Inventory Management
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DISCLAIMER: This article was written in 2021 and has not been updated. For more up to date information about small business funding products and options, please browse our recent articles.

Are you struggling with managing your inventory? Or maybe you just think there is room for improvement? If so, you’re far from alone. An estimated 94% of companies experienced supply chain disruptions over the past year due to the pandemic, according to the recent Annual Global Supply Chain Report by Interos.

If you’re a product-based small business, getting your goods within a given time and in the right quantity is essential to not only thrive but to survive. When you can’t for some reason, you’ll lose the confidence of your customers and they’ll likely start to look for a more reliable solution.

So how can you improve inventory management to keep your business going strong? We’re going to share 5 ways. But first, let’s take a quick look at what inventory management entails and the current events posing challenges for large and small business supply chains.

What is inventory management?

Inventory management involves tracking your goods throughout the supply chain from the point of raw materials and initial purchase orders to receiving, warehousing, and shipping finished products. The end goal is to ensure you always have the right amount of products on hand to fulfill orders from your customers.

However, a lot can go wrong and the consequences can be detrimental to your business. If you have excess inventory, you lose money. If you have shortages, you lose money and disappoint customers. If you incur shrinkage, guess what? Again, you lose more money. However, sometimes, events and factors beyond your control can impact your inventory management processes.

Supply chain disruptions in 2021

The majority of businesses are currently experiencing disruptions to their supply chains. 2020 brought about the perfect storm of events between the Suez Canal accident, weather events, trade disputes, cyber attacks, and, most markedly, the pandemic.

When the coronavirus hit, the economy came to a screeching halt leaving U.S. companies sitting on billions of dollars of inventory. Soon, most businesses liquidated the goods that were collecting dust and canceled future orders, underestimating the rebound of the economy.

However, when the economy began to recover faster than anticipated, many companies couldn’t restock to pre-pandemic inventory levels. Various stages of supply chains had slowed down their production operations, some had gone out of business, and the supply couldn’t keep up with the climbing demand. We’re now seeing shortages of everything from microchips and gas to chicken and ketchup. Pre-pandemic, car retailers who had two months’ worth of cars in stock now only have one month – near record lows.

Of course, with increased demand and decreased supply comes higher costs which only makes the problem worse for business owners and consumers. For example, the cost of lumber to build a 2,000-square-foot house reached $27,000 in May of 2021, where it was just $7,000 before the pandemic. Further, overall, the producer price index on all commodities is up 19.5% year over year.

With shortages making inventory management harder than usual, about half of businesses surveyed recently said operational resilience and global supply chain risk management will be a top priority within two years. Are you one of the many wondering what steps you can take to improve your inventory management system?

5 ways to improve your inventory management system

What should you be doing to protect and optimize your inventory management practices? Here are 5 tips to keep in mind.

1. Diversify your suppliers

One way to help mitigate your risk is to not put all your eggs in one basket. Look at your supply chain and consider what you would do if one link broke. Do you have a backup?

For example, say you are the primary pool shop for your small town. Everyone comes to you for their pool and spa chemicals, equipment, and toys. However, with the current shortage of chlorine, you now can’t get one of your top-selling items from your supplier. Without it, your customers are going to be forced to go somewhere else. And who knows if they will come back?

To help avoid situations like this, examine each link in your supply chain. Then, shop around and try out different suppliers so you can have a backup plan in place if you ever need one. If your go-to supplier fails, you can have a fail-safe ready to step in. Plus, shopping around may help you find better quality goods and lower cost goods which can help to increase your profit margins.

2. Get rid of stagnant inventory items

When you purchase inventory, you’re investing with the expectation of future returns. But sometimes, those returns don’t come as quickly as you’d hoped, if at all. When items don’t sell, they tie up your cash flow, cost you for storage space, and come with opportunity costs (money lost that you could be making on other items). This can occur when you launch new products, reach the end of seasons (for seasonal items), or just have a poor product-market fit. So how do you make sure you have the right inventory items in stock and don’t rack up holding costs?

The first step in fixing a problem is identifying it. You’ll need to find any slow-moving (or no-moving) items you have in stock. You can do so by looking at the average amount of time products remain in stock before being shipped and the expected sales vs. actual sales. If sales are down and shelf time is longer than average, inventory turnover will be low resulting in lower profitability.

