How Inventory Management Can Make or Break Your Business
Your inventory is one of the most essential parts (if not the most essential part) of your business, which is why managing it efficiently is critical. You should always have enough supply available to meet demand. While stopping here might suggest ordering as much product as possible so that you never run out, it’s also important to never have too much. Having excess product, known as overstocking, can be costly and detrimental to your cash flow.
It’s a delicate balance to find, and it’s different for every business. Failing to find this balance can break you, but establishing it as soon as possible will help you grow. With a combination of best practices and tools—like software for inventory management—you can oversee your inventory as effectively as possible.
Why inventory management is critical
So, why exactly is maintaining a balanced inventory so imperative? Well, when you overstock, you’ll experience a budget deficit. It costs money to keep everything in storage. Unsold product will count as a loss if you cannot find a way to sell it within a reasonable time frame. If you don’t, then the goods will remain in storage or need to be thrown away.
A minor loss won’t hurt you—it’s to be expected, so don’t panic if you don’t sell all of your products every month—but exceeding your projected sales by too much, too often will work against you. Plus, it’s not like the manufacturer will refund you for perfectly good items that you failed to sell.
Conversely, the consequences of not having enough product are obvious. If you are not prepared to meet the demand for your goods, then you’ll face a lot of disappointed customers and need to present them with those dreaded words: sold out. Hopefully, customers will try to purchase from you again when you have more—but they may also go to another business that is not out of stock, and being sold out too regularly could damage your reputation. Also, understanding your product line is important to increase your revenues and market share. However, failing to accurately price your products can do more harm than good to your business.
Inventory management is the practice of proportioning the amount of product you want to have available (whether you are brick-and-mortar or virtual) compared to how much you expect to sell. Finding the right ratio will improve the cost control of your operations.
Techniques to manage inventory
When it comes to managing inventory efficiently, then it helps to have a plan. Jean Scheid from Bright Hub advises that you have at least a 30 days-over supply of inventory, lest you find yourself with a shortage. Some industries are different, of course—such as food, where products have expiration dates that are sooner rather than later—but prioritize the products that sell well and order or create less of those that don’t.
There are a few named techniques that work for many businesses when it comes to actually managing a warehouse. They include:
First in, first-out (FIFO):
The first batch of inventory sent to your warehouse should be the first sold when a customer orders from that product grouping. For example, say you sell organic fruits. When a customer buys a batch of peaches, then the peaches you send are from the few that arrived most recently. If you maintain this practice, then you won’t have peaches rotting that become un-sellable. This technique is particularly important for businesses that sell perishable goods, and you can offer discounts if your products are close to their sell-by dates.
Always better control (ABC):
With this strategy, categorize your products into groups A, B, and C. A consists of expensive goods that you hold a lot of stock in. B products are priced and stocked more moderately, while C items are inexpensive and more limited. With these categories, you can prioritize the investments you wish to make.
A few tips to apply
When it comes to managing your warehouse, make sure that your most popular items are the most accessible (i.e., closest to the door or packaging station). Don’t forget quality control, either; you do not want to sell your customers faulty goods.
It’s also difficult to understate how valuable inventory management software can be, especially when it’s combined with an electronic point of sale system. With such a tool, you will always know how much of any product you currently have on-hand because the system automatically deducts products from the database whenever customers make a purchase.
You can keep a sharper eye on the rate at which particular products are coming in and going out. Many software options even generate insightful reports regarding your sales history and future projections, so you can use data to decide how much inventory to order next time.
Inventory management can make or break a business, so it’s crucial that you understand the demand for each of your products and calculate how much you can expect to order, manufacture, and sell. What are some inventory management methods that you exercise?