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Selecting the right inventory management techniques for your business is no easy task.
Why? Because even though inventory lies at the heart of all growing brands — for small-to-medium businesses — managing it across multiple channels, multiple locations and multiple product categories can be overwhelming. In fact, the faster you grow, the more difficult it becomes.
That’s why setting the right foundation from the start is so critical. To help you do that, we’ve outlined the (1) techniques, (2) process, and (3) best practices.
The following are the most common inventory management techniques used by businesses of all sizes — along with the inventory holding costs and potential profits of the most prominent.
Keep in mind that you’ll probably need a mix of different techniques to develop the most comprehensive strategy for your business.
This method banks on the notion that it is almost always cheaper to purchase and ship goods in bulk. Bulk shipping is one of the predominant techniques in the industry, which can be applied for goods with high customer demand.
The downside to bulk shipping is that you will need to lay out extra money on warehousing the inventory, which will most likely be offset by the amount of money saved from purchasing products in huge volumes and selling them off fast.
ABC inventory management is a technique that’s based on putting products into categories in order of importance, with A being the most valuable and C being the least. Not all products are of equal value and more attention should be paid to more popular products.
Although there are no hard-and-fast rules, ABC analysis leans on annual consumption units, inventory value, and cost significance. Categories typically look something like:
Items of high value (70%)
and small in number (10%)
Items of moderate value (20%)
and moderate in number (20%)
Items of small value (10%)
and large in number (70%)
The key is to operate each category separately, particularly when selective control, allocation of funds, and human resources are required.
Cycle counting involves counting a small amount of inventory on a specific day without having to do an entire manual stocktake. It’s a type of sampling that allows you to see how accurately your inventory records match up with what you actually have in stock.
This method is a common part of many businesses’ inventory management practices, as it ultimately helps ensure that customers can get what they want, when they want it, while keeping inventory holding costs as low as possible.
Backordering refers to a company’s decision to take orders and receive payments for out-of-stock products. It’s a dream for most businesses but it can also be a logistical nightmare … if you’re not prepared.
When there’s just one out-of-stock item, it’s simply a case of creating a new purchase order for that one item and informing the customer when the backordered item will arrive. When it’s tens or even hundreds of different sales a day, problems begin to mount.
Nonetheless, enabling backorders means increased sales, so it’s a juggling act that many businesses are willing to take on.
As a general rule, the bigger the item value (physically and monetarily), the more “delivery tolerance” you get from customers.
If you’re a small retailer, it may not be feasible to risk overstocking. In this case, you might consider labeling the item’s “Buy now” button as “Pre-order” or “Get yours when it comes back in stock.” This creates a reasonable expectation for customers that it will take a bit longer to arrive.
Alternatively, some businesses run with a “no-stock” approach which involves taking only backorders until they’ve generated enough sales to then place a large bulk in order with a supplier.
Just In Time (JIT) inventory management lowers the volume of inventory that a business keeps on hand. It is considered a risky technique because you only purchase inventory a few days before it is needed for distribution or sale.
JIT helps organizations save on inventory holding costs by keeping stock levels low and eliminates situations where deadstock - essentially frozen capital - sits on shelves for months on end.
However, it also requires businesses to be highly agile with the capability to handle a much shorter production cycle.
If you’re considering adopting a Just in Time inventory management strategy, ask yourself the following:
Consignment involves a wholesaler placing stock in the hands of a retailer, but retaining ownership until the product is sold, at which point the retailer purchases the consumed stock. Typically, selling on consignment involves a high degree of demand uncertainty from the retailer’s point of view and a high degree of confidence from the wholesaler’s point of view.
For retailers, selling on consignment can have several benefits, including the ability to:
While most of the risk in selling on consignment falls on the wholesaler, there are still a number of potential advantages for the supplier:
If you consider selling on consignment — as either a retailer or wholesaler — set terms clearly regarding the:
This inventory management technique eliminates the cost of holding inventory altogether. When you have a dropshipping agreement, you can directly transfer customer orders and shipment details to your manufacturer or wholesaler, who then ships the goods.
Similar to dropshipping, cross-docking is a practice where incoming semi-trailer trucks or railroad cars unload materials directly onto outbound trucks, trailers, or rail cars.
Essentially, it means you move goods from one transport vehicle directly onto another with minimal or no warehousing. You might need staging areas where inbound items are sorted and stored until the outbound shipment is complete. Also, you will require an extensive fleet and network of transport vehicles for cross-docking to work.
An inventory cycle count means counting a small amount of inventory on a specific day without having to do an entire manual stocktake. In other words, it’s a type of sampling technique that allows you to see how accurately your inventory records match up with what you actually have in stock on the shelves.
