple business locations.
Inventory control is one part of the inventory management process, focused on the movement of goods in a warehouse.
Inventory includes unfinished goods and materials required to produce products. Stock refers to finished goods that are ready for distribution.
Order frequency determines how often customers buy an item during a certain time period. To come up with this figure, divide the number of orders made by the number of unique customers who made purchases during a specified time frame. If you divide 1,000 orders by 250 customers, your order frequency would be four. If you can increase the number of purchases a customer makes in a set period and those purchases remain consistent, you’ll be able to build a stable revenue stream from repeat orders and improve the lifetime value of a customer.
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