At its base level, inventory management refers to tracking the goods a company has in stock. It includes such activities as ordering, restocking, storing and inventory forecasting.
Strategically managing inventory gets more challenging in accordance with growth of units sold. Inventory can also grow if new and more types of products are introduced and sold. The right inventory system can help manage inventory, and is a crucial part of supply chain management.
Many small businesses think that outsourcing order fulfillment and product storage to a third-party logistics (3PL) provider means completely turning over the inventory management process to them. The truth is a 3PL can provide valuable tools and data that will allow a seller to successfully manage their inventory in the most efficient as well as cost effective manner possible.
The Importance of Inventory Management
In today’s hyper-competitive ecommerce marketplace, good inventory management is an often overlooked but critical aspect for any seller. It is vital that the inventory management process is efficient, cost effective, and accurate. If you do not have all of those components in place you may run considerable risk of failing to meet customer demand and losing money.
There are many benefits for a seller to establish proper inventory management.
1. SAVE MONEY ON STORAGE FEES
If you have too much inventory on hand it will likely cost a lot in storage fees. And that’s money that could be spent on branded shipping materials, or absorbing expedited shipping fees. Storing goods is most often based on how much physical space your products take up. Fees vary depending on how many units you need to keep in stock. By keeping your inventory at the right amount based on your customer demands you will save money on storage fees, and put it toward aspects of your business.
2. ENSURE YOU NEVER RUN OUT OF PRODUCT
One of the most critical parts of inventory management is calculating the right amount of product units (SKUs) needed in stock at any given time. If your stock level dips too low, you run the risk of running out of products which can lead to missed sales, backordering, and customer service issues. On the flip side if you have too much inventory, it can result in having products that can no longer be sold due to decreased demand or being outdated. This is also known as “dead stock”. Proper order management, combined with analytics can also help with your warehouse management operations.
3. PROVIDE INSIGHTS INTO CUSTOMER BEHAVIOR
By monitoring the amount of product inventory that gets shipped (as opposed to that which is unsold, in storage, or stuck in any part of the supply chain) you will gain valuable insights into what customer’s preferences. Is there a peak month of purchase? Perhaps a specific location that buys your product most frequently. Additionally any spikes or dips in inventory after a product launch will help lend necessary feedback on your promotional efforts and product likeability. This can cut down on the lead time as purchase orders come in as well as streamline operations at your point of sale. This can help with both inventory tracking and inventory control, and is crucial for a small business.
4. FORECAST FOR THE FUTURE
Proper inventory management can help with inventory forecasting. By tracking and managing your inventory storage levels and output flow, you will be better able to plan for demand. If you monitor your inventory trends on a monthly, quarterly, or unit-to-unit basis you will likely be more able to keep up with sales.
5. PLAN FOR THE UNEXPECTED
No one can predict the future, but by managing your inventory can help you prepare for unexpected supply chain issues or deficits, such as:
- Delayed inventory from the manufacturer
- Unexpectedly sell out of a product
- Run out of storage space
- Cash flow problems
By analyzing your inventory over time you can create a contingency plan for problems that might occur. This preparation will help bolster your business when you encounter adverse circumstances that otherwise could have serious adverse effects for your bottom line.
Inventory Management Techniques
CONDUCT A REGULAR INVENTORY AUDIT
Auditing your physical inventory can be time consuming, but it is an important aspect of inventory management. It involves counting actual warehouse inventory on hand (also called cycle counting) and making sure that it matches up with what you have listed in your inventory management software. If you work with a third-party logistics(3PL) provider, they should perform inventory counts on a regular basis (using a barcode scanner to track SKUs) and compare it to the information against their inventory management system. This can help to cut down on human error. There should be clear rules in your 3PL partner agreement (also know as a Service Level Agreement – SLA) that states the frequency the inventory is checked and the allowable discrepancy.
Some use a technique called spot checking. This means choosing a specific product and counting the units on hand and comparing it to what your inventory records show. Instead of counting the number of all of your products, you can assume if you randomly select a spot to check, and it matches perfectly to your inventory records, that the rest of the inventory follows. However if you spot check and find non matching information, it might be best to do a full inventory audit.
SET REORDER POINTS
Reorder points are the minimum quantity, established by you, of each of your products that need to be on hand to prevent having a stockout. If your inventory dips below that quantity, it means that you need to order more products.
It can require some work on the front end to calculate what the reorder point is, but having it will help you avoid running out of inventory which can cause numerous after-effect problems for your business.
ESTABLISH AND MAINTAIN GOOD RELATIONSHIPS WITH YOUR SUPPLIERS
The first step in setting up your business is finding the right manufacturer that can help build your products in the most cost-effective and efficient manner in order to grow your business. After you have chosen your manufacturer it is important to establish a positive relationship with them so that they can help with your inventory management, as opposed to getting in the way of it.
Communicate with them frequently to let them know of potential increases in sales, promotions, or other factors that could cause a spike in your need for additional inventory. This will help ensure that they can keep up with your customer demand, and that you have all of the products in your inventory that you’ll need. With well-established communication, should you run low on products, they are more likely to go out of their way to help you restock.
USE EFFICIENT AND EFFECTIVE INVENTORY MANAGEMENT SOFTWARE
Finding the right software system to help handle inventory management is invaluable. The right software will provide the real-time metrics, reporting, and updates that match your needs—whether that is needing to move unsold products, meeting a sudden and unexpected demand in sales, or re-calculating your inventory after making a mistake. Accurate reporting of inventory levels is crucial, and your inventory software should keep you on top of this when you need it. The ability to track trends over time will be imperative to successful inventory management. The right software can even help you choose where to warehouse your inventory which can cut down on shipping costs.
A great example of inventory management software is ERP. ERP (short for enterprise resource planning) refers to an integrated approach to business planning and operations. With ERP systems, businesses can manage all their finances, logistics, operations, and inventory in one place.
If you establish the best practices for inventory management it can be an incredible help in efficiently running your business. It is important to take make the right choices that can scale and grow with your business. Great inventory management will save money, time, and improve customer service.
Help with inventory management is one of the many benefits to working with a 3PL. If you are seeking logistics support we’d love to hear from you. You can read DCL’s list of services to learn more, or check out the many companies we work with to ensure great logistics support. Send us a note to connect about how we can help your company grow.