Loss of sales and spiraling costs make poor inventory management a major problem.
Not having enough stock results in stock-outs. Orders come in, you don’t have the items the customer wants, and then a scramble ensues to expedite higher-priced replenishment—or, possibly even worse, you lose the sale to a competitor who has the desired stock available. Stock-outs carry opportunity costs: the opportunity to sell at the best price, and the opportunity to sell at all.
On the other hand, holding excess stock carries costs because the inventory you stock has to be warehoused, insured, secured against shrinkage, depreciated, and taxed as an asset. Excess items generally cost the business an additional 25% to 50% per year. Excess stock carries opportunity costs as well: the working capital tied up in unsold inventory is unavailable for other purposes.
Just-in-time inventory management
Just-in-time inventory management (JIT) is a strategy used to increase company efficiency by stocking product only as it’s needed for sale. Reducing the amount of inventory stored in the warehouse allows you to avoid product waste due to damage or expiration while decreasing the costs incurred housing and maintaining unsold inventory.
How to improve inventory management
Improving inventory management requires increasing command of your warehouse operations and the physical stock inside it. Here are four things you can work on right away that will improve your inventory management.
1. Evaluate your current practices.
Before you can make improvements, take an overall look at your current practices. Effective inventory management is purpose-driven. Understanding what each link in the chain does—and why—allows you to hone in on the specific aspects of your system that need improving. Try consulting with other members of your team to identify potential problem areas and start there.
2. Perform routine stock reviews.
A major part of inventory management is simply knowing how much of each item you have in stock. Tracking what you bought against what you sold won’t give you the full picture. Items can get lost, stolen, or damaged after they enter the warehouse—it’s unavoidable. And often, lost items go unreported until the right person takes notice. Remedy this problem by routinely reviewing your physical inventory for accuracy with your records.
3. Systematize stock replenishment.
Having a system in place for restocking your inventory ensures you’re never completely out of stock. It’s crucial for the smooth flow of product during busy periods. If you’re not using the just-in-time strategy, you should have a policy to replenish inventory at set levels. Whenever the stock of an item falls below a certain number, get the order in. Systematizing the replenishment process avoids having a lapse in product availability between the time you order and the time you receive the shipment.
4. Learn customer behavior.
Start keeping track of how often you’re restocking certain items and try to identify any trends or patterns. Depending on your industry, there may be seasonal or other outside factors that affect your product flow. Note the periods when customers are ordering more and when they’re ordering less. Having a solid handle on how your customers behave allows you to stay ahead of the dry spells and mad rushes so you can work on maintaining the right inventory balance at all times.