Picture your favorite retailer.
If the answers are yes, chances are they probably have a good handle on their inventory management.
Inventory management — a crucial component of supply chain management — is the process of tracking stock levels and the movement of goods, whether it be delivering raw materials to manufacturers or fulfilling orders for finished products.
Inventory management is the fundamental building block to longevity, helping businesses to minimize costs, improve cash flow and boost profitability.
When your inventory is properly organised, the rest of your supply chain will fall into place. Without it, you risk a litany of mistakes like mis-shipments, shortages, out-of-stocks, spoilage (when dealing with perishable stock items), overstocks, mis-picks and so on.
Nonetheless, 43% of small businesses still don’t track their inventory, and, on average, U.S. retail operations have a supply chain accuracy of only 63% — which means many retailers aren’t taking advantage of the inventory management software available.
Unlike an enterprise resource planning (ERP) system, an inventory management system focuses on one supply chain process. They often come with the ability to integrate with other software systems — POS (point of sale), sales channel management, shipping — so you can build a personalized integration stack to meet the unique needs of your business.
Before building an inventory management plan, you’ll need to have a solid understanding of each step in the inventory management process. This is crucial to minimizing error and choosing the most effective inventory management software for your business.
To better visualize these eight steps, try creating an inventory process map like the one below. Track and review each step of the process in order to minimize out-of-stock and overstocked inventory.
Especially for larger apps with lots of moving parts, inventory management can become complex, encompassing several techniques and strategies. Let’s take a look at some inventory control techniques you may choose to utilise in your own warehouse.
Economic order quantity (EOQ) is a formula for how much inventory a company should purchase with a set of variables like total costs of production, demand rate and other factors. The formula identifies the greatest number of units in order to minimize buying, holding and other costs.
Minimum order quantity (MOQ) is the smallest amount of inventory a retail business will purchase in order to keep costs low. However, keep in mind that inventory items that cost more to produce typically have a smaller MOQ, as opposed to cheaper items that are easier and more cost effective to make.
This technique splits goods into three categories to identify items that have a heavy impact on overall inventory cost.
Just-in-time (JIT) inventory management is a technique in which companies receive inventory on an as-needed basis instead of ordering too much and risking dead stock (inventory that was never sold or used by customers before being removed from sale status).
Safety stock inventory management is extra inventory that is ordered and set aside in case the company doesn’t have enough for replenishment. This helps prevent stock-outs typically caused by incorrect forecasting or unforeseen changes in customer demand.
LIFO and FIFO are methods to determine the cost of goods. FIFO, or first-in, first-out, assumes the older inventory is sold first in order to keep inventory fresh.
LIFO, or last-in, first-out, assumes the newer inventory is typically sold first to prevent inventory from going bad.
The reorder point formula calculates the minimum amount of stock a business should have before reordering. A reorder point is usually higher than a safety stock number to factor in lead time.
Batch tracking is a quality control technique wherein users can group and monitor similar goods to track inventory expiration or trace defective items back to their original batch.
If you’re thinking about your local consignment store here, you’re exactly right.
Consignment inventory is when a consigner (vendor or wholesaler) agrees to give a consignee (retailer) their goods without the consignee paying for the inventory upfront. The consigner offering the inventory still owns the goods, and the consignee pays for them only when they sell.
Perpetual inventory management is simply counting inventory as soon as it arrives to deliver real-time insights.
It’s the most basic type of inventory management system and can be recorded manually on pen and paper or an Excel spreadsheet. Or, by using handheld devices that scan product barcodes and RFID tags, you may use an inventory system that automates inventory balances as soon as stock is moved, sold, used or discarded.
Dropshipping is an order fulfillment method in which the supplier ships products directly to the customer. When a store makes a sale, instead of picking the item from their own inventory, they purchase the item from a third party and have it shipped to the consumer.
Lean manufacturing is a broad set of management practices that can be applied to any business practice. Its goal is to improve efficiency by eliminating waste and any non-value-adding activities from daily business.
Six Sigma is a method that gives companies tools to improve the performance of their business (increase profits) and decrease excess inventory.
Lean Six Sigma enhances the tools of Six Sigma, but instead focuses more on increasing word standardization and the flow of business.
Demand forecasting is based on historical sales data to forecast customer demand. Essentially, it’s an estimate of the goods and services a company expects customers to purchase in the future.
Cross-docking is a technique whereby a supplier truck unloads materials directly into outbound trucks to create a JIT shipping process. This essentially eliminates warehousing, and there is little to no storage in between deliveries.
Bulk shipments is a cost efficient method of shipping in which a business palletizes inventory to ship more at once. To see some examples of effective inventory management in action, check out our BigCommerce Case Studies page, where you can find success stories from both B2C and B2B merchants.
Whether you’re a brick-and-mortar, ecommerce or multichannel retailer, inventory management is crucial if you want to seriously compete and give your customers the experience they want. Without implementing inventory management techniques, you’ll never get ahead.
Sign up with an inventory software that masters the basics of inventory management and acts as a catalyst for your growth, or choose an ecommerce platform like BigCommerce that allows you to centralize your store’s inventory management across all channels.
Especially with a topic as broad and complex as inventory management, there’s bound to be a slew of questions. Here are our answers to a few of them:
A growing business likely means increasing demand and higher overhead costs. Inventory can be costly, especially when you account for warehousing, damaged items and replacements, spoilage and quality control.
Here are some of the best ways to free up capital and minimize inventory management costs:
The proof is in the numbers when measuring the success rate of inventory management.
After you have implemented new inventory management techniques, compare data and KPIs from before and after. Some seasonality and inventory metrics include stockouts, mis-stocks, inventory turnover ratio, dead stock and order cycle time.
Have your level of mis-shipments, mis-picks or out-of-stocks decreased? What about dead stock? Have you eliminated the dead piles of inventory around the perimeter of the warehouse?
If you can answer yes to these, you’ve successfully conducted inventory management. As a result, you may expect to see better customer reviews, improved customer loyalty and even a boost in Amazon Seller Rating Performance.
Order management is the process of tracking customer orders, whereas inventory management is the process of tracking stock levels and the movement of goods, whether it be delivering raw materials to manufacturers or fulfilling orders for finished products.
Thus, inventory management is an important aspect of order management, since order fulfillment requires the right amount of inventory to be available. Luckily, inventory management systems can work to integrate the two, making it easier for business owners to keep products in stock and fulfill orders in a timely manner.
The goal of inventory management systems is to know where your inventory is at any given time and how much of it you have in order to manage inventory levels correctly.
They streamline and optimise inventory levels and maintain product availability across all sales channels, giving you a centralized view of your inventory and purchase orders. With the help of inventory management software, ecommerce businesses can free up and reallocate capital, minimize inventory costs and enhance customer satisfaction.
Ultimately, there is no one-size-fits-all inventory management system.
The key to choosing the best inventory management solution is to identify what features and functionality your business needs.
Do you need to track inventory trends? Are you looking for multi-location inventory management? Do you need to automate workflows and accounting?
Make a list of your business priorities and use it to narrow down your options.