Do you know how much inventory is in your warehouse right now? If the answer is a shrug, you would do well to learn about inventory management. Businesses which rely on the sale of physical goods must learn how to manage the flow of those goods in and out of their warehouse.
What is Inventory Management?
Inventory management refers to how you handle the physical items that your business manufactures or orders and then sells to customers. For a retail store, it could be dresses, for a manufacturer it could be widgets. But if your business has physical stock on hand, managing it could become the key to your success.
Why does Inventory Management Matter?
If you’ve ever had the experience of telling a customer, “I’m sorry, that’s not in stock,” and then watching them go to a competitor, you’ve learned the importance of inventory management the hard way. Failing to properly manage your stock on hand could lead to either lost sales or cash flow issues.
You need to make sure that you have the products you need on hand when they’re needed. Some customers may be willing to wait while you order a widget, but others may go down the street and never come back. Poor inventory management could cost you money.
It could also hurt your cash flow. If you’ve bought or made too many of one product and it sits in your warehouse the money you spent on that inventory isn’t available for other things. It’s tied up in excess stock. This means you lose out on the opportunity to find something your customers might like better, or which might sell faster.
The ultimate goal of inventory management is to cut the cost of carrying unsold inventory and maximize sales.
How to Manage Your Inventory
Whether you track it in a spreadsheet or buy specialized software, you’ll need to perform some or all of the following steps to manage your inventory.
Keep Track
If a customer calls and ask if you could overnight them ten computer parts, do you know if you have that many in your warehouse? To properly manage inventory, you must have accurate counts of what you have available to sell at all time. This is called “real time” inventory management.
For businesses with low inventory turnover, it’s possible to track using a spreadsheet or inventory log. You’ll have time to count and subtract in between orders. A business with high turnover might want to invest in software with SKU and scanning capabilities.
A component of keeping track is counting inventory. For tax purposes, you’ll need to do this at least once a year.
Forecast Demand
Do you know how many parts you’ll need to fulfill orders next month? Part of inventory management is forecasting future needs so that you can place order or ramp up production to have enough stock to meet future orders.
It’s important to try to prevent product shortages, which also involves predicting the raw materials you’ll need to order for production. If your supplier has a three month lag time, you’ll need to place your order with enough time to get the raw materials into your shop in time to make product to fill orders.
Inventory management and forecasting can get quite complex. If your supply chain is dependent on several variables you’ll need to develop robust forecasting tools. Developing accurate forecasts also prevents you from having excess stock sitting around.
Organize a Warehouse or Storage
It’s impossible to have an accurate inventory count if you don’t know where it’s stored. If your system says you have five wheels in stock but you can only find three of them in your back room, you can’t sell the other two.
Wherever it is that you store your products, it should be well-organized and labeled. This will also save you labor hours. Employees who can quickly locate an item can pack and ship an order faster, or bring it out from the back room and complete the sale.
Set Minimums
If you have a consistent seller, a core product, or a raw material that you must have on hand at all times, consider setting reorder minimums. When you set a reorder minimum level in your software it will automatically notify you to reorder something when your stock is getting low.
This can prevent costly production delays. Having safety stock on hand also means you can get that sale.
Be Accessible to All Staff
Can any retail employee look up your stock on hand and immediately answer a customer’s question? Whether it’s through a handheld device or a point-of-sale, your business could require making your available inventory counts available to all staff.
If this is the case, it’s unlikely you’ll be able to use an old-fashioned spreadsheet. Inventory counts should be accessible to every employee who might need them. Even in a less-complex business, if only one person has access to the file and they’re on vacation, what then?
When choosing how you’ll manage your inventory, and which system to use, think about who might need to access it and when.
While setting up a system for managing inventory could require an investment of time initially, it’s worth it in the long run. When your accountant asks for a reconciliation of your electronic records to a physical inventory count there won’t be any surprises. You can keep customers happy and manage your cash flow at the same time.