Cycle counting is a key part of many businesses’ inventory management practices, as it ultimately helps ensure that customers can get what they want, when they want it, while keeping inventory holding costs as low as possible.
How often you do a cycle count and how much stock you count will depend on the types of products you sell and the resources at your disposal. For example, you might do an ABC inventory analysis to determine your class A products, and do a cycle count on your most high-value items more frequently than your other items.
Regardless of your specific approach to inventory counts, here are some best practices to follow:
There are three main types of inventory cycle counts that you can use:
Using the company’s proprietary inventory system, on-site logistics managers can view their store’s stock levels and monitor any discrepancy in expected sales (unique to each store) versus inventory levels.
For example, let’s say that IKEA’s MALM bed frame has been selling much slower than expected. In this case, the logistics manager can manually check and confirm the stock of the bed frame. This means logistics managers only need to cycle count if the system catches a discrepancy.
While there’s no one-size-fits-all approach to inventory management, the most successful businesses utilize tools to make inventory optimization faster, easier, and more accurate.
Instead of managing inventory manually or periodically, cloud-based inventory and order management solutions equip you to manage inventory perpetually with real-time updating and counts.
The benefit to you and your customers is having the right inventory in the right place at the right time. It also allows you to monitor sales channels, locations, and currencies within a company-wide single source of truth.
Let’s break that down into three pillars of an inventory management strategy …
To join the ranks of the world’s fastest-growing businesses, you must have the inventory visibility necessary to trust your inventory quantities and locations.
It’s next to impossible to manually update and synchronize inventory counts and locations if you have a multichannel strategy. Lacking visibility often results in out-of-stocks, deadstock, and preventable returns. Your inventory quantities and locations must offer an honest accounting of stock quantities and locations.
In addition, transparency challenges you with unvarnished data that inform crucial decisions. For instance, it can significantly improve fulfillment and delivery accuracy which reduces returns.
Enhanced inventory visibility also helps you better track your inventory turnover ratio — a key metric in assessing the health of your business. Such insight can inform product pricing adjustments and future re-stocking decisions to improve profitability.
Inventory management should make life easier, not harder.
The right process takes the guesswork out of scaling your business and minimizes the risk of mistakes. With real-time visibility at your fingertips, you can make data-informed decisions about:
And you can do it all with the speed needed to stay competitive in an evolving market. Combining quantitative and qualitative modeling melds historical sales data with current economic and market forces to better predict demand and allocate inventory accordingly.
With the right system, you’ll have access to the insights necessary to make smarter, more profitable decisions.
Focus on growth, instead of tedious day-to-day tasks.
With automation, you’ll never run out of inventory as you’ll receive automated backorder notifications and replenishment reports in real-time. For instance, if the quantity of an item in stock drops below the reorder value, automation can instantly alert you that the item needs to be reordered.
With the right integrations, replenishment may be automated too or the automated restock alert can be checked against predictive demand forecasts and then reordered.
With multi-location inventory, automated rule-based order routing can match orders with stock in warehouses that are closest to the customer. Routing orders in this manner saves time, expedites fulfillment, and reduces shipping costs.
Finally, automation can also help you improve the customer experience and increase retention with automated order confirmation emails. The system you select may integrate with your email service provider, which positions you to update customers regarding the status of their shipment and sends emails with discounts, upsell, and cross-sell opportunities.
As you grow and finesse your inventory management strategy, it’s essential to choose a system that can integrate multiple links in your supply chain — from pure stock control to shipping, eCommerce, logistics, accounting, and beyond.
The aim is to integrate and automate as many of your supply chain components as possible to improve accuracy, speed, and cost.
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It’s common to see best practices loosely defined by phrases like “operational excellence” or “world-class.” But these descriptions are little more than fluff.
True best practices are achieved through continuous improvement, tying each operation to customer value, and a collective mindset that embraces technology to create sustainable success.
Here are ten that can guide you…
The ability to effectively leverage large amounts of data used to be cost-prohibitive for smaller organizations. Today, the best strategies surround collection, aggregation, and insights from a single source of truth … yours.
Inventory management software has changed the game by allowing SMBs to:
The ultimate guide to becoming a data-informed merchant
Whether you’re a large-scale organization or a small-to-medium business, data-informed decision making can help you drive results that will improve your business and, ultimately, your bottom line.
Inventory turnover calculates how many times specific goods have been sold and reordered during a given period. It’s a ratio that first divides COGS by average inventory:
Then, divide your inventory turnover rate by 365 to determine how many days it normally takes to turnover that inventory:
Maximizing inventory turnover can dramatically increase profitability by helping you determine the right reordering points and thereby reduce holding costs as well as spoilage.
