Many retail businesses think that theyâ€™re doing the best job possible with inventory management. If you think so, youâ€™re not wrong. Most businesses big and small have a reasonable grip on inventory, but the smallest of issues often throws them off.
When it comes to inventory management best practices, weâ€™d say that thereâ€™s always scope to improve and to do better.
Why should you do it now?
Because the slope of inventory management is very slippery, and all it takes to slide down is one bad decision. These best practices can serve as a guide to know what might be going wrong, and how to fix problems before they even arise.
Inventory Management Best Practices
Here are seven inventory management best practices for you to review your business against, and make changes.
Always correlate sales and inventory
As the backend and frontend elements of a retail business, sales and inventory always go hand-in-hand. To use a very simple example, you cannot sell what you donâ€™t have. At the same time, you cannot sell much more than what the market is ready for.
Interestingly, the two most common errors in inventory management are understocking and overstocking. It is easy to see how understocking affects sales. But overstocking is a particularly dangerous problem in retail. When you have too much stock, you pay to keep it (cost price), store it (warehouse costs), market it or even lose some money selling it at a discount.
In short, you lose money. Money that could be used to acquire faster moving items or to market these items.
Since you know that inventory has a measurable impact on sales, link the two as closely as possible. Gauge what your optimal inventory levels are for each product and do your best to stay within those limits.
Use your vendor lead time as a metric in calculating how much inventory you need.
Speaking of sales, past sales data is your most dependable source of information on how much inventory to hold in a given time period.
Have a process for inventory audit
Not counting stock often is a big pit that small retail businesses fall into. Since the number of SKUs is lower, many retailers assume that they can get away without a stock audit.
However, frequently counting your stock tells you which ones have been lost due to theft, or damaged from being around for too long. In other words, these are products you cannot sell and need to write off.
When this happens too often, counting helps you pinpoint where the problem is.
For smaller warehouses with slow-moving items, we recommend a monthly count. For retailers with a high inventory turnover, weekly counts are ideas. FMCG retailers count their stock at the end of every day.
You can either count the entire warehouse in one go or count different sections on different days. Hereâ€™s a handy guide on stock reconciliation to help you choose.
Evaluate inventory turnover and get rid of slow-moving items
Your inventory turnover ratio is a measure of how quickly your items move, thus generating revenues.
In retail, a turnover ratio between 2 and 4 is considered very good. Weâ€™ll get into the calculations and the detailed explanation here. But a turnover ratio of 2 means this- the product has sold and been reordered at least twice in the given time period.
Why is this important?
Because a high turnover means youâ€™re selling and generating revenue. Low turnover means your products are sitting around costing you money and warehouse space.
If some of your products have a low turnover ratio, you should consider doing away with them.
Adjust reorder levels and safety stock to match with peak sales periods
The last thing you want during peak sales periods is understocking. Imagine having all that demand out there, but nothing to sell!
For every product, your reorder levels determine when to raise new purchase orders with your vendor. Be sure to evaluate this every few months, since not all products sell the same at all times. Particularly during peak season, adjust the reorder level based on how much you sold in the past.
Also, add in safety stock for unexpected sales spikes. (To be sure, thatâ€™s good news.)
For nearly every retailer, the holiday period is a source of unbeatable sales numbers. Last yearâ€™s holiday period volumes serve as one indicator of what is to come. Combine these insights with the current yearâ€™s market trends, and youâ€™ll know your reorder levels and how much safety stock to hold.
This approach also works when youâ€™d like to anticipate a lull period.
Decide On Warehouse Flow
When it comes to inventory management best practices, nothing compares to getting your hands dirty doing stuff.
As the physical source of all inventory, a warehouse is a sacred place. Stock the warehouses neatly, and assign shelf numbers to each section. Use barcodes to track products and their location within the warehouse.
To significantly reduce picking time, use dedicated flows for when and how orders will be picked from the shelves, prepared for shipping. Also, define where in the warehouse the orders will be packed and made ready for shipping. Store damaged goods separately so theyâ€™re not picked for shipping again.
The idea is to reduce confusion in deciding which products have been picked for order fulfillment, and which ones actually belong on the shelf.
Each of these processes ensures that you fulfill orders correctly, and in the shortest time possible, with the least amount of confusion for your employees.
Train warehouse employees
Speaking of employees, have you trained them yet? Warehouse employees are many, and their roles on any day are many.
Once you have processes for order fulfillment in place, it helps to ensure theyâ€™re on the same page as you.
Schedule time for training days and mock drills. You can even have warehouse teams compete with each other in fulfilling orders right. Hire a warehouse manager who is willing to follow set processes and understands the need to do so.
Most importantly, make warehouse employee training a regular process. Donâ€™t assume that all new employees will pick up where the old ones left off. Involve yourself at the warehouse now and you will see dividends as your sales spike over time.
Automate as many inventory functions as possible
The last of our inventory management best practices is one that, we think, is a must-do.
Are you still using spreadsheets to manage your inventory? If so, it is time to make a switch. With growing inventory and as many sales channels to boot, you shouldnâ€™t have to worry about updating inventory levels manually.
In fact, it is impossible for a human being to track inventory accurately all day, seven days a week and at all hours.
To do this, automation is your friend. Use an inventory management system that can track and consolidate inventory across sales channels and warehouses. Remember, you wonâ€™t always be a small business. When you grow, your inventory grows with you.
Using an inventory management system, you can automate most things that you would do instead. Whatâ€™s more, a system can do it more accurately and without needing a break. You can focus, instead, on your sales patterns and how best to grow your business.
Looking for more help with inventory management? Hereâ€™s a guide that can help.
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Armed with a degree and a pen, loves to tell stories. When not telling stories, she also works. Hard to decide which one she likes more.