It’s also a good idea to calculate your overall costs to store items for the average length of time you have them. A longer shelf life will not only cut into your profits but could end up costing you money. By continuously optimizing the inventory you carry and clearing out stagnant items, you can make your business more profitable.

A popular inventory management technique uses what’s known as ABC analysis. It’s a way to rank your items based on demand, cost, and risk data. With this information, you can keep an ongoing understanding of which products are most critical to your financial success. Regardless of which technique you use, inventory software management can help you keep track of underperforming products so you can continuously optimize your lineup without endless hours of manual calculations.

3. Keep a close eye on shrinkage

The next tip for good inventory management is to minimize shrinkage — the inventory you lose due to factors such as employee theft, shoplifting, human errors (administrative), spoilage, accidental damages, vendor fraud, and more. Basically, it’s the difference between the amount of inventory your records say you should have and the amount you actually have when you perform a physical inventory count. The problem? When your inventory levels are lower than they should be, it costs you money and could cause delays that negatively impact customers. Plus, you may have vendors or employees taking advantage of you.

To find out your shrinkage rate, subtract the actual value of your inventory by the book value of your inventory, divide it by the book value of your inventory, and multiply it by 100%. The average shrink rate in the U.S. is 1.44%. If yours is markedly higher, it’s time to take some preventative action. What can you do? Level up your inventory control and security measures.

  • Install surveillance cameras in your stock locations so you can monitor them in real-time.
  • Require credential badges for employees that are tied to software that tracks when they interact with inventory (receive, move, and fulfill purchase orders).
  • Upgrade warehouse management protocols by limiting permissions.
  • Give ways for employees to anonymously report theft.
  • Store high-value items in areas with extra security.
  • Introduce a system of double-checks to prevent mistakes.
  • If you have perishable items, ensure you’re using the first-in, first-out (FIFO) system.
  • Invest in inventory management software so order management can be performed in one centralized system, increasing security and reducing errors. Inventory tracking keeps you aware of where items are at every step of the supply chain.
  • Look for warehouses and fulfillment centers that do not hold you liable for shrinkage.
  • Be aware of the risks you face at your storage location (e.g. flooding, fires, etc.) and take preventative action (inventory insurance, moving, etc.).
  • Track shrinkage over time.

4. Think outside the box

Have you ever had enough products to fulfill an order quantity but they were in the wrong packaging with the wrong barcodes? For example, say you sell orange juice in single containers under one SKU and packs of four under another SKU. If you run out of single containers but have plenty of four-packs, you could break down the four-packs to fulfill the orders. But what about the SKUs?

For situations like these, it can help to have a system in place to adapt, adjust the packaging and inventory base as necessary, and update the SKUs/barcodes. You can do this in-house or hire a fulfillment center that offers this kind of flexibility.

5. Use forecasting to set minimum inventory levels

Lastly, not sure how to know the amount of inventory you should order on a regular basis? That’s where forecasting comes in. When forecasting, you should consider current trends, past data, and upcoming events so you can predict how much stock you will likely need for a specific period. Then, factor in replenishment data like timing, availability, and lead time so you know when to set your reorder points. This way, your stock levels are refilled when necessary to ensure your customers won’t experience any delays.

While forecasting can be quite complicated, there are several inventory management solutions you can turn to for help. They can analyze sales and inventory data at large as well as down to an individual retail store or SKU. The software handles the technical work to help you with automating demand analysis, reordering, and keeping proper minimal inventory levels. While some surges and plummets in demand are unpredictable, forecasting can help you to gain a general idea of what to expect under normal circumstances.

Inventory management optimization can keep your business going strong

The bottom line? With effective inventory management in place, your business can minimize inventory costs, prevent losses, maximize efficiency, and get the most out of your supply chain. Despite the various shortages going on in the world today, you can take extra steps to ensure you have backups in place to keep business operations moving forward as usual. However, growing your bottom line also depends on minimizing shrinkage, adapting products as needed, forecasting, setting proper reorder points, and cleaning our non-performing products. Luckily, you’re not on your own. There is no shortage of inventory management tools for everyone from e-commerce store owners to founders of brick-and-mortar retail businesses. Easily track inventory, stay on top of supply chain management, monitor pricing, and more to keep your business moving in the right direction.

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