January 17, 2016    5 min read

If a company aims to operate successfully it must have proven and efficient inventory management controls in play. From enabling the business to maintain accurate inventory levels, to on-point forecasting and seamless supply chain integration, inventory management exerts a major influence on the profitability of any business.

This is why it is vital for a business – large, medium or small – to have a cutting edge inventory management system in place, driven by a sound inventory management strategy. Failing to do so will most likely result three key areas of loss – wasted time, wasted resources and wasted money.

What follows are the fundamental building blocks upon which a successful inventory management strategy can be built.

1. Gather essential data

There is no way to map out an effective inventory management strategy until you have a very clear assessment of your current inventory situation. If your business has been relying on spreadsheets or manually compiled inventory records, then chances are you are dealing with an inaccurate and outdated data picture of your current inventory levels.

This is particularly dangerous because inaccurate inventory levels form the baseline for every poor decision to follow – from forecasting and purchasing, to storage and sales. For instance, if your inventory levels are off you will either over or under forecast demand. When this occurs the business will end up facing one of two unwanted outcomes – or possibly both:

Overstocked and out of cash

Taking on excess inventory that is not actually needed results in an overstock issue. This occurs when a business is left holding too much unnecessary stock due to inaccurate forecasting, ill-informed inventory levels, or a sudden reduction in market demand. Overstock places considerable burden on a business’s cash flow due to the inflated labor and storage costs, as well as increased risk due to loss from theft, damage and obsolescence. No business can expect to operate profitably if its cash flow is tied up in excess inventory.

Under stock, missed sales and lost customers

Conversely, if in-demand inventory levels are mistakenly thought to be adequate, the purchasing department will end up placing a re-supply order that will not be sufficient for expected demand, or worse yet, fail to place a re-supply order at all.

This leaves the business unable to fulfill customer orders due to not having the right inventory on hand, which results in lost sales, lost customers and lost reputation – not to mention lost income.

Invest in the right data delivery tool

The solution then, and an advised strategic starting point, is to gather all the essential inventory data required – current inventory on order, on stock and in distribution and sales. This needs to be done with precision, in real-time and, most importantly, accessible by all department process managers to ensure clear communication and cooperation. Cloud-based inventory management software is indispensable if a business is serious about gathering the essential data of its inventory system with the intent to formulate a strategy to carry itself forward proactively.

2. Identify areas of loss

Gathering the essential data will allow the business to gain a data-driven appreciation of exactly where it stands from an inventory level perspective. This appreciation is invaluable when it comes to carrying out the next step of the strategic process – identifying and eradicating the areas of loss.

Seen and unseen dangers

What having a cloud-based SaaS (Software-as-a-Service) inventory management system in place does for a business is that it allows process managers to identify the key areas of loss, on both a seen and an unseen level.

Most clearly identifiable will be those areas where inventory is disastrously high and where high rates of obsolescence are occurring. Obsolete inventory needs to be liquidated as fast as possible to free up much needed cash flow, reduce storage and labor costs, and free up space for inventory that is actually needed.

Also, it will become apparent where customer service targets are constantly going unmet due to stock-outs. Inventory management software is perfectly suited to this task – especially so in the case of a business that deals with a wide variety of products – in that it can be automated to notify the supply chain manager when and which inventory is high or low, and thus ensure timely re-ordering.

Once the business has the ability to accurately track, trace and account for every item of inventory moving through the supply chain, unseen areas of loss will become apparent too. These unseen areas or causes of loss can include theft, corruption and simply bad business practice. This is especially useful in situations where multiple warehouses are being operated in multiple locations – both domestic and internationally.

3. Practice proactive, data-driven inventory management

A business that has an effective inventory management software system in place is best positioned to carry the business forward proactively. Protocols and systems can now be implemented to address the main areas of loss and weakness in the supply chain, as well as positively drive the business forward by reliance on timely, accurate and integrated data.

Fluctuating stock levels can be automated to best meet fluctuating customer demand. Stock picking can be structured in accordance with inventory needs – i.e., the oldest inventory gets picked first – and forecasting will be achieved with far greater accuracy, ensuring inventory levels remain optimal.

Planning insights, that simply would not be available to a business operating on outdated and out of sync inventory management systems, can be fully taken advantage of. Sales history, inventory on stock and open orders can now be tracked and analyzed to ensure demand forecasting is driven by correct data.

A final strategic advantage inventory management software affords businesses is the ability to carry out far more effective pricing strategies. Now, the landed costs of inventory can be calculated accurately, ensuring that losses due to guesswork based pricing strategies do not occur. This way margins can be relied upon, and the overall proficiency of the business to operate as profitably as possible is maximized.

The objectives for business success are generally very simple; to grow the business profitably by meeting customer service targets and reducing costs as much as possible. Having an efficient and effective inventory management system in place is what enables businesses to meet these fundamental objectives.