Inventory Management Techniques Every Online Business Needs to Know
Does Your Ecommerce Store Exceed Shopper Expectations?
GET YOUR WEBSITE SCORE
I'm ready to start building or already have my own ecommerce store.
I have questions and would like guidance from an ecommerce expert.
TALK TO SALES
Picture your favorite retailer.
In every business, inventory is always one of the assets that account for a large proportion of the total asset value. Although warehouse management activities are not in many cases, if they are not closely inspected, huge waste will be ignored. Therefore, build an inventory management system being stock to request for all business. In this article, we will discuss types of inventory management systems and how they will impact businesses.
What is inventory management?
Table of ContentsShow More
1. What is inventory management?
2. The importance of an inventory management system in business
3. Types of inventory management systems
4. Odoo Inventory Management – Maximize Your Warehouse Efficiency
1. What is inventory management?
Inventory management refers to how a business manages its current stock, including how it tracks and manages the number of products as they move in, across, and out of the business.
It encompasses making sure the right levels and quantities of stock are available at the right time and in the correct locations. It can also involve processes such as optimizing warehouse layouts and identifying redundant inventory.
2. The importance of an inventory management system in business
An inventory management system is a system that helps keep track of inventory levels, orders, and the storage of goods in the inventory of each business. The process of building an inventory management system is defined from the moment the raw materials enter the warehouse until the moment the finished product is released out of stock.
Accordingly, this work requires closely monitoring the business operations of the business, as well as predicting the fluctuation of goods in the market to coordinate the inventory, making appropriate storage policies, and minimizing the risks of inventory. Building an inventory management system offers many benefits within an organization:
Ensure that the quantity of inventories fully meets the market demand, avoids disruption in the supply.
Minimize potential risks from inventory such as goods stagnation, product quality reduction, and expiry date. From there, increase the ability of capital turnover of the organization.
Balance the stages in the business: Purchase – Reserve – Production – Consumption.
Optimize inventory to increase business efficiency and reduce investment costs. From there, it helps businesses improve their competitiveness compared to their competitors.
3. Types of inventory management systems
That being said, the inventory management system is only as strong as the manner in which you use it.
The inventory control by the experts who produced the program is worth additional time and resources. Work with them to ensure that you use the appropriate strategies and features to make the most of your buck.
Take a look at certain different types of inventory management systems that you can use in your own warehouse.
Types of inventory management systems
3.1. Perpetual inventory control system
Details on the continued availability of various types of goods and stores purchased, released and their balance in hand is vital for a large business organization. The perpetual inventory management system enables the producer not to experience the physical stock inspection process but to know the availability of certain products and stores.
The right information about the receipt, issue, and materials in hand are maintained under this scheme. The main aim of types of inventory management systems is to provide accurate details at all times about the stock level of each item.
Until it is followed by an ongoing inventory management system to review the total inventory of units 3-4 times annually by collecting 10-15 items daily against physical inventory that takes place once a year, the system for continuous inventory control will not be effective.
The products are rotated so that the operation of the continuous stock collection is normally carried out more efficiently, by someone other than the storekeeper. This will help to check that the storekeeper works as well. The performance of the inventory control system depends on the correct implementation of the ongoing inventory verification system.
Advantages of perpetual inventory control system
Quick assessment of the closing stock:
Whether it’s a local boutique or a large enterprise, ask yourself a couple questions:
Do they consistently have the products in stock that you want?
Do they carry goods both in-store and online?
If the answers are yes, chances are they probably have a good handle on their inventory management.
What is 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 organized, 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.
Process of Inventory Management
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.
Goods are delivered to your facility. This is when raw materials and subcomponents for manufacturers or finished goods for consumers first enter your warehouse.
Inspect, sort and store goods. Whether you use dropshipping, cross-docking or a different warehouse management system, this when inventory is reviewed, sorted and stored in their respective stock areas.
Monitor inventory levels. This may be through physical inventory counts, perpetual inventory software or cycle counts and helps minimize the chance of error.
Stock orders are placed. Customers place orders either on your website or in-store.
Stock orders are approved. This is when you pass the order to your supplier, or it may be automated through your POS system.
Take goods from stock. The necessary goods are found by SKU number, taken from stock and shipped to the manufacturer or customer.
Update inventory levels. Using a perpetual inventory system, you can automatically update inventory levels and share with necessary stakeholders.
Low stock levels trigger purchasing/reordering. Restock inventory as needed.
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.
Inventory Management Techniques
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 utilize in your own warehouse.
Economic order quantity.
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.
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.
Category A is your most valuable products that contribute the most to overall profit.
Category B is the products that fall in between the most and least valuable.
Category C is for small transactions that are vital for overall profit but don’t matter much individually.
Just-in-time inventory management.
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.
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.
FIFO and LIFO.
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.
Reorder point formula.
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.
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.
here was a time when inventory management could be done by writing down your numbers in a spreadsheet or even a notebook. But given how retailers have expanded their businesses to multiple channels, sell an even more diverse line-up of products, and offer various fulfillment options, that system will no longer cut it.
