Use These Inventory Management Tips To Save Your Business MoneyJanuary 7, 2018 - 12 minutes read
5 Ways To Simplify Your Inventory Management Process
Inventory management isn’t front facing, like marketing is. It isn’t glamorous. But it is absolutely critical to your company’s well-being. Even if your business has a great marketing and sales team, and you are engaging with your customers on a regular basis, you can still lose money if you have poor inventory management. Businesses that treat inventory management as an afterthought find it difficult to compete, while those that take it seriously find that they have a leg up on the competition. So what is inventory management and why does it matter?
For small businesses and companies that are just starting out, good inventory management is vital because a misuse of resources can have drastic negative effects on the business. When your inventory management is strong, you’ll notice that you avoid dead stock, save money on storage expenses, and improve your cash flow.
Each of these is important. Dead stock is inventory that can’t be sold anymore, because the product has gone out of season (think winter coats in the summer time), gone out of style, expired, or become irrelevant for some other reason. Good inventory management helps companies avoid dead stock. Storage costs go up when you have to store more products, so when you have too much product stored at once or have a product that is hard to sell, then your storage costs will increase. Good inventory management helps to avoid this and save you money.
Remember that the products that are sitting in a warehouse are things that you have already paid for in cash. You are going to sell these products for cash eventually, but while they are in the warehouse, they haven’t become cash yet. They are simply products – shoes, clothes, bags – that you can’t do anything with. You can’t pay your rent in handbags or order more products in exchange for the shoes you already have. That is why it is critical to make sure you are looking at cash flow and inventory management at the same time, because you need to know how much of a product you can sell and how much you need to buy. You need to understand how all of these things affect how much cash you have in hand, so you have the necessary funds to properly run your business.
With a strong inventory management system, you won’t have to wonder how much of the product you have, you’ll know exactly how much. You’ll be able to predict when you’ll run out of a particular product, and you’ll be able to make sure it gets replaced on time. This helps you to plan to make sure you always have enough cash to run your business, while ensuring that your operations are moving as efficiently as possible. Here’s a closer look at some tips that will help you manage your inventory effectively:
Ensure that you set par levels
You never want to be in a position where you can’t fulfill orders because you don’t have enough product. It will force your customers to consider a competitor, only because you don’t have the requested product in stock. You can avoid this problem by setting par levels. Par levels are the minimum amount of product that you must keep on hand. If the inventory you are holding falls below the par levels, then you will have to order more. By ordering more of a product whenever you fall below the par level, you’ll establish a minimum quantity that you will always have. Your par levels typically vary from product to product, because different products have different levels of demand from customers, and different durations for how long it takes to get back in stock.
Setting par levels helps to simplify decision making. Instead of wondering how much to order, you’ll always know that you need to get back above par level.
Maintain strong relationships with your suppliers
One of the biggest factors in strong inventory management is maintaining good relationships with your suppliers. If you don’t have a good relationship with your supplier, then you might not be able to get products back in stock when necessary, or maybe you won’t get a fast enough response for the questions that you have. At times, you will need to return a product that isn’t selling, restock a certain product in a short period of time, or even expand your storage space. You need to have a partner that is willing and ready to address your problems.
If you have a good relationship with your supplier, you might even be able to negotiate minimum order quantities to get a better deal for your business. Make sure that you always maintain open lines of communication so that you know what to expect from your supplier. You’ll want to let them know, for example, when a product is selling fast and you are going to request to restock quickly.
Follow the first in first out rule
The first in first out rule, or FIFO, is one of the inventory management principles that helps businesses become more efficient. The FIFO rule dictates that the oldest inventory gets sold first, and not the newest inventory. When you sell your newest inventory first, old products can get worn out or design features can change. You don’t want to hold on to old products that will be harder to sell later on, because of certain changes. The good news is that this is a relatively simple change to make, although it is one that requires organization. You’ll need to make sure that old products stay at the front of the warehouse, while newer products are added to the back. That way, there will be no confusion and your business will automatically follow the FIFO rule.
There are plenty of problems that can pop up when it comes to your inventory. For example, you might find that demand for a product spikes and you don’t have enough product. Maybe the warehouse you are using doesn’t have enough space to accommodate spikes in demand. Maybe you miscalculated and have less product than you thought. Maybe your supplier runs out of a product while you still have open orders. Or maybe your supplier discontinues a product altogether without letting you know in advance. All of these problems are threats to your inventory management, and you need to figure out where your specific risks are. From there, you can draft a contingency plan. That way, you’ll have a plan in place when a problem arises instead of scrambling to try and solve it when it pops up.
Use forecasting to predict demand
Using forecasting to predict demand can help your business become more efficient. Nobody is perfect when it comes to market predictions, but you can use trends in the market, sales from last year during the same week, the growth rate you’ve experienced this year, promotions that are upcoming, your planned ad spend, the overall economic numbers, and sales from subscriptions and contracts in order to make a prediction about an upcoming demand. These predictions help you to know what products you’ll need to have in stock, and how much of each. Good forecasting will save your business time, effort, and money. You might not get everything 100% correct, but at least these factors will give you a blueprint with which to work with.
These tips will help you to get better control of your inventory management and stop losing money. When it comes to inventory, if you are inefficient, it implies that you are losing money that can be reinvested in your business. By setting par levels, maintaining strong relationships with your suppliers, and following the first in, first out rule, you start becoming more efficient relatively quickly. Contingency planning and using forecasting to predict future demands are more complex, but those steps will also help you to better manage your inventory and keep your cash flow strong.
If you are looking to manage your inventory more wisely and save money, then these tips will help you immediately. Remember that your inventory is money, and should be treated as such. And when your money isn’t spent effectively in the inventory space, that means that you are losing dollars that can’t be spent on growth, research and development, or marketing. By creating an inventory management strategy and sticking to it over the long term, you can make your business more efficient and increase your competitiveness within your industry. Your business can gain better control over its inventory today by implementing these tips.
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