Why should your inventory management be more effective? According to a Zippia survey, 43% of small businesses don’t track their inventory. They're missing the crucial benefit of inventory management: it’s key to freeing up cash to invest back into your business.
Importantly, an effective inventory management process saves you time, improves your cash flow, satisfies your customers, and makes your inventory decisions data-driven.
“How can inventory management improve your business?” explores why inventory management is key to generating growth, and the various strategies and benefits to successfully manage your inventory.
SHORTCUTS
In order for your business to sustain growth and profitability, inventory management is crucial. Inventory management encompasses all procedures and processes involved in organizing, purchasing, delivering, tracking, and storing inventory.
The aim of inventory management is to have the right amount of product, at the right time, and in the right place, while maximizing your company's resources. Successful inventory management is cost-efficient as it optimizes your storage, purchasing, and organization of inventory.
By applying a strategy to manage your inventory you can meet customer demand without holding onto excess stock. Through maintaining consistent procedures, you can cut down on waste and importantly, improve your cash flow.
Several methods are available for managing inventory, which you can tailor to your specific industry, product type, and business model. Keep reading to learn how you can implement these strategies in your business.
For your business to be successful, you need to have cash available to invest back into your business. Also, you need consistent and timely access to goods you are selling to your customers. Poor inventory management ties up your cash, overwhelms your storage facilities, causes late deliveries to customers, and wastes employee time.
The longevity of your business depends on healthy cash flow, positive customer satisfaction, productive employees, and being adaptable to uncertainty. Assessing your inventory management before it causes problems will be essential in avoiding future bottlenecks to growing your business.
Inventory management can aid in your business's success by helping to reduce costs, eliminate inefficiencies, save time on inventory administration, prevent theft, provide trend insights, and make better stocking decisions.
Inventory can be divided into four main types. Understanding the type(s) of inventory you manage will help determine the most effective inventory management method(s).
Raw materials are basic materials used to produce goods. This includes: parts, intermediate components, ingredients, and materials needed to make and/or repair goods.
Raw materials are derived from natural materials, and divided into three main types: plant/tree-based, animal-based, and mining-based.
Raw materials are either direct or indirect to the production of goods.
Work-In-Progress (WIP) are unfinished items in the process of being made to sell.
Maintenance, repair, and operations (MRO) are items needed for the production process but are not a component of the product. MRO also includes materials for handling, storing, and sending products.
Finished goods are items ready to sell to customers.
Just-In-Time Management (JIT) involves receiving inventory on an as-needed basis. It's also known as lean manufacturing, which aims to eliminate waste and non-value adding activities in order to improve efficiency.
With JIT, you keep the lowest stock possible, or make goods once orders come in. It's most commonly used for ecommerce or businesses who sell made-to-order and/or offer customization to the customer.
Implement this strategy by either accurately forecasting customer demand on a timely basis and stocking for those numbers, or receiving inventory/creating products as orders come in.
Benefits:
Challenges:
Materials Requirement Planning (MRP) is a method used to determine raw materials, labor, and other resources needed to produce goods at a specific time and place. This method creates a smoother production cycle which keeps up with demand and is often used in manufacturing companies.
Three steps to implement MRP:
Benefits:
Challenges:
Economic Order Quantity (EOQ) is an equation which determines the optimal amount of inventory to purchase per order, to minimize inventory costs. By identifying the ideal number of units to buy, while minimizing holding costs, the EOQ method aims to reduce excess inventory.
To calculate EOQ, use the following equation:
EOQ = √(2DK/H)
The EOQ number you calculate is the ideal amount of inventory to purchase per order to minimize order and holding costs. However, you must decide when to place your orders.
Benefits:
Challenges:
Days Sales in Inventory (DSI) is a measure of the average time, in days, it takes for your company to turn inventory into sales. This formula provides insight into the liquidity of your inventory.
The lower the number of days it takes for your inventory to become sold goods the more efficient your company is. It's important to note the ideal number of days is relative to the industry you are in, so you should make industry-specific comparisons.
To calculate DSI, use the following formula:
DSI = (average inventory/COGS) x 365
By finding this figure, you can understand how long it takes for inventory to leave your storage facilities. This information helps make better decisions about when to order more inventory, how much inventory to store at once, and provides insight into your company's performance.
Benefits:
Challenges:
The ABC method categorizes inventory into three groups based on their profitability:
This method is based on the Pareto Principle, which states 80% of results come from only 20% of effort. As recommended by BusinessNewsDaily, you should prioritize managing of the 20% of goods bringing in 80% of your revenue.
After categorizing inventory, focus on managing A products. These products require the most attention for ordering, stocking, and shipping. You can efficiently store and stock inventory by prioritizing A items, followed by some B and a little amount of C items.
This method is ideal for companies with limited time and resources; as it allows them to focus on inventory generating the most revenue and leaving the fastest.
Benefits:
Challenges:
When should you re-evaluate your current inventory management practices? It may be time to implement changes if you:
With an effective system to manage your inventory you should be able to answer most, if not all, of the following questions:
Use ERP software designed for inventory management.
