There was a time when stock management could be accomplished by writing down your numbers in a spreadsheet or even a notebook. But given how retailers have expanded their businesses to multiple stations, sell a much more varied line-up of goods, and provide various fulfillment options, that system will no longer cut it.
As time and technology — and the retail sector — have evolved, a more sophisticated approach to inventory management is not only a good idea — it has become a necessity. While there’s absolutely no one-size-fits-all approach to stock management, there are particular approaches that have been shown to be successful which you could apply to your company to reduce your stress and boost your bottom line.
What’s Inventory Management and Why Is It Important?
Inventory management is a means of keeping tabs on your company’s stocked goods and tracking their weight, measurements, amounts, and location. The purpose is to minimize the cost of holding inventory by allowing you to know when it is time to replenish merchandise, or purchase more materials to fabricate them.
Inventory management is one of the most important things you can do as a merchant, as it ensures that you have sufficient stock on hand to fulfill customer demand. When not handled correctly, you may get rid of money on potential earnings that can not be filled or waste money by stocking too much inventory.
But when done correctly, stock management can help save you money in an assortment of ways. If you sell something using an expiration date, stock management will help you avoid unnecessary spoilage. This also helps you prevent dead inventory — those things which may not expire, but that can go from style or season.
Ultimately, inventory management saves you on warehousing costs. Storage costs increase when you have too much merchandise to put away at once or if you are stuck with something that’s tough to market, so preventing this saves you money.
Essential Inventory Control Methods
Inventory is product that you have already paid for, but if it is sitting on your shelves or in a warehouse, it is not making you any money. That’s why successful stock management can lead to better cash flow, and boost your bottom line. And while there are lots of different inventory management approaches to utilize, the more common inventory management methods are given below.
Establish Par Levels
The first thing you should do is establish par levels of your goods, which are the minimum amount of product that has to be available at all times.
You know it’s time to purchase more when your inventory dips below that predetermined amount, which will vary by product. These amounts are based on how fast the product sells and how much time it takes to get back in stock, and in a perfect world, you may order the minimum amount that will return over level — eliminating surplus stock when preventing a deficiency of in-demand product.
While establishing level levels can take a small amount of upfront and research work, having them set will systemize the process of ordering and allow you to make faster decisions. Do not forget that things can change over time, so check your level levels during the year and make any necessary adjustments.
First-In, First Out (FIFO)
First-in, first-out (FIFO) is among the simpler approaches to inventory control and is when a retailer fulfills an arrangement with the product that’s been sitting on the shelf the longest. Basically, your earliest stock gets sold — not your new stock.
Although this is absolutely critical for perishable things to prevent spoilage, it’s also great practice for non-perishable products. Things like packaging layout and attributes often change over time, and the last thing you need is to wind up with something obsolete you can not sell.
FIFO often leads to a lower cost of goods sold amount because older things generally carry a lower cost than items bought more recently, as a result of potential price increases. With a lower cost of good sold amount, you can have greater profits.
Last-In, First Out (LIFO)
On the opposite end of the spectrum, we’ve got last-in, first out (LIFO) that is the opposite of FIFO. This inventory management method assumes the most recently obtained product is also the first to be marketed, and the latest pricing is used to ascertain the value of the product that’s been sold.
While most retailers elect to use the FIFO method, some select LIFO based on the premise that prices are steadily increasing. This implies the most recently-purchased inventory are also the maximum cost, which will yield lower profits, and, subsequently, lower taxable income.
Manage Supplier Relationships
There is more to getting a good relationship with your suppliers than simply making friendly conversation. It requires clear, proactive communication because being elastic is part of effective stock management. Things can easily change, and having the capability to return a slow selling thing to make room for a new item, quickly restock a quick seller, troubleshoot manufacturing problems, or temporarily expand your storage space is dependent upon how willing your providers are to work with you on resolving any possible difficulties.
Keeping the lines of communication open means they can allow you to know if a product is running behind schedule or telling them when you are expecting an increase in sales so that they can adjust production. In case you’ve got a strong relationship with your providers, this may cause stronger sales.
Use ABC Analysis
This stock management technique helps you to prioritize products, categorizing each item under one of the following:
- A (high-value goods, low sales frequency): They will require the most attention since these items have a greater financial impact on your company. However, they’re more difficult to forecast because they are not in high demand.
- B (middle-value goods, average sales frequency): In terms of priority, these goods fall somewhere in the middle.
- C (low-value goods, high sales frequency): These products move off the shelves more quickly and easily, which makes them easier to forecast. Because they generate sales which are not as impactful to your bottom line, they need the least amount of care and upkeep.
This procedure makes it possible to understand which products are sitting on the shelves for a long time. “A” products are the most precious and must be closely monitored to be sure that you don’t run the risk of over- or understocking. With”C” goods, which can be more self-sustainable, make sure they are making you money and that it is worthwhile to keep selling them. Eventually with”B” items, simply track them to see if there is the possibility for them to become”A” or”C” products.
Use Open-To-Buy (OTB) Inventory Planning
Open-to-buy (OTB) stock planning, also referred to as product management, helps retailers stock the ideal quantity of the correct products at the perfect time by showing the difference between how much stock is available and how much is required. Since it breaks it down by class, this could allow you to get more product-specific insights.
The OTB formulation shows you how much stock you can afford to buy and is:
Planned sales + sales and markdowns + planned end-of-month stock — beginning-of-month stock
This is normally a monthly calculation, and will allow you to move more merchandise quickly as it requires less commitment and investment. This is a particularly effective technique for retailers that often bring in goods at the beginning of the year and put them available at the end of the season, in addition to those who simply need to keep stock fresh and exciting for their clients.
Get a Contingency Plan
With retail, it is merely a matter of time until you are confronted with a challenging matter. Whether it’s having sales spike suddenly and you oversell your inventory, a item is suddenly discontinued, or the maker runs from your merchandise and you’ve got orders to fill — you need to expect you will have some type of problem to manage.
It is possible to mitigate the harm by identifying possible risks and preparing a contingency plan. Determine what issues may arise and determine how you are going to react, what measures can be taken to fix the issue, and if/how other components of your business may be impacted.
Accurately Predict Demand
A crucial part of inventory management is having the ability to forecast demand — that is no easy task. There are an infinite number of variables and you can never be totally certain what’s coming, but it doesn’t mean you can not attempt to get as near as possible. When attempting to project future earnings, here are a few things that you can consider:
- Market trends
- Last year’s sales at the same time
- Growth rate of the present year
- The entire condition of the market
- Guaranteed earnings from contracts
- Planned promotions and ad spend
The Bottom Line
Using a proper inventory management system in place, you can do everything from lowering your overall costs and predicting future sales to preparing your company for the sudden and keeping your business profitable.
There is no”one best” technique, but by trying a few of the ones we discussed here, you can more easily learn what works best for you.
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