What is inventory management?
If you’re in the process of just starting out in retail or wholesale, you may be asking yourself “What is inventory management?” or “What is inventory control?”
Effective inventory management and inventory control are one in the same, and the definition is pretty simple to understand.
Inventory management refers to the process by which you track how many units of each product you have on your warehouse shelf, in store or sitting with other retailers and distributors. This enables you to succeed in having the right products and quantities, in the right place, at the right time, and for the right price.
When effectively tracking and controlling your inventory, you’ll know how many of each item you have, when you might be running low on products and whether you should replenish that item in order to keep selling it. And as a busy business owner, you should be able to do all of this at a glance, enabling you to make good purchasing decisions quickly and easily.
Benefits of effective inventory management
There are a number of benefits that effective inventory management can bring, such as:
- Accurate reports: You rely on costs of goods sold, balance sheets, income statements and margin reports to effectively manage your business. But if the figures are inaccurate, your management decisions will also be off.
- Efficient reordering: When you’re working with correct inventory numbers and a threshold limit is reached, you’ll be able to trigger a new purchase order to replenish your goods and keep your sales coming in.
- Reduced theft: Inaccurate inventory numbers, or worse, not managing inventory at all, leaves your business open to internal theft. But if you’re running a tight ship, missing products can be quickly and easily detected. Not only does this work as a great deterrent, but it also allows you to act on issues if needed.
- Handle high order volumes: In the event of high order volumes, such as those that arise during peak trading seasons, flash sale events, or when celebrities step out in your products, your inventory numbers should be able to keep up in order to keep your sales flowing profitably across all channels.
6 inventory management techniques
But accurate inventory management and inventory control hinge on best practice and using effective inventory management techniques. To help, consider the following six inventory and warehouse management best practices.
1. Stock takes (Inventory counts)
Physically counting your inventory, often referred to as stock takes or inventory counts, are necessary to help you keep on top of your inventory. Not only are they necessary in order to keep your inventory numbers in check, but they’re a great opportunity to confirm all your products are still in good selling condition, allowing you to remove items that are damaged.
You may have been advised to complete stock takes once a month, once a quarter or at the end of your tax year. These are all correct as this inventory management technique largely depends on how many products you have flowing in and out of your warehouse or storeroom.
For businesses that see a high volume of outgoing shipments or incoming deliveries, the more frequent you can perform stock takes, the better. But we’re not suggesting you should make it a habit to count all of your inventory each time. This is where cycle counts come in.
2. Cycle counts
The cycle count procedure involves dividing your inventory into smaller, more focused lists of products that need to be counted. You could divide your products up by product category, product vendor or even the warehouse location.
But there are two certain counts that are the best inventory control method: high risk and high value.
High risk counts are a list of products that have historically had the largest inventory discrepancies, are prone to theft or have had the most inventory corrections performed against them due to breakages or returns. This type of count ensures you’re analyzing the reasons for why there’s been so many write-offs and thus, you’ll learn how to mitigate the causes.
High value counts, on the other hand, are a list of products that have the highest cost, or potential sales value. As these items are your most cash-intensive, it’s important to understand and accurately track them at all times.
3. ABC analysis
The idea behind the ABC analysis is to effectively prioritize your attention and resources on inventory that need it most. According to the Pareto Principle, 80% of overall inventory consumption comes from just 20% of your total items. ABC analysis comes in useful to help you to identify how to make your inventory control as efficient as possible.
Using this method as a starting point, you can split your inventory into three categories, based on value, cost and consumption. As an example:
Group A: Items of high value (70%) and small in number (10%)
Group B: Items of moderate value (20%) and moderate in number (20%)
Group C: Items of small value (10%) and large in number (70%)
Use these groups to help categorize your products, and then you can ensure your inventory management practices revolve around counting those items in Group A first, followed by Group B, and C respectively.
4. Just in Time (JIT)
Although Just in Time ordering, or JIT, is still considered to be a risky strategy for some, it can be a great way of offsetting the risks associated with inventory management to your manufacturer or supplier instead.
With JIT in place, you’ll receive goods just before they need to be shipped or sold. This is helpful to smaller businesses that perhaps don’t have as much warehouse space or monetary capital as larger ones. Instead of tying up cash in inventory, you can instead invest that money on attracting more sales in the first place.
But for this inventory management technique to work, you’ll need to have a healthy and trustworthy relationship with your supplier, or you’ll risk disappointing customers if goods are slow to dispatch.
For more info about Just in Time ordering, check out this in-depth guide written by ecommerce fulfillment company, James and James.
5. Surplus inventory & dead stock
Surplus inventory, also referred to as excess inventory, can result in deadstock if you don’t have an effective inventory management strategy in place in order to shift these products and prevent this from happening again.
Dead stock, or dead inventory, is used to describe products that were never sold or used by consumers before being removed from the sales process, perhaps because they’re outdated. Read on for some ideas on what you can do with both dead stock and excess inventory.
Cross-merchandising is a great strategy to help increase sales of your surplus inventory and slow moving items, allowing you to shift these products quicker.
Likewise, adapting your multichannel strategy can be a great driver in shifting excess inventory. Perhaps it’s as simple as selling these goods on marketplaces like eBay and Amazon, or even using social media marketplaces on Facebook and Instagram to sell these items to those who may not yet be aware of your brand.
Another idea for managing surplus inventory is to donate it, which according to Global Trade Magazine, provides “generous tax benefits aimed at C Corporations that donate goods to charity. According to Section 170(e) (3) of the Internal Revenue Code, C Corporations that donate their inventory to qualified nonprofits can receive a tax deduction of up to twice the cost of the donated products.”
For more advice on the do’s and don’ts of managing surplus inventory, read this blog by Nicole from Retail Minded.
6. Returned inventory
With 89% of American shoppers claiming they would shop again from an online store if treated to a positive returns process, it’s important to establish a good way of managing this type of inventory within your inventory management strategies.
There are different ways to handle returned inventory. To start with, we’ll focus on two types: authorized returns and automatic/blind returns.
If you require your customers to call or email in their return requests, we refer to these as ‘authorized returns’. Dealing with returns in this way offers your team the opportunity to speak with the customer to find out more about why they’re returning the product, and if a different product can be offered in exchange for it. It also ensures you have a view of inventory you’re expecting back into the warehouse, but it does require more man power and time.
On the other hand, automatic or blind returns can make the returns process easier for both yourself and your customers. A return slip and free shipping label contained within the original package, or allowing customers to print a returns slip direct from your website is what’s required with this process. Although you won’t have a view of incoming inventory in advance of it arriving at your warehouse, you will spend less time in the long-run, especially if you have a reliable inventory management system enabling you to scan goods into the warehouse.
To learn more about an effective returned inventory process, check out our mini 3-part blog series:
Part 1 - Returned Inventory: What do Your Customers Want & What do You Need?
Part 2 - Returned Inventory: How to Have the Best Returns Process for Your Business
Part 3 - Returned Inventory: Top Tips for Reducing Returns
So whether you need to drop-ship, partially fulfill orders, process back orders, run your operations from one warehouse or several, it’s vital that both your inventory and warehouse inventory control procedures are managed correctly.
Bluetooth barcode scanners, automation bots and an integrated warehouse management system are all ways that can help you to control your warehouse inventory, resulting in reduced processing costs, eliminated errors, speedy order dispatch and a multitude of other benefits.
We hope these six inventory management techniques and strategies provide you with a good starting point. Need more? Check out these 12 tips for taking control of your inventory.