Inventory is one of the largest assets in a goods-based business, and even if your business is small-scale, chances are that a significant part of its capital is invested in inventory. In a goods-based business, your success depends on inventory being managed well. In this article we look at what best practice looks like in inventory management.
Determine Your Business’ Needs
Although many aspects of good inventory management will look similar between businesses, each business will be faced with different challenges, so ‘best practice’ inventory management can only ever be an approximate guide. The most important aspect of best practice in inventory management is to determine your business’ inventory needs – what is it that your business needs from its inventory management function? Does your inventory management software need to support barcoding? What about support for eCommerce or mobile sales platforms?
Track Inventory in Real Time
Before inventory management software became readily accessible, businesses would typically keep track of their inventory on a periodic basis. This involved regular stocktakes and a lacuna of inventory data in between. With the advent of inventory management software, businesses can monitor inventory levels, sales performance and the cost of goods perpetually; there is no uncertainty between stock takes. Real time inventory is a surprisingly simple concept. The stock count is simply updated at the same time that inventory is moved into, out of or through the warehouse. Because the stock count is updated in real time, stock levels in the inventory management system more closely mirror stock levels in the warehouse.
Convert Data to Business Intelligence
Once you have real time inventory data, you also unlock the tools to accurately forecast inventory and sales performance. Businesses increasingly recognise the value of data because the more data they have, the more competitive they can be in an increasingly saturated market.
Avoid Clipboards and Spreadsheets
Although clipboards and spreadsheets seem like a great way to keep inventory costs under control, particularly for smaller businesses, in reality they tend to cost businesses more than they could ever save. Spreadsheets are error prone and have very poor accountability mechanisms, posing a recipe for mistakes and confusion. Spreadsheets also make it difficult to take advantage of new technology, such as barcodes and real time inventory control.
Hold as Little Inventory as Possible
Successful inventory management involves keeping just enough inventory on hand in order to keep the business running effectively. Many businesses cling to the safety net of large reserves of safety stock when, in fact, holding substantial inventory compromises business performance. Excess inventory involves higher than necessary warehouse costs, insurance and obsolescence and shrinkage risk. Crucially, holding too much inventory also ties up capital, rather than freeing it up to be used more productively in the business.
Manage Supply Chain Risk
A stock out is an unacceptable outcome for a competitive business. If you are a retailer, any sale you miss out on is a competitor’s gain. If you are a manufacturer, shutting down production while you wait on inventory increases the cost you need to pass on to your customers. While holding a small amount of safety stock is an acceptable way to mitigate inventory risk, holding larger buffers is not a realistic option. Rather than compensating for risk by holding excess stock, best practice involves reducing the risk of stock outs by partnering with reliable suppliers and creating a backup plan within the supply chain.