For some, the word inventory only means one thing lots and lots of counting at the end of the year. If you have a big inventory there’s probably no better way than counting, physically, your stock on hand at the end of the year. Your auditor will require it.

If you’re a smaller business, it’s even more vital to have solid inventory management system in place as Inventory is a placeholder for money. You paid money for it, and when you sell it you’ll recoup that investment (and then some).

Holding inventory ties up cash which is why good inventory management is crucial for business. Just like having your finger on your cash flow pulse you have to strive to manage your inventory.

Inventory Management Saves You Money

Good inventory management saves you money. It’s critical that you take Inventory management seriously.

Manage Spoilage

If you’re selling a product that has an expiry date, like food, there’s a very real chance it will go bad if you don’t sell it in time. You don’t want to run out of the product but you don’t want to overstock and you want to sell it all before it goes bad. Acceptable amounts of Spoilage and Wastage must be factored into your management plan as its inevitable.

Dead Stock

Dead stock is stock that can no longer be sold because the demand that was once there, has faded or disappeared.  It could have gone out of season, out of style, or otherwise become irrelevant.

Save on Storage Costs

Warehousing is a variable cost, meaning it fluctuates based on how much you’re selling. Storage is a function of purchasing and goes hand in hand with your Sales and Mangement Strategy when it comes to buying, storing, selling and disposing of stock. When you store too much product at once or end up with a product that’s difficult to sell, your storage costs will rise adding costs to the product. Your Inventory Management Plan will save you a lot of money on storage costs.

Inventory Management Improves Cash Flow

A goog Inventory Management Plan will save you money as it improves cash flow. Inventory is money sitting on the shelf.

This is why it’s important to factor inventory into your cash flow management. It affects both sales (by dictating how much you can sell), and expenses (by dictating what you have to buy). Both of these things factor heavily into how much cash you have on hand. Better inventory management leads to better cash flow management.

When you have a viable Inventory Management System, you have a valuable management tool because it will help you know how much product you have on hand at any time, and based on sales, you can project when you’ll run out and make sure you replace it on time. Not before time, not after you run out but at exactly the right time.

Not only does this make sure you don’t lose sales based on low stock (critical for cash flow), but it also helps you plan ahead for buying stock so you can ensure you have enough cash to do so. Money spent on inventory is money that is not spent on other business needs. Manage it wisely.

8 Inventory Management Techniques

Inventory Management is highly customizable for every business but there is a basic formula that can be applied to almost any selling situation. The optimal system is different for each company, however, every business can be catered for using Financial Management techniques.

Regardless of the system you use, the following eight techniques to will help you improve your inventory management—and cash flow.

1. Set your Amounts-on-hand Levels

Good inventory management starts with setting “par levels” for each of the products you sell. Working with the minimum amount of product that must be on hand at all times. When your inventory stock dips below set levels, you know it’s time to order more and/or an order is triggered to your supplier.

The process to order the minimum quantity that will get you back on par. Par levels will vary by product based on how quickly the item sells, and how long it takes to get back in stock. Amounts-on-hand levels will also vary according to your warehousing and storage capacity and the discount you can get for ordering in bulk.

Although it requires research and decision-making up front, setting par levels will systemize the process of ordering; not only will it make it easier for you to make decisions quickly, it will allow you effectively use a team to manage it.

Par levels will change with conditions, over time. Your Inventory Management System will deem checks on par levels a few times a year to confirm they still make sense for your buyer and in terms of your profit and the market. If something changes in the meantime, don’t be afraid to adjust your par levels and your re-order amounts and/or suppliers as necessary.

2. First-In First-Out (FIFO)

“First-in, first-out” is an important principle of Inventory Management. It means that your oldest stock (first-in) gets sold first (first-out), not your newest stock. This is particularly important for perishable products.

It’s also a good idea to practice FIFO for non-perishable products to avoid product redundancy.

A good relationship with your suppliers

To be successful in Inventory Management you must be able to adapt quickly. Whether this means returning a slow selling item to make room for a new product, restock a fast seller very quickly, troubleshoot manufacturing issues, or temporarily expand your storage space, it’s important to have a good relationship with your suppliers. Cultivating a good working relationship with them means they’ll be more willing to work with you to help you solve your problems. Having a good relationship with your product suppliers goes a long way towards negotiating minimum order quantities too and don’t be afraid to ask for a lower minimum so you don’t have to carry as much inventory.

A good relationship isn’t just about being friendly. It’s about good communication. Let your supplier know when you’re expecting an increase in sales so they can adjust production. Keep them in the loop when you’re planning for a Sale or expect an increase in Sales so you are in sync with that product’s production. Your work and theirs demand a close relationship which is in both your interests’ to foster.

