Inventory management has long been something retailers worry about. However, it is not just brick-and-mortar stores who must have their inventory in check. Likewise, it’s not something that keeps business owners up at night because with the right support and inventory management software, inventory control and a tidy warehouse are very achievable. In this article, we consider some best practices online retailers, or e-tailers as they are commonly known, can put into place with their inventory.
Understand the value of inventory
Inventory represents a dollar value to the company and therefore businesses should carefully consider its saleability before purchasing inventory. However, inventory also represents a phantom cost to the company. If money is tied up in stored product, then it cannot be used elsewhere. This is also known as opportunity cost.
Inventory also represents a cost in the form of lost business if there is a stock out situation. It has been found that companies repeatedly underestimate the value inventory actually has, and that even losing 1% of business due to stock-outs can in fact cost a $30 million per annum company, $300,000 a year. That is a lot of money!
Find your limits
It is important to work out the company’s limits where inventory is concerned, especially to avoid costs associated with carrying inventory. To ascertain your limits for individual products, you need to know how valuable they are to the company’s bottom line and how quickly the product is sold. For a product’s profitability relative to the overall cost of having it in inventory, we calculate its Gross Margin Return on Investment (GMROI). This is the gross margin the product gives to the company divided by its average cost while it is in inventory. The rate at which a product is sold gives us an idea of how long it sits in storage which of course, incurs storage costs.
Once you know these details about each item, you can then ascertain what is worth stocking, how much should be stocked in inventory to avoid stock-out situations, and what products are better ordered on demand.
If you’re in the distribution industry or have your products manufactured off-site, consider having your supplier ship the product straight to your customer’s door. This saves time and you avoid incurring the cost of holding inventory. This can make your product cheaper, increasing profit margins. This may also be a way of ensuring money is not tied up in stored inventory that does not sell, as you only order from your supplier when an order is placed with you and the result is increased cashflow and sustainability of the business.
Don’t be afraid to change direction
It is one thing to ascertain products which are not doing so well and quite another to act on it. Just because something was always done a certain way does not mean it should continue at the cost of the company. If some products aren’t selling well at all, then an inventory management best practice is to liquidate any badly performing products as quickly as possible so that you can regain capital, and reinvest funds elsewhere.
We have highlighted some inventory management best practices however they are so much more attainable with a good inventory management system to support you. Inventory is a massive part of a company, in terms of operations and capital, and therefore it is well worth the time and money to invest in good support to get it right from the beginning.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.