Picture this: it’s payday and a customer has just thought of the perfect gift from themselves and it’s a product from your business. As their work shift comes to a close, they hurriedly make their way to your store and look for the product they had in mind… only to find out that it wasn’t available on your shelf. Disappointed, they try to check for nearby alternatives, and actually end up with an order from one of your competitors who had a similar product in stock.
This story is a bit dramatic, yes, but it’s one of the realities for businesses with poor inventory management. Not only can retailers lose sales, they might also experience increasing levels of customer dissatisfaction, which could lead to negative word-of-mouth and damage their business reputation. However, this is only a few of the many potential consequences that businesses could face with lackluster inventory management systems in place.
In this article, we will take a look at how businesses can significantly improve their inventory management practices in order to avoid such situations for their customers. After all, effective inventory management is all about creating a seamless and responsive supply chain that meets customer demand while minimizing costs and maximizing efficiency.
Understanding the challenges of inventory management
A simple mismanagement of inventory can cause low stock count and reduce supply chain efficiency, which can eventually lead to stockouts if not handled properly. As mentioned earlier, this can lead customers to your competitors who might have the item that they’re looking for. On the other end of the spectrum, however, overstocking (which refers to having too much inventory) can lead to profit loss and dead stocks.
In fact, even restocking itself can become a problem as you would have to plan appropriately in order to consider lead times–failure to do so can cause delays in the reordering process, which will affect product availability for your customers.
When ordering from suppliers, errors in sourcing and manufacturing can also occur, which can cause product defects and damages. Other problems include theft, damages caused by shipment, or improper storage conditions; all of which can lead to product recalls, inventory destruction, and dissatisfied customers. Improper storage conditions may be influenced by various factors such as lack of space, which becomes a bigger problem as businesses grow.
Other frequent struggles that businesses face are ones that are often out of their control. A good example of this would be the ever-changing demands of customers. While it’s important to maintain inventory levels during regular and peak seasons, many external factors can easily change the demands of the market and the supply chain. An example of this is the COVID-19 pandemic that affected many countries all over the world; when the lockdown began in 2020, people started panic buying food and disinfectants, causing businesses to be taken aback by such high demand.
These are only some of the many challenges that a company may face face when it comes to inventory management. When it comes to mitigating them, you can either take the traditional approach or go modern and make some tech work for your benefit. Let’s explore both.
How to improve manual inventory management
A manual inventory management system is an extremely cost-effective way of keeping track of your stock levels. When managing inventory with the traditional pen and paper method, consider conducting regular audits and cycle counting to keep theft, damages, defects, and returns in check. Although the frequency of audits depend largely on the size of a business, it’s a good rule of thumb to perform them at least once every quarter. In the process of conducting audits, it’s of course important to take the time to learn different formulas that will be used for inventory management such as the formula for lead time, safety stock, stockout, reorder point, maximum stock level, economic order quantity, and stock turnover rate.
Optimizing your warehouse layout also goes a long way. A good warehouse layout can improve inventory visibility. When you group your inventory properly, you will be able to find items quickly, which, in turn, can significantly speed up various processes. You can even take note of high-priority and high-demand items and then create a standardized list of your inventory within your warehouse. By doing so, you will gain access to some useful information such as your inventory turnout ratio and inventory shrinkage–both of which would help you understand how losses affect your business and what actions can be taken to in order to minimize them. Being able to do this properly will greatly benefit your business, but on the other hand, an inaccurate inventory list can also lead to outstocking, overstocking, and lost revenue.
When it comes to deadstock, however, you can “move” them out of your inventory by selling them to discount outlets (as single items or as bundles) or giving them away as gifts with retail purchases. This way, you can minimize your carrying costs and increase storage space. You can then use this freed up space to store safety stocks, which will ensure that you have enough inventory on hand whenever you need them. Safety stocks are calculated based on lead times, inventory turnover, and demand fluctuations. With them, you can avoid stockouts and lost sales.
Keeping tabs on your suppliers is also an essential part of how you manage inventory. Always note down order history, contacts, and lead times in a notebook or ledger–they will help you in reordering quicker and maintaining your relationship with your suppliers. While you’re at it, do your best to maintain a diverse range of suppliers – this will make your supply chain more resilient and will give you more security should one of your suppliers fail to deliver.