As time and technology — and the retail industry — have evolved, a more sophisticated approach to inventory management isn’t just a good idea — it’s become a necessity. While there is no one-size-fits-all approach to inventory management, there are certain approaches that have proven to be successful that you can apply to your business to decrease your stress and increase your bottom line.
What Is Inventory Management and Why Is It Important?
Inventory management (sometimes referred to as store inventory control0 is a way of keeping track of your business’s stocked goods and monitoring their weight, dimensions, amounts, and location. The aim is to minimize the cost of holding inventory by letting you know when it’s time to replenish products, or buy more materials to manufacture them.
Inventory management is one of the most important things you can do as a merchant, as it ensures you have enough stock on hand to meet customer demand. When not handled properly, you can lose money on potential sales that can’t be filled and/or waste money by stocking too much inventory.
But when done right, inventory management can save you money in a variety of ways. If you sell something with an expiration date, inventory management helps you avoid unnecessary spoilage. This also helps you avoid dead stock — those items that might not expire, but that can go out of season or style.
Finally, inventory management saves you on warehousing costs. Storage costs increase when you have too much product to store at once or if you’re stuck with a product that’s difficult to sell, so avoiding this saves you money.
Looking for an inventory management system that can do all of the above? Vend’s powerful stock control capabilities can help keep your inventory in check. Take a tour of our inventory software or take a free Vend trial to see how.
Essential Inventory Store Control Methods
Inventory is product that you’ve already paid for, but when it’s sitting on your shelves or in a warehouse, it’s not making you any money. That’s why effective inventory management can lead to better cash flow, and increase your bottom line. And while there are many different inventory management methods to use, the more common store stock management techniques are listed below.
Establish Par Levels
The first thing you should do is establish par levels of your products, which are the minimum amount of product that must be on hand at all times.
You know it’s time to order more when your stock dips below that predetermined level, which will vary by product. These levels are based on how quickly the item sells and how long it takes to get back in stock, and in a perfect world, you will order the minimum quantity that will get you back above par — eliminating excess stock while preventing a lack of in-demand product.
While establishing par levels can take a little bit of research and up-front work, having them set will systemize the process of ordering and help you make quicker decisions. Remember that things can change over time, so check your par levels throughout the year and make any necessary adjustments.
Did you know that Vend lets you set re-order points to ensure that you always have adequate stock? Learn more about how to set the right re-order points here.
First-In, First Out (FIFO)
First-in, first-out (FIFO) is one of the more straightforward approaches to stock control and is when a retailer fulfills an order with the item that has been sitting on the shelf the longest. Basically, your oldest stock gets sold first — not your newest stock.
While this is absolutely critical for perishable items to avoid spoilage, it’s also good practice for non-perishable items. Things like packaging design and features often change over time, and the last thing you want is to end up with something obsolete that you can’t sell.
FIFO often results in a lower cost of goods sold number because older items generally carry a lower cost than items purchased more recently, due to potential price increases. With a lower cost of good sold number, you can have higher profits.
Last-In, First Out (LIFO)
On the other end of the spectrum, we have last-in, first out (LIFO) which is the opposite of FIFO. This inventory management method assumes the most recently acquired product is also the first to be sold, and the most recent pricing is used to determine the value of the merchandise that has been sold.
While most retailers opt to use the FIFO method, some choose LIFO based on the assumption that prices are steadily rising. This means the most recently-purchased inventory will also be the highest cost, which will yield lower profits, and, subsequently, lower taxable income.
Manage Supplier Relationships
There’s more to having a good relationship with your suppliers than simply making friendly conversation. It requires clear, proactive communication because being adaptable is part of successful inventory management. Things can quickly change, and having the ability to return a slow selling item to make room for a new product, quickly restock a fast seller, troubleshoot manufacturing issues, or temporarily expand your storage space depends on how willing your suppliers are to work with you on solving any potential issues.
Keeping the lines of communication open means they can let you know if a product is running behind schedule or informing them when you’re expecting an increase in sales so they can adjust production. If you have a strong relationship with your suppliers, this can lead to stronger sales.
Use ABC Analysis
This inventory management technique helps you to prioritize products, categorizing each item under one of the following:
A (high-value products, low sales frequency): They will require the most attention because these items have a greater financial impact on your business. However, they’re harder to forecast because they’re not in high demand.
B (middle-value products, average sales frequency): In terms of priority, these products fall somewhere in the middle.
C (low-value products, high sales frequency): These products move off the shelves more quickly and easily, making them easier to predict. Because they generate sales that are less impactful to your bottom line, they require the least amount of attention and maintenance.
This method helps you understand which products are sitting on the shelves for too long. “A” products are the most valuable and should be closely monitored to make sure you don’t run the risk of over- or understocking. With “C” products, which are more self-sustainable, make sure they’re making you money and that it’s worth it to keep selling them. Finally with “B” items, simply monitor them to see if there’s the potential for them to turn into “A” or “C” products.
Utilize Open-To-Buy (OTB) Inventory Planning