Stop losing money: 8 Methods to maximize inventory management
When most people think about inventory management, they think about walking around a giant warehouse with a clipboard counting endless rows and rows of boxes. Rather, imagine inventory as your own bank where the currency is products.
The products have been paid for and it’s just sitting there waiting to make you more money. Don’t let it go to waste. Maximize it.
The importance of inventory management
When you purchase inventory, you trade your money for a placeholder: product. It’s easier to neglect a bunch of boxes in a warehouse versus a pile of money, but that’s really what your product is. You have to manage your money in the best ways possible because if you lose your product, you’re wasting money.
How inventory management can save you money:
Any product that can perish can cost your business untold amounts of money if it isn’t sold in time. Good inventory management helps eliminate product waste.
Dead stock is any product that you can’t sell for whatever reason. Market trends may have changed, or a new and better product may have come out. Good inventory management helps minimize any dead stock.
The cost of storing your inventory can vary based on how much product you’re storing. Ordering too much can cost you higher storage fees and more in lost product if you’re not able to sell it all. If you manage the inventory well, you can avoid this.
Optimize cash flow with inventory management
Inventory management doesn’t just save money. It can help your cash flow as well. Don’t forget that your stored product is your cash which could be in the form of a smartphone, camping gear, or anything you sell.
If you have a great inventory system, you’ll be able to keep track of how much product is stored, as well as be able to predict when you’ll need to reorder. You never want your product sitting still. If you efficiently cycle through your inventory, you’ll also be cycling in more money to grow your business.
8 Techniques to great inventory management
What inventory management looks like will vary from business to business, but every business strives to remove human error. That’s where inventory management software really becomes important. Inventory management software really should be the first step you take in maximizing profits from your inventory.
Once you have an inventory management software that fits your business, hone your management style with these eight techniques:
1. Determine Par Levels
An excellent way to simplify inventory management is by determining the “par level” for your products. A par level is the least amount of product you need to have in stock to continue sales. If the quantity of product falls below that level, you know it’s time to reorder.
Usually, you want to reorder just enough to get your stock over the minimum amount needed. This helps cover any losses if market changes and a product stops selling as well.
Par levels will be determined based on a number of things such as time needed to restock and the rate at which the product sells. You may have to do a bit of research, but setting par levels will help keep consistency and efficiency in the business.
Don’t forget that markets have trends which can change. Don’t get stuck in a routine of reordering the same amount of the same products. Follow the trends to maximize profits.
2. First-In First-Out (FIFO)
“First-in, first-out” is a common and important rule of thumb when it comes to inventory management. In short, the first product you receive should be the first product sold. You never want product gathering dust in the warehouse. In general, you don’t want to sell old product, especially if you are selling perishable goods such as food.
If products sit too long, natural wear and tear from normal warehouse conditions can diminish the quality and value of your products. Unfortunately, products don’t improve by sitting in the store.
FIFO is easy enough to implement. It may take a little reorganizing, but the principle is sound. Keep the older product next in line and place the newer product toward the back.
If you have an agency or warehouse managing your inventory for you, they’re probably already doing this. However, it never hurts be safe and to just give them a call.
3. Business Relationships
Maintaining good relationships with business partners can go a long way, and being a good customer is part of that.
Suppliers love buyers who are effective communicators. Calling your product supplier at the last minute with a rushed order puts stress on them and your relationship with them. Give them a call in advance to let them know what you’ll need and when. When business partners see that you’re willing to work with them, they’ll often be willing to work with you when you need help.
Of course, communicating in a timely manner is great, but don’t forget to be courteous and friendly. It never hurts for a partner to enjoy doing business with you.
Business is unpredictable, and a lot of things can happen unexpectedly. For example:
- Shipping errors or delayed