As a small business owner, it’s very important for you to utilize resources to run and manage your stores efficiently. Inventory must be one of the most complicated problems that you need to deal with: How much should I have in stock for this item? Is this item selling well or am I losing money due to excess stock? How to make sure we will have enough stock when the customers want it? Do I need to track stock every day, every week, every two weeks or every month?
There are so many questions that can make you feel really overwhelmed. Today, we will discuss how to manage inventory effectively for small businesses like yours and look at some best practices for managing inventory.
What is Inventory Management?
Inventory management is the part of supply chain management that aims to always have the right products in the right quantity for sale, at the right time. It can help you avoid running out of stock, spending too much money on stock that sells slowly and takes up space in warehouse or store. You can also make sure that your products are sold in time to avoid spoilage or obsolescence.
In short, managing inventory effectively can help you reduce the costs of excess inventory and maximize sales.
Common Inventory Problems
There are 3 types of inventory problems that most retailers, including small and big corporates, run into: excess stock, out of stock, and inventory shrinkage.
While you want to take advantage of discounts and free shipping by buying in large quantities, excess stock may cause many problems. You don’t want a large part of your business’s money to be held up in merchandise, and you risk losing money if you can’t sell the products quickly enough, especially for season products like Christmas cards and ornaments. In addition, there are costs for storing excess stock.
Short of stock
On the other side, having too few of an item on hand can lead to a loss of potential customers. A study by GT Nexus showed that 63% of shoppers would choose to buy the product from a competitor or didn’t buy it at all if they found out what they wanted to buy was out of stock.
A reduction of inventory in a retail store is often referred to as shrinkage. For retailers, shrinkage is an increasing problem. According to the National Retail Security Survey by NRF, an average shrink rate is 1.44%, which cost US retail about $49 billion in 2016.
According to a study in 2014, the top 4 sources of inventory shrinkage are:
1. Shoplifting (38%)
2. Employee theft (34.5%)
3. Paperwork errors (16%)
4. Supplier/ vendor fraud (7%)
When products are damaged, it is also considered a type of shrinkage. It is a very costly problem for retailers and can result in a loss of profit as you still have to pay the cost of inventory while not being able to sell it.
Businesses often apply security methods like installing cameras to prevent and increase the prices to cover these potential losses, but it’s very likely to make customers unhappy if they are price sensitive.
While shrinkage is something that you need to factor into your bottom line, you don’t have to simply absorb it as a cost of doing business. It is advisable to talk to your tax adviser to understand if you can deduct the casualty and theft losses related to inventory on your personal or corporate tax return. In terms of shoplifting, you can also apply a few easy ways to prevent shoplifting before it happens.
Inventory Management Techniques
Fine-tune your forecasting. Accurate forecasting is critical. You can project sales better through time based on factors such as previous sales data, market trends, predicted growth and the economy, promotions, marketing efforts, etc.
Use the FIFO approach (first in, first out). Products should be sold in the same chronological order as they were purchased or created to avoid being damaged, or out of date and can’t be sold. You can find the best way to apply FIFO in the supermarket: they put the newer products in the back and the older ones are at the front, so it’s more likely that the older ones will be sold first.
Adopt an inventory management software. Your inventory management software should be connected to your website and Point of Sale, and synchronize inventory in real time with them, which means stock levels are automatically adjusted every time you make a sale. By that way, you can track your stock levels at all times with least effort. Also, It should let you set up stock alerts when an item is low or out of stock so you can place purchase orders in time.
Some businesses use tracking inventory spreadsheets to manage inventory but they are not an effective inventory management tool. You have to update the stock manually, which has many disadvantages: it’s time-consuming, the inventory information is not updated in real time (because it can’t communicate with your website and POS) and it increases the possibility of human errors during the process. Also, spreadsheets can’t scale with your business.
Audit your stock. Even if you have the best inventory management software, periodically you still need to count your inventory to make sure what you actually have in stock matches what the inventory reports show. You can examine your products at the end of every year or use ongoing spot-checking for products that sell fast or have stocking issues.
Don’t forget quality control. It’s important to ensure that all your products are in good condition. During stock audit, you should have a checklist for signs of damage and correct product labeling so you and your staff could examine the quality of the products.
Identify low-turn stock. If an item hasn’t sold at all in the last 6 to 12 months, you probably should stop stocking it and consider special discount or promotion to sell it. Excess stock wastes both space and money.
Remember your ABCs. Many businesses find it helpful to have tighter controls over higher-value items by grouping inventory items into A, B, and C categories.
Products in Category A have the largest annual consumption value (usually the most expensive ones) and make up the smallest percentage of inventory. Products in Category C are the opposite: have the lowest annual consumption value (the least expensive ones) and make up the largest percentage of inventory. Category B products are in between. Annual consumption value is annual demand multiplied by a product’s cost.
The chart below shows an example of how businesses can break this down:
|Classification||Percentage of Inventory||Annual Consumption Value|
Inventory Management Solution
A good inventory management software can assist you in streamlining the process and help you track your inventory in real time. Good inventory management software should:
– Keep track of your inventory in real time
– Enable multi-warehouse inventory management, tracking inventory across several stores or warehouses
– Help you forecast demand in order to prevent product shortages and excess stock. Notify you of low-stock items and place purchase orders.
– Provide inventory reports
– Offer quick and painless barcode scanning to speed up intake
1. An online website on Magento 2
2. Embedded ERP by Boostmyshop to create different warehouses and manage inventory at each one
3. ConnectPOS, Magento 2 POS in physical stores, that synchronizes inventory in real time with Magento 2 and Embedded ERP
According to Robin, Managing Director of Dampfi, the integrated system has enabled them to manage multi-warehouse inventory efficiently and create a seamless shopping experience for their customers. You can find more details about Robin’s sharings in Dampfi: Seamless Transition from Online E-cigarettes Store to Retail Stores.
*ConnectPOS is integrated with Boostmyshop Embedded ERP to help you manage multi-warehouse inventory at ease. You can view the stock at different stores and warehouses and transfer stock directly from POS.
ConnectPOS is the retail pos system in the ecosystem. ConnectPOS gladly presents a comprehensive training guide ebook tailor-made for cashiers in the retail business.