5 Steps to Better Inventory Management

Inventory management is a challenge for any small business owner selling a product, especially as inventory typically represents 45%-90% of all expenses. Ultimately, it comes down to one question: How much do I order and when? Order too little, too late and you don’t have enough supplies to meet demand. This can result in the loss of sales to competitors and damage to your brand if it’s a regular occurrence. Order too much, too early and you risk losing money due to carrying costs.

The simplest answer to this question is to predict demand. However, inventory management is more than just predicting demand. It is an ongoing cycle that, with the right process, can help you decrease costs and increase your profits. Use this five step approach to improve the efficiency of your small business’s inventory management:

Step 1: Inventory Planning | The key to inventory planning is knowing when goods will be bought and sold. An ideal inventory management system would arrange for the arrival of new goods at the same moment the last item has been sold or used. Accurately predicting demand over time helps to optimize economic ordering costs.

Step 2: Establish Order Cycles | Whenever you have a product that you know will be consistently used or sold in a specific amount of time, orders to replenish that product should be made with the same regularity. Establishing an ordering cycle that automatically replenishes these goods every week, month, or period saves you time, avoids stock-outs, and minimalizes costs for both you and your suppliers.

Step 3: Balance Inventory Levels | How well you balance inventory is a major factor between healthy profits and loss. To efficiently manage merchandise levels consider both market and budget related factors. Ask yourself, is the inventory correct for the market?; is the inventory turning over properly?; and what is the ideal inventory level for a typical business in this industry? These questions will help you determine the correct inventory levels to ensure that demand is met and that you are still making a profit.

Step 4: Review Stocks | Good inventory management means ensuring that merchandise is fresh and current. Items sitting on the shelf as obsolete inventory are simply dead capital. Keep your inventory up-to-date and remove any obsolete merchandise as quickly as possible to limit losses and costs.

Step 5: Follow-up and Control | Periodic reviews of the inventory to detect slow-moving or obsolete stock and to identify fast sellers are essential for proper inventory management. Taking regular and periodic inventories must be more than just totaling the costs. Any clerk can do the work of recording an inventory. However, it is the responsibility of key management to study the data and review the items themselves in order to make correct decisions about the disposal, replacement, and discontinuance of different segments of the inventory base.

Use this five step process to improve inventory management in your business. It takes time, but you will feel the benefits of inventory control immediately as sales and profits increase — worthwhile goals to work towards in any business.

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