Inventory management often falls to the back burner when it comes to building a new business. Other more glamorous areas tend to take the spotlight like marketing and sales. They’re the real money makers right?
Inventory management, on the other hand, doesn’t seem like it has very many benefits other making sure that you have the products you want to sell on hand. While this is true (and a very important part of inventory management) there’s a lot more to it than that.
Why Inventory Management Matters
Inventory management is basically trying to balance having just the right amount of inventory at the right time. Running out of inventory can be painful but having too much can be a silent killer. Inventory ties up your cash flow which limits your growth.
Inventory is only an asset on a balance sheet, otherwise it’s a liability.
How Inventory Management Adds Value
Poor inventory management can cost you dearly. As a new business owner it can sometimes be tempting to order in the largest quantities you can afford in order to get better pricing. The more you buy the lower the price per unit, the cheaper the better right?
This can backfire though. You might save money in the short term but pay more in the long term.
When done correctly inventory management can not only save you money but make you money as well. Again inventory management is about cash flow and making room for growth.
Reduce Expiration
If your products have an expiration date (supplements, food, etc.) you can run the risk of having those products expire if you order too much inventory and can’t sell through it fast enough.
This can also happen if you or your 3PL aren’t following best practices like FIFO (first in, first out). We’ve had clients to turn to us for help after losing thousands of dollars due to a lack of FIFO practices.
Proper inventory management helps you to avoid all of these potential outcomes.
Avoid Dead Inventory
Another way that inventory management can save you money is by saving you from dead inventory. Dead inventory is product that you just can’t move, not because it’s expired but perhaps it’s out of style or the trend has passed. Fidget spinners anyone?
Good inventory management means high-turnover rates which keeps product moving through your system quickly instead of sitting around for months at a time.
Save on Storage
Having more inventory than you really need means that you’re paying more for storage for no reason. If you need to pay for more warehouse or storage space to house your excess inventory this can be expensive. This is especially true if you’re paying for space with a third-party fulfillment partner (like Ship Central Fulfillment).
Stay Agile
If you are able to keep a tight hold on your inventory then it allows you to stay incredibly agile. If a new trend pops up you can jump on that trend quickly.
The clothing store Zara is a great example of this. They identify current trends and then jump on those which keeps them ahead of their competition.
Inventory and Opportunity Cost
Earlier I mentioned that inventory is only an asset on a balance sheet. While you paid cash for your inventory and you’ll hopefully sell it for cash eventually, it is most definitely not cash while it’s sitting in your warehouse. Until you sell your inventory you have nothing to show for it, it’s only a cost, a liability.
It can also rob you of future opportunities as well and this all goes back to cash flow. If you tie up all of your cash in inventory then you don’t have the money to invest in growth. Unfortunately Facebook doesn’t accept popsockets and fidget spinners as payment.
This can be especially damaging if you invest your cash in slow moving inventory.
4 Methods to Improve Your Inventory Management
1. Set Minimum Threshold
Setting a minimum inventory threshold level is one of the most basic inventory management practices. The minimum threshold tells you when you should order more inventory.
In order to determine this number you need to have a sales forecast or at least a rough idea of how many units you expect to sell. You also need to know what the lead time is to get another shipment of that product at your warehouse.
Let’s use six weeks as an example. So, when you’re down to having only a six week supply of product left, that’s when you should reorder. This should ensure that you won’t run out and that you don’t reorder too early.
2. Determine Safety Stock Levels
While a minimum reorder threshold is necessary you should also keep a small amount of safety stock on hand. This acts as your contingency plan. Things happen and you should be prepared. It’s not really an if but a when the following could happen
- Sales spike unexpectedly.
- Your supplier discontinues your product.
- Manufacturer is backed up and your order is delayed.
- You miscounted inventory and don’t have as much as you thought.
- A shipment gets stuck in port.
Any or all of these things could happen and you should consider adding some padding to your minimum reorder threshold.
3. Forecasting
Forecasting is a word that gets thrown around a lot when it comes to inventory management. Forecasting is trying to predict exactly how much inventory you’ll need and when based on data like current and past sales trends.
Forecasting can be very helpful in deciding how much inventory to order but keep in mind that forecasting will always be wrong. No matter how much data you have you’ll never be able to perfectly predict the future. Unless, of course, you’re psychic.
That doesn’t mean you shouldn’t try though. Look at your sales trends past and present before ordering.
4. Count Your Inventory
One way to seriously screw yourself over is to not know how much inventory you actually have. Many businesses have been hurt this way.
The report says you have X amount when in reality you have Y. If you store your inventory yourself, then be sure to set up a system to count your inventory regularly.
If you use a third-party order fulfillment company be sure to discuss with them how they count and keep track of inventory levels to make sure that the numbers you see in your reports are accurate and up to date.
The Takeaway
Inventory management might seem simple or even unimportant on the surface but when you do it right, it can fuel your growth. Whether you’re managing your inventory yourself or you use a third-party fulfillment partner you need a clear view into what is happening with your inventory so that you can manage it properly.
At Ship Central Fulfillment our warehouse management software offers real-time inventory updates so that you have complete visibility and control over your stock. You can even set up reports within our system to make inventory management even easier!
Learn More About Ship Central Fulfillment