For every business selling tangible products, keeping track of all its resources is extremely important. One of these resources is its inventory, also called stock. Inventory can include finished products, partly manufactured products, or the materials you use to manufacture your offerings.
Managing inventory properly is essential for small businesses because it can bring significant benefits, such as better capital and cash flow management, greater adaptability, reduced stock issues such as over or understocking, and improved customer satisfaction.
Read on for some inventory management tips to give your small business the push it needs to gain these benefits, cut carrying costs, and successfully meet consumer demand.
What is inventory management?
Inventory management refers to the process of tracking inventory in all its stages and forms, from pre-production to post-manufacturing and sales, so that you have the right amount of everything at the right time. Depending on the type of business you run, your inventory can include raw materials, work-in-progress goods, and finished products.
The term can mean different things for different businesses. For example, a small-scale business that resells manufactured items, such as a dropshipper or retail store, would need to manage its inventory differently from a small business that manufactures its own products. For the latter, inventory management could be a more exhaustive process with a greater number of factors to consider.
Contrary to a popular misconception, service providers can also be required to manage inventory. A service-based business could have no physical stock to manage at all. Instead, service inventory can include hotel room bookings, salon appointments, or subscriptions for a SaaS product.
The eventual objective of inventory management is to help you achieve that perfect balance between demand and supply without having an inventory surplus or shortage. Otherwise, small businesses such as yours could suffer heavy losses.
The inventory management process is extensive, and there are many bases to cover if you want to manage inventory perfectly for your small business. However, these five inventory management tips, when done right, will take you a long way.
1. Implement a proper inventory management system
A 3PL warehouse management software can help companies keep track of their inventory levels, monitor sales, predict future demand, avoid stockouts or overstocking, and ultimately drive business growth.
Many small business owners believe that high-tech inventory management systems are only for large-scale enterprises, but that’s not true. Small businesses can – and should! – consider investing in affordable ERP or MRP software specially designed for small-scale setups. There are quite a few popular inventory management systems available for small businesses, with a range of features for tracking inventory, managing sales, and generating reports with simple yet sophisticated visualisations. These systems automate many of the manual processes businesses use to track inventory and provide real-time data that companies can rely on for better decision-making.
Many businesses are moving towards a direct-to-consumer model, i.e., instead of selling to wholesalers or other intermediaries, they set up their independent websites (e.g., via Shopify or WooCommerce) to sell directly to consumers. Utilizing advanced inventory management software can further streamline this direct-to-consumer approach, offering real-time tracking and analytics. They use various tools or apps for accounting, shipping, marketing, and other business functions. Thus, they now need modern inventory management tools that can easily integrate with the abovementioned business essentials and get a general overview of their business operations, where all the data is integrated into a single point of truth.
When selecting an inventory management system for your business, it is vital to do your research so you can find a product that best fits your unique business needs. This often means exploring the many options available in the market and comparing their features, scaling capacity, pricing, support, and integrations. Once you have chosen a system, you must also train your staff to use it right so they can take maximum advantage of its features.
2. Conduct regular inventory review and analysis
Regularly reviewing inventory levels and analysing data can help businesses pick up on hidden trends and identify opportunities for cutting costs and increasing efficiency. You can conduct inventory reviews via physical counts or computerised methods.
There are three standard methods of carrying out inventory review:
- Periodic inventory involves taking a physical count of all inventory items at fixed intervals, such as weekly, monthly, quarterly, or yearly.
- Continuous inventory, also called perpetual inventory, involves ongoing, real-time monitoring and tracking to stay aware of inventory levels at all times.
- Cycle counting is a combination of the above, where a business counts a small subset of its inventory, often daily, such that all of the inventory has been counted at least once over a designated period.
Which strategy would suit your business best depends on the size and scope of your inventory and the nature of your business. For example, a small retail store with a relatively low inventory turnover or seasonal products might only need an annual review. A manufacturing company with a high volume of fast-moving raw materials, on the other hand, might do better with continuous inventory review.
Inventory reviews are also useful for determining carrying costs. These usually include costs of warehouse storage, insurance, financing, and labour. On top of that, holding inventory also ties up capital. There are several to cut these costs, such as clearing out slow-moving or obsolete inventory and renegotiating contract terms with suppliers.
3. Establish a reorder point system
A reorder point is a predetermined level of inventory for a specific item at which a business will place an order for more of that item.
By setting the right reorder point, small businesses can help prevent the following:
- Dead stock: inventory that is no longer in demand
- Stockout: when a business runs out of a particular item
- Overstocking: when a business has too much inventory on hand
All of these situations can lead to wasted inventory, lost sales, and capital and cash flow issues. According to a recent study by NielsenIQ, stockouts cost retailers in the US around $82 billion in lost sales in 2021. Setting accurate reorder points can help small businesses avoid such losses by ensuring they have the right amount and type of inventory available at the right time.
To accurately calculate reorder points, you need to consider various factors, such as:
- Delivery lead times (the time it takes to receive an order from a supplier)
- Demand or sales
- Safety stock (buffer or cushion inventory kept on hand to avoid a stockout in case of an unforeseen hike in demand)
Additionally, small businesses should regularly review their reorder strategy and factor in historical data and usage patterns to ensure their approach aligns with their business goals, needs, and demand patterns.
4. Collaborate closely with suppliers
One of the most significant advantages of building close, lasting relationships with suppliers is improved communication and order fulfilment. You can ensure that they are always aware of when your inventory is running low and can make timely deliveries if you run into unexpected demand hikes and are bordering on a stockout.
Another key reason why it is important to build trust with your suppliers is that it opens avenues for you to negotiate better prices and more favourable payment terms. By getting better deals on the products you purchase, you can successfully cut down carrying costs and eventually boost profitability.
By establishing close communication with suppliers, small businesses can foster a certain degree of loyalty and thus improve supplier performance. This can lead to more reliable delivery times and a better overall relationship with suppliers in the long term.
5. Integrate technology into your inventory management process
There is little you can do these days without relying on technology in some way or another. Integrating technology into your inventory management process can significantly impact the efficiency and accuracy of your operations.
With the right technology, you can automate many tasks in your inventory management process, such as regularly tracking inventory levels, gathering large amounts of data, generating complex reports, and reordering stock timely. This can save your business time and money and help you make better business decisions in the short and long run.
You can integrate many different types of technology into your inventory management process. Some examples include barcode and RFID systems, which are usually helpful in tracking individual products and their locations; IoT devices, which are great for monitoring stock levels in real-time on the go; and AI/ML algorithms that can help you accurately predict demand and optimise your inventory levels accordingly.
One of the most important reasons to augment your inventory management process with tech as early on as possible is that it allows you to scale your operations as your business grows. With manual processes, it can already be quite challenging to catch up with the growing demands of a growing business. Undergoing digital transformation at a later time can pose even more problems. Tech-infused mechanisms can thus effortlessly handle large volumes of data and transactions, making it easier for you to manage your inventory as your small business expands.
Remember that it is crucial to choose the right tools for your specific business. A small-scale retail store might not need the same level of technological integration as a large warehouse. Consider your particular needs, such as the size, scope, and complexity of your business operations, so you can choose technologies specifically designed to meet those needs.
There are several ways to optimise your inventory management process, including conducting regular inventory reviews, building lasting relationships with your suppliers, and investing in software and technologies that are best suited to fulfil your business needs.
In the long run, these inventory management tips will prove significantly rewarding for your small business. By perfecting your inventory management process, you can improve cash flow and capital management, accurise demand management, automate and streamline your workflow, and reduce the various stock-related costs.