Manage inventory effectively (Guide 2023) (2023)

Learning how to effectively manage inventory is critical for any business that sells physical goods. Everything related to your products, from timely ordering to correct receipt, tracking and storage, is part of inventory management. It's important that you get these things right because mistakes here directly affect your bottom line.

By minimizing lost sales, misstocking and over-ordering, inventory management increases your profits and may even reduce your taxes.

What is inventory management and why is it critical to success

Inventory management is the general term for the processes and procedures that affect the ordering, receiving, storage, tracking and payment for all the goods that a company sells.

Lagerstyring vs. Supply Chain Management

Inventory management is an important part of supply chain management, but the terms are not interchangeable. Supply chain management monitors the flow of products from raw materials and production purchases to final distribution. Inventory management is about capturing, tracking and storing the products you have and providing data to an up-to-date market.

For a small business or self-employed, supply chain and inventory management processes easily go hand in hand. However, it's important to know the differences as you grow and start outsourcing supply chain and warehouse tasks to staff or outside contractors.

Why it is necessary to learn how to manage inventory

Any business that sells products needs to manage the products properly to survive. If you don't have items in stock to sell, or if you can't find items to fulfill orders, you have no income. It's that simple.

However, inventory shortages are only the first obstacle caused by poor or no inventory management. It's very easy to order excess inventory if you don't keep a close eye on inventory, leaving you cash-strapped in the short term. Over time, inventory overruns also lead to lost profits due to expired, obsolete, and otherwise unsaleable inventory.

And let's not forget corporation tax. Too much unsold inventory at the end of the year equals higher property taxes and income taxes. Fortunately, you can avoid these obstacles by incorporating simple inventory management processes and tools into your business plan.

Inventory management in 7 steps

If you find that inventory-related tasks are taking up a large portion of your day, it's probably time to evaluate and restart. Good inventory management is more than just increasing inventory accuracy, it makes your day more efficient. When you have good processes and procedures in place, you will quickly find more time for business building activities.

Here's a seven-step approach to creating an inventory management plan with processes, controls and tools tailored to your company's unique needs.

1. Determine methods for purchasing and storing products

How you source and store the various products you sell determines how you manage your inventory. If you store all products in your own facility, your inventory management and processes are handled internally.

But if you store goods remotely in fulfillment centers or supplier warehouses, or if you use dropship suppliers, you need to connect your warehouse processes and data tools to their systems.

2. Define how you want to track inventory data

Whether you stock items yourself, use a fulfillment partner, or focus on dropship suppliers, tracking inventory data is critical to inventory management. Spreadsheets and inventory management systems are invaluable tools for this.

The inventory data you want to record and track generally includes:

• Domestic and Supplier Product Numbers:Product numbers are called stock-keeping units (SKUs), and many suppliers also use Universal Product Codes (UPCs).
• Quantities Available (QOH):the current stock amount per item in your store or facility
• Product storage location:allocated areas where goods are stored or displayed
• Supplier information:contact information, minimum order quantities, number of boxes and delivery times, also known as delivery times
• Product price:wholesale price per supplier and volume discounts
• Retail prices:current and promotional sales prices on goods

You can use a spreadsheet for simple inventory management needs, such as less than 100 items. However, integrated inventory management systems such as Square POS, Lightspeed or Clover are very affordable and make inventory management in small businesses easy from day one.

These systems streamline customer orders, inventory management, supplier information, purchase orders and warehouse receipts into a single system. Additionally, most connect seamlessly with retail point-of-sale (POS) systems, online sales channels, fulfillment centers and dropship partners for real-time inventory updates.

3. Create an internal SKU system

Creating an internal product SKU system is useful for quickly locating and tracking products during day-to-day operations. SKUs generally use a combination of letters and numbers arranged to represent the most important details about an item at a glance.

For example,BW066-3201_RASPis an internal SKU coded to communicate specific information about a home goods company.

• BW:is the internal vendor code for the BentleyWare vendor
• 066:is the internal category code of an array
• 3:is the internal material code for plastics to control appearance, handling and packaging
• 201:attached to the last four digits of the supplier's UPC to verify orders and warehouse receipts
• FIL:is the internal color code for the Raspberry

So with a glance at the SKU, employees know exactly what an item is and other important details like where it's stored and how it's displayed or shipped.