To maximize turnover, you have to know what inventory to prioritize. Not all products are created equal.
Highlighted above, ABC inventory management places products into three categories based on their value to your business. It’s an adaption of the Pareto principle: 80% of all effects come from just 20% of causes.
Applied to inventory:
As you assign merchandise to each category, align value with your company’s goals. Normally, this is profitability but it can also be increasing market share through gross sales.
With demand volatility at an all-time high, there is no universal standard, which is why demand planning and inventory optimization are hard to get right.
Traditionally, accurate demand forecasting has been easier said than done. Extensive product ranges, multiple sales channels, promotional offerings, price changes, and external factors like seasonality have made it difficult to get an accurate picture of future growth. Especially if you rely on spreadsheets and trawling through volumes of historical data.
Today, however, automated demand forecasting is available to businesses of all sizes, thanks to intelligent inventory management systems.
Sales and inventory forecasting for small business
Take the guesswork out of business planning and goal-setting.
Workflow automation refers to systematizing part or all of a workflow to improve efficiency and lower human dependencies. In essence, it means utilizing technology to centrally manage a complex web of working parts while reducing the need for manual labor.
Automating part or all of a supply chain has huge potential benefits — namely, freeing up your people while increasing productivity and accuracy. In fact, a report by McKinsey predicts that automation could accelerate the productivity of the global economy by between 0.8% and 1.4% of global GDP annually.
With the right system, workflow automation is achievable for any business:
Automation and the supply chain
Find out how automation can be used to accelerate the speed at which your products move through the supply chain, reducing costs and growing your bottom line in the process.
From raw materials to finished goods, batch and expiry date tracking allow you to see where each “collection” of inventory has come from, where it’s going, how much of it is left, and when it will expire.
Batch and expiry date tracking are critical for several reasons:
Find out how batch and expiry tracking software can help you manage and keep track of product movements.
First-in, first-out (FIFO) is an accounting discipline that — just as the name implies — means the first items in your inventory are also the first ones to leave: i.e., oldest items go first. Last in, first-out (LIFO) is the opposite: that is, the newest items take priority.
If you sell perishable items, then FIFO is a necessity. Otherwise, you’ll end up with spoiled inventory that you’ll have to write-off as a loss.
For non-perishable goods, LIFO is usually the default because you won’t need to rearrange warehouses or rotate batches. The only caveat is if you sell both non-seasonal staples alongside highly seasonal products, in which case you’ll need a mixed approach.
As an inventory management best practice the key is being intentional, disciplined, and organized around the approach that works for you.
Far too many businesses let incoming shipments or their 3PL decide for them.
Pipeline inventory refers to any item that’s been purchased but hasn’t yet reached its final destination. For example, if a wholesaler buys stock from an overseas manufacturer, that stock is considered pipeline — i.e., within the business’ supply chain — during the shipping and receiving process.
Optimal pipeline inventory can be calculated by multiplying lead time — how long it takes between ordering and receiving stock — by demand rate — how many units you sell between orders:
Keeping your pipeline flowing smoothly is one of two safety measures to ensure you don’t run into stockouts.
Decoupling inventory — or decoupling stock — refers to goods that are set aside in case of a hitch or stoppage in production. This inventory is also known as safety stock.
Decoupled inventory provides a safety net to mitigate the risk of a complete halt in (1) production if one or more components are unavailable and (2) order fulfillment in the case of stockouts.
Considering pipeline inventory and decoupled inventory together is important because they help you strike the right balance between risk and cost. Maintaining that balance makes for effective inventory management and sustained growth.
Inventory kitting — also known as “product bundling” — groups, packages, and sells separate items as a single unit. When a kitted or bundled item is purchased, an inventory system should automatically link each individual item to the sale.
Bundling can benefit both B2C and B2B businesses by:
Here’s how to get started bundling:
If you sell packs made up of multiples of products, you can quickly set up different pack sizes for existing products using a pack size variant. This essentially creates a new product from your bundled products.
If you want to make a product bundle of different variants (such as blue pajamas and yellow slippers), you can easily do so with bundles functionality.
You also have the option of assigning product variants to batches for tracking. This helps to ensure you have enough stock on hand of each variant.
The truth is even the best techniques, the best process, and the best best practices have their limits outside of a centralized inventory management system. Otherwise, you’ll find yourself fighting an uphill battle.
This is even more vital when it comes to pillars like real-time visibility, automation, and smart insights…
All your products, customers, orders and transactions synced and secure in the cloud.