Speaking of relationships, maintaining good communication with both your suppliers and retail customers is an absolute must. Communicating with your suppliers will help set expectations for lead times, planning inventory levels, and minimizing errors when you fulfill their orders, whereas communicating with your customers about inventory-related issues will pave the way for transparency regarding their orders. This will minimize the risk of losing sales due to bad customer service or lack of updates regarding customers’ orders.
All of the above tips can be accomplished with traditional methods, of course, but by utilizing modern digital technology, specifically a point of sale or POS system, the process will become much more efficient. In the next section, we will discuss how a POS software can streamline the inventory management process for you and your business.
How a POS can streamline inventory management
A point of sale system can provide a myriad of benefits for businesses, but in terms of how it manages your inventory, it can track your stock levels in real-time, which can help you understand inventory turnover rates and avoid stockouts and overstocking. Not only does it make the process incredibly efficient thanks to features such as barcode scanning and integrated payment options, it also reduces the risk of inconsistencies and human errors, giving you more accurate data.
A POS software can provide you a comprehensive and user-friendly interface in managing your inventory, as well as task automation, which can greatly reduce the time spent on inventory management compared to a traditional process.
If that wasn’t enough, you can even integrate accounting software to your POS to assist in managing financial records and tracking expenses. Sales are tracked by recording each transaction and updating inventory levels in real-time. You will be able to know which of your products are selling and which aren’t. These features can help you make informed decisions about what you can do to manage your inventory and adjust to the appropriate technique for your inventory management to reduce costs and maximize sales.
Moreover, businesses with multiple branches will greatly benefit from a POS system since it will allow business owners to manage their inventory remotely.
Regardless of whether you use traditional means or a POS software for inventory management, however, there are some practices you can follow to improve your overall inventory management system efficiency.
Best practices in inventory management
One of the best practices in inventory management is prioritization. Experts have generally suggested grouping your items into A, B, and C groups.
- A group: Items which are generally retail for a higher price.
- B group: The B group consists of in-between items. These moderately priced items move more slowly than C items but faster than A items.
- C group: Items in the C category are items that retail for a lower and turn over quickly.
Given this internal grouping, you must also establish a system among your employees for processing and managing your inventory in order to create consistency in your overall process. You can even have employees manually check your inventory and work off a checklist as a form of quality control, which can boost customer satisfaction. This includes, but is not limited to inspecting products for defects and checking whether or not products match their descriptions. If some items do not pass the quality check, you can return them to the supplier.
It was briefly mentioned earlier that there are techniques that are used in managing your inventory. Familiarize with yourself with these techniques to know which ones are best suited for your business and supply chain.
- Perpetual Inventory Management: Your inventory is counted as soon as they arrive and when items are sold or lost to damage or theft, they are subtracted. This technique is often combined with demand forecasting.
- Demand Forecasting: This makes use of your past sales data to forecast future demand and quantities that should be ordered for your inventory.
- Just-in-time inventory management: This is used to minimize storage costs and eliminates overproduction of your inventory as stocks are only ordered from suppliers when needed. Although this is viable when the supply chain is consistent, this can cause issues when there is a problem along the way.
- Reorder Point Formula: Another important need is to set a reordering threshold to know when it’s time to reorder products from your suppliers. Reorder stocks once levels fall to a certain point or simply reorder in advance of a high-demand period based on previous sales data. This is to avoid stockouts that could eventually lead to negative rapport with customers and possibly negative feedback.
Lastly, use the data at your disposal to stay up to the date and learn the latest sales trends, which will allow you to forecast which items you may need for your inventory in the near future. For starters, your inventory can adapt based on seasonal trends, promotions, and sales history.
Conclusion
Improving inventory management is crucial for any business looking to enhance customer satisfaction, reduce losses, and maintain a competitive advantage. Regardless of the approach, the key to success lies in implementing best practices such as regular audits, optimizing warehouse layout, utilizing a data overview for informed decision-making, and many others.
It’s important to treat inventory management as a catalyst for building a positive reputation and fostering customer loyalty. After all, adopting these strategies will ensure your business is well-equipped to meet customer demands, streamline operations, and ultimately achieve sustainable growth.