4. Organize storage areas

Having a place for everything and everything in its place makes all your storage-related tasks fast and efficient. If you manage inventory in your own facility or store, first organize and identify storage areas such as shelves, racks, and bins, then assign each product to a specific room.

This is where internal SKUs come in very handy. You can easily link specific areas of the shop floor, warehouse or warehouse using your SKU's supplier or category codes.

5. Use forecasts to order inventory

Forecasting predicts how much inventory you will need to meet upcoming demand. Of course, there are many factors involved such as the rate of product sales, upcoming promotions, market trends, seasonality and business growth to name a few.

The goal of forecasting is to have enough inventory on hand to meet expected sales for a specific period of time, such as 15, 30, or 60 days. Understanding product sales velocity is critical to forecasting, and inventory management systems help tremendously with forecasting tools built into purchase orders.

Understanding supplier lead times also plays a key role in forecasting. Reliable suppliers who ship quickly means you have less inventory and order more often, which helps cash flow. With suppliers that ship more slowly or buy seasonally, you have fewer and larger purchases, leaving more cash in inventory.

6. Set up procedures for stock receipt

Getting inventory shipped quickly is another important element in learning how to manage inventory. You may not sell or ship inventory that has not been properly inspected, displayed or displayed. Therefore, it makes sense to make inventory receipts a priority in your inventory management plan.

Inventory control must also be accurate, as errors directly affect your product quality data and lead to overorders, false orders, and unsold inventory. All this affects the final result.

The best procedure is to take inventory against your purchase order and open and check all boxes and containers to make sure everything is correct. Do not rely on box labels and packing slips from suppliers, as their staff can also make mistakes.

After receipt, the inventory must be stored quickly in the designated area. Alternatively, if it's excess inventory or seasonal items, you can record temporary locations in your inventory management system so you can find it when needed.

When placing or storing new inventory, you can use methods such as "last in, first out" (LIFO) or "first in, first out" (FIFO). In general, it is smart to use the FIFO method, which stores new products behind older inventory, so that you sell older products first. This is especially important for perishable foods and items with an expiration date, such as cosmetics.

7. Monitor inventory levels

Most inventory-based businesses perform an annual inventory count, called an audit, for tax purposes. This compares a physical count of all items in stock with the on-hand (QOH) shown in the data files. However, discrepancies found in annual censuses are almost impossible to detect and explain, as it can take months for the errors to become apparent.

This is where intermediate metrics like cycle counts and random checks fill the gap. These help you detect and correct small inventory inaccuracies before they become major problems.

• Number of cycles:Divide your entire inventory into units that count on a rotating schedule. Cycle counts can be performed by supplier, product category, warehouse location or whatever suits your business.
• Control samples:Periodic counts of some items help identify random errors in inventory, ordering, storage, or theft.

In short, when in doubt, measure. Keeping a close eye on inventory is key to improving your cash flow, detecting theft or other loss issues, and improving your bottom line.

The best tools for inventory management

There are many financial inventory management tools on the market. Some are even free, like Square POS. Most of these systems provide everything you need to manage inventory. Plus, they seamlessly connect sales channels and fulfillment sources into one system, so you're prepared for growth.

Here are some of the best inventory management tools to consider:

• Square POS:free basic POS system with a full suite of inventory tools
• Serie:advanced storage system, ideal for multi-warehouse and manufacturing operations
• Shopify point of sale:POS system for Shopify online, retailers and multi-channel sellers
• Speed ​​of light:advanced POS system for large merchants in several stores
• Piano:online checkout and warehouse system that integrates with many e-commerce solutions
• eHopper:designed for restaurants with inventory management at the ingredient level
• Monday. dk:a step up from spreadsheets with inventory tools and reorder alerts

It boils down

It's easy for startups and small business owners to buy and sell products without an inventory management plan. But if it goes on too long, inventory management deficiencies quickly become headaches that cost you both customers and profits. By putting these seven essentials in place, you'll be well on your way to learning how to manage inventory and—best of all—making money from day one.