4. Contingency Planning

A lot of issues can arise related to inventory management. These types of problems can cause issues for unprepared businesses. For example:

  • your sales spike unexpectedly and you oversell your stock
  • you run into a cash flow shortfall and can’t pay the for the product you desperately need
  • your warehouse doesn’t have enough room to accommodate your seasonal spike in sales
  • a miscalculation in inventory means you have less or more product than you thought you’d have
  • a slow moving product takes up more of your storage space than allocated
  • your manufacturer runs out of your product and you have orders or empty shelves
  • a manufacturer discontinues your product without warning

It’s not a matter of if problems arise, but when. Figure out where your risks are and prepare a contingency plan.

  • How will you react?
  • What steps will you take to solve the problem?
  • How will this impact other parts of your business?

Remember that solid relationships go a long way to helping you solve your problems.

5. Regular Reconciliation

Regular reconciliation is vital. In most cases, you’ll be relying on software and reports from your warehouse to know how much product you have stock. However, it’s important to make sure that the facts match up. There are several methods for doing this. Reasons for doing this, for going to this trouble are to avoid further issues caused by problems such as

  • your sales spike unexpectedly and you oversell your stock
  • your warehouse doesn’t have enough room to accommodate your seasonal spike in sales
  • a miscalculation in inventory means you have less product than you thought
  • a slow moving product takes up all your storage space
  • your manufacturer runs out of your product and you have orders to fill
  • your manufacturer discontinues your product without warning
  • It’s not a matter of if problems arise, but when.Figure out where your RISKS are and prepare a contingency plan.How will you react?What steps will you take to solve the problem?How will this impact other parts of your business?Annual Physical Inventory CountA physical inventory is the practice is counting all your inventory at once. Many businesses do this at year-end because it’s a necessary part of the accounting process. Although physical inventories are typically only done once a year, it can be very disruptive to the business, needing to be done after hours.Spot Checking by Sample

    If you have a lot of products, you may want to do a spot check throughout the year. Choose a product and count it then compare the number to what it’s supposed to be. Not scheduling the check makes it even more accurate. It doesn’t replace the end of year count and it helps to prove your numbers are correct, that your systems are working properly and nothing unexpected is happening to your stock.

    Cycle Counting

    Cycle counting is a popular inventory counting solution that allows businesses to count a number of items in a number of areas within the warehouse without having to count the entire inventory. Cycle counting is a sampling technique where the count of a certain number of items infers the count for the whole warehouse.Instead of doing a full physical inventory, some businesses use cycle counting to audit their inventory.

    6. Prioritize With ABC

    The ABC approach rates inventory items from A to C, basing its ratings on the following rules:

    • A-items are goods which annual consumption value is the highest, 10-20% of total inventory items represent 70-80% of total inventory consumption. These are usually low priced products.
    • B-items are the interclass items, with a medium consumption value. That 15-25 % of annual consumption value typically accounts for 30% of total inventory items. These are usually medium-priced products.
    • C-items are, on the contrary, items with the lowest consumption value. The lower 5% of the annual consumption value typically accounts for 50% of total inventory items. These are usually the highest priced products.

    The annual consumption value is calculated with the formula:(Annual demand) x (item cost per unit)

    Items in category A require regular attention because their financial impact is significant but sales are unpredictable. Items in category C require less oversight because they have a smaller financial impact and they’re constantly turning over. Items in category B fall somewhere in-between.
    Some products need more attention than others.

    Use an ABC analysis to prioritize your inventory management. Separate out products that require a lot of attention from those that don’t. Do this by going through your product list and adding each product to one of three categories

    7. Accurate Forecasting

    A huge part of good inventory management comes down to accurately predicting demand. There are many variables. You’ll never know exactly what buyers want, when —but you can get close; you have to try. Here are a few things to look at when projecting your future sales:

    • trends in the market, fashion, supplier knowledge
    • last year’s sales during the same week
    • this year’s growth rate
    • guaranteed sales from contracts and subscriptions
    • seasonality
    • cultural influences ie pop culture

    Keep an open mind to continually try to create a more accurate forecast.

    8. Just in Time (JIT) or Dropshipping

    Having inventory arrive just before you sell it is the ideal situation. No carrying costs, no storage costs and its quite common amongst online businesses these days. Basically, you completely remove inventory management from your business.

    The downside is that quality control is sacrificed. Goods may be shipped without being checked as vigorously as you would like.

    Many wholesalers and manufacturers advertise dropshipping as a service, but even if your supplier doesn’t, it may still be an option. Don’t be afraid to ask. Although products often cost more this way, they do so because expenses related to holding inventory, storage, and fulfillment are less.

    Choose the right combination of inventory management techniques for your business. Implement them today before you run into problems and can’t restock or can’t afford to restock or have serious shortfalls in book-recorded amounts on hand or some other problem caused by a less than workable Inventory Management System.