Automate your inventory management system.
Leverage real-time data & analytics to optimize inventory management.
Use demand planning tools to forecast accurately.
Integrate mobile technology for real-time inventory updates.
Engage customers and suppliers on payment terms.
Encourage customers and suppliers to migrate from paper to digital payments.
Embrace modern technology solutions.
Unlock trapped cash.
Reduce liquidity risk.
To implement effective inventory management it is important to select reliable and timely suppliers. Depending on your suppliers, it may be beneficial to make bulk orders or to order less inventory more often to improve cash flow.
Determine how you will be alerted to order more inventory: do you have inventory management software notifying you, or will physical counts by employees alert you?
Additionally, it is vital to optimize how inventory is stored. Establish clear processes and procedures for organizing and receiving orders, and ensure these methods are consistent and standardized across all your storage facilities. Lastly, to prevent theft of inventory, ensure your warehouse security is up-to-date.
To determine how to track your inventory, consider the amount of current inventory and data you need to ensure your business runs smoothly. If you have fewer than 100 items, a spreadsheet might suffice, but as your business grows consider using an inventory management software.
Creating tracking tags for inventory helps you know where your inventory is at all times. These tags can include the item's supplier, colour, product type, lot number, and more.
A Stock Keeping Unit (SKU) system uses a unique combination of letters and numbers (typically eight digits long) assigned to different product types. With a SKU system you can track how much of each product type you have, making it easier to know when to order more.
SKUs quickly identify unique characteristics of each product type. In a retail environment, letters and numbers on a SKU will let employees know what type, colour, size, and/or brand a product is. For example: a SKU for a men's large polo shirt from brand X in blue might read as XXX-PO-BLU-03.
In your storage facilities, you should use zoning techniques by assigning each product type to a specific area. Additionally, to minimize errors and confusion keep raw materials, work-in-progress, MRO, and finished goods in different areas.
To make your inventory tracking informative, consider which inventory is being moved out first. You can determine which inventory is leaving first using one of these three methods:
Once you've settled on a method, you can organize inventory accordingly to ensure the inventory you want to leave first will be sent first.
As explained by Forbes Advisor, ideally, you should maintain just enough inventory to cover predicted sales over a certain period. To determine necessary inventory, use forecasting; estimating inventory needs using past sales, current promotions, season, and market trends.
Use forecasting to decide how much inventory to order and when. This helps reduce storage space and free up cash flow.
Once you have decided how to organize your inventory, create consistent procedures for receiving it.
Best practice is to receive stock against the inventory order receipt to ensure all ordered items arrived and are in acceptable condition. After inspecting and sorting goods, store them in their designated places.
While stocking new inventory, use shelving methods like LIFO, FIFO, or FEFO.
Keeping track of your inventory will help you determine your reorder points for each good. Deciding how to track inventory levels is based on two methods:
To determine when you should physically count your inventory, consider the following options:
To achieve better inventory management:
An inventory management software can help you better keep track of your inventory and give you data-driven insights. If you are looking for an inventory management software look for the following features:
Overall, choose an inventory management software which best matches your business needs and offers your visibility into your inventory trends and organization.
Efficient cash flow and inventory management are intertwined in the success and growth of your business. Being ineffective at inventory management and/or struggling to maintain appropriate cash flow levels can have a detrimental effect on your business.
Software programs optimize your inventory management and allow you to stay on top of your cash flow. They increase visibility and tracking of your purchases, enabling you to make better inventory decisions. Plooto allows you to keep track of all your bills in one place, and integrates with existing accounting software, making it easier to answer questions about what was purchased, how it was paid for, and how it affected cash flow.
You can streamline your process of inputting invoice details by using Plooto Capture, which automates the recording of invoice details by extracting them using best-in-class Optical Character Recognition (OCR) technology. Once reviewed, bills are published into your accounting software and a payment is created on your Plooto dashboard. Then, once payments are made, Plooto automatically syncs payment information back to your accounting software - saving you the headache of manually updating bill payments.
Implementing an effective and consistent strategy to manage your inventory promotes growth and success of your business. Inventory management software can aid in real-time tracking of inventory, provide data insights, and help to make the inventory management process more efficient.
Streamlining your inventory management frees up cash to invest back into your business, improves customer satisfaction, and enables data-driven decisions.
That's it from us! We hope you've been able to learn about the importance of inventory management and different ways to implement its methods.
Inventory management encompasses all procedures and practices involved in organizing, purchasing, delivering, tracking, and storing inventory. You can implement numerous inventory management strategies to help you manage your inventory.
Inventory can be divided into four types: Raw materials, Work-In-Progress (WIP), Maintenance, Repair, and Operations (MRO), and finished goods.
Just-In-Time (JIT) inventory management involves keeping the lowest stock possible and/or receiving/creating inventory once orders are made. This method is also known as lean manufacturing, which aims to eliminate waste and non-value adding activities.