How To Improve Inventory Management for Your Business

If your business sells physical products, you perform some type of inventory management. You may even use inventory management software to keep tabs on the stock in your warehouse. What you may not be aware of, however, is how inventory management can have a direct impact on your business's profitability.

Keeping too little inventory in stock can frustrate customers and cost you sales. On the other hand, overstocking causes cash flow issues and can negatively impact your cost of goods sold (COGS) numbers. These and other inventory control problems hurt your company's bottom line, raising expenses and cutting profits.

The only way to find the sweet spot between these two extremes is to learn how to improve inventory management. This guide tells you what you need to know and provides five inventory control techniques you can adopt right now.

Inventory management is the process of supervising and controlling the quantity, location, and cost of inventory items. It's a critical component of the supply chain process, ensuring that the correct amount of product is available when needed.

Comprehensive inventory management covers more than the amount of product currently stored in warehouses. Inventory management should also manage stock levels at distribution centers, stores, and other distribution points, particularly for retailers.

As per Gartner’s Market Guide for Retail Store Inventory Management Applications, these are currently the biggest challenges in inventory management [1]:

• Inventory management applications are often outdated. Isolated legacy systems make it difficult for accurate data to reach warehouse managers and other company leaders.

• Modern, cloud-based inventory management systems support helpful new technology such as radio frequency identification (RFID), internet of thinking (IoT), and smart shelves, but implementations and integrations can be complex.

• Retailers struggle with the impact of returns on their inventory management processes.

Before attempting to improve inventory management at your organization, it helps to know where things currently stand. Employ one of these popular methods to analyze your current inventory levels:

• ABC analysis: This popular analysis technique assigns one of three categories to your current stock: A (highest-value stock), B (stock that sells but isn't as valuable as A stock), and C (low-selling inventory). This method of prioritization provides a framework for inventory management.

• VED analysis: The VED analysis is similar to ABC, but stock is instead labeled as vital, essential, or desirable. You should remove any stock that doesn't fit in one of these three categories, according to the VED approach.

• Monitoring KPIs: Some common key performance indicators to regularly monitor include inventory turnover, average days to sell, and average inventory.

Here are the top five tips on how to improve inventory management:

1. Monitor demand closely to avoid stockouts

If customers visit your website or walk into your store and don't get the product they want, they'll buy it elsewhere. You'll lose sales to a competitor and leave a bad impression on customers. You should, therefore, always keep extra inventory—safety stock—to meet any sudden increase in demand. Here's how you can do that:

• Check your monthly sales data to identify products that have shown a consistent increase in demand over the past couple of months.

• For each identified product, use demand forecasting models that analyze historical and seasonal sales data to predict demand in upcoming months.

• Increase or decrease procurement based on expected future demand. As a rule of thumb, maintain more safety stock for products with higher expected demand.

2. Audit your inventory stock regularly

Maintaining accurate inventory data is essential to ensure inventory optimization. However, what's equally important is auditing the data regularly to keep it up to date. Use the following approaches to tally the actual product numbers with the count mentioned in your records:

• Physical inventory count: In this method, all your inventory items are physically counted to cross-check actual numbers with the numbers mentioned in your books. If you have multiple warehouses, conduct a count for each one. These checks are typically done once a year.  

• Inventory cycle count: Unlike annual physical counts, you perform cycle counts throughout the year—monthly, quarterly, semi-annually, or any time interval per your needs. All you need to do is divide your inventory items into separate categories and set an auditing schedule for each category. 

• Inventory spot check: Spot checks are real-time inventory audits for specific items to see if you have the required numbers in stock. Perform spot checks as many times as you deem necessary. This is in addition to physical and cycle counts. Spot checks help you keep tabs on fast-moving or high-demand products.

3. Build strong supplier relationships

Good supplier relationships go a long way toward ensuring smooth supply chain operations. For instance, if product demand suddenly surges, your supplier can help arrange stocks on short notice. A good rapport will also help you negotiate better prices when purchasing inventory in bulk.

To maintain a good working relationship with your suppliers, honor your contractual obligations by purchasing the promised products and paying on time. Repeated payment delays will create a bad reputation for your business and hurt supplier relationships. Furthermore, communicate regularly with your suppliers to have a clear understanding of responsibility and eliminate any confusion or disagreement.

4. Track product expiration by batch number

Products such as groceries have a limited shelf life and must be sold before expiration. To clear such items, follow the first in, first out (FIFO) method—i.e., sell the oldest products first. 

Use batch tracking to identify which products came in first. In this method, products with the same expiration date are grouped together and assigned a unique batch code. Inventory tracking by batch number helps identify inventory items sitting the longest on your shelves.

5. Invest in an inventory management system

The inventory management process is complex and involves various tasks. You need to maintain accurate records, process customer orders, create and send invoices, manage suppliers, and much more. Doing all of this manually is not just time-consuming but also prone to data entry errors. Inventory management software should be used to automate these processes and reduce the chance of human error.  

An inventory manager can automatically track existing inventory levels, raise purchase invoices for new and repeat orders, categorize products into multiple batches, create real-time reports, and monitor stock movement. It also lets you set automatic reorder points to help avoid stockouts.

The five techniques shared in this article will help you create an efficient inventory management strategy, but implementing all five at once can lead to complexities. Use a phased implementation approach by starting with one technique, implementing it, observing its impact, and then moving to the next technique.