How to Practice Good Inventory Management
Maintaining a positive cash flow may be the most important task for your small business, but to do that, you’re going to need strong and well-organized inventory management.
Ideally, good inventory management is the part of the supply chain that will allow you to always have the right product available at the right time and in the correct quantity.
Inventory control, however, can easily spiral into a mess due to poor planning and the ongoing supply chain disruptions being caused by the COVID-19 pandemic. To prevent your inventory situation from getting out of control, your best bet is to practice the basics when it comes to inventory management, as well as possibly stocking up on your most popular products as the current inflationary environment and supply chain shortages worsen.
Inventory Management Options
You may wish to consider an inventory management system that utilizes barcode scanning, as that will give you a way to easily monitor your inventory. There are plenty of great software packages out there to help you with this. As we move into 2022, now is the perfect chance to take the right steps to make sure you have a handle on your inventory to ensure the financial health of your business.
If your budget allows, you may want to hire an inventory manager or stock controller who will be responsible for processing all customer orders, receiving deliveries and making sure that your business receives all of the inventory that is ordered. The inventory manager should know how much inventory you have and be able to conduct inventory valuations at any given time.
Is Dropshipping Right for You?
Dropshipping is an inventory control method in which the manufacturer or wholesaler is responsible for shipping the products once your customer buys the product from you. This will allow you to avoid keeping products in a warehouse or storeroom and is often used by online stores. This method can be used across multiple industries.
Be forewarned, however, that there are some definite drawbacks to dropshipping: this method will result in a lower profit margin, as the manufacturer or wholesaler will demand a cut of the cost of the product, and you won’t be able to offer rock bottom prices. Also, you will have no control over the cost of shipping or quality control, as the product will never touch your hands before they are shipped to your customer.
Conduct Accurate Sales Forecasting
Sales forecasting is crucial to good inventory management – knowing how much inventory you need at any given time is especially important in the current economic environment, as supply shortages continue to plague businesses due to the COVID-19 pandemic. Given that inflation is at its highest in 50 years, you may even want to order excess inventory of your most popular items before it gets much higher.
Sales forecasting uses historical data, industry trends, and the status of your current pending sales to predict – with reasonable accuracy – your sales volume on a weekly, monthly, quarterly, and annual basis. Sales forecasting can get tricky, but there are plenty of sales forecasting software packages out there to help you. If you want to do it on your own, here are some steps you should take when forecasting sales:
- Determine your sales cycles. Many small businesses rely on seasonal sales, so it’s important to document what times of the year you close the greatest amounts of sales. It could be during the holidays. If you sell stationery products, it could be during the back-to-school season; if you sell pool products, it could be around Memorial Day. This will be key in figuring out when you need the most inventory.
- Examine your historical data. Use a record of your past sales volumes under similar conditions to estimate how your business will perform in the present. Given the current economic environment, this is especially important. How many sales per rep did you get in years past? How did your business perform in times of rising inflation? Determine your average year-over-year growth, and if you have historical data, then adjust it to rising inflation and to the fact that you may not have as many sales reps as in years past due to the “Great Resignation.”
- Assess your sales pipeline. How many potential sales do you have in the works? Analyzing this will give you an idea of what inventory you need in the near term. Examine each sales lead and determine the probability of it closing. You may want to ask yourself: at what stage is the potential sale? How old is this lead? What is the level of interest? When do you expect it to close?
Use the FIFO Approach
Using the FIFO approach (first in, first out) will help you organize and prioritize your inventory. In essence, this means that inventory should be sold in the order in which it was purchased, with the most popular inventory being ordered and sold first. This is especially important if some or all of your inventory is perishable or will become obsolete once a holiday has passed. This will go a long way in keeping your inventory management precise and organized. The best way to apply FIFO to your warehouse or storeroom is to keep the newer items in front and the older ones in the back.
Calculate Annual Consumption Value
Knowing the annual consumption value (ACV) of your inventory will help you keep tighter control over your warehouse or storeroom. ACV is simply the annual demand for a product multiplied by the product’s cost. Generally, products with the highest ACVs are the most expensive products, so, therefore, should make up the smallest percentage of your inventory. Then, you can create the ABCs of your inventory, with category A being the items that have the highest ACV; category C being the items with the lowest, and category B being the items that are in between.
Regularly Audit Your Stock
It is a good idea to physically check your inventory for quality control and to make sure you have the items that you think you have. Even with a good barcode inventory management system, you still may have miscounted the number of items you have, or you could have damaged items on your shelves that, obviously, you don’t want to ship to customers. Conducting regular spot checks of your inventory is especially important for your most popular items.
Identify Unpopular Stock
Nothing will clutter your inventory management like holding onto stock that isn’t selling. Perhaps you overestimated the stock’s value and popularity; but regardless, holding onto it will cost you money and space in your warehouse. Examine different strategies to get rid of it, such as a special discount sale or promotion.
Make it a Regular Practice
Good inventory management requires a daily effort to make sure your business has everything that your customer wants. If done properly, it can prevent costly situations such as stock shortages or excess stock. In short, good management of your products will reduce costs, improve your business’ cash flow and bolster your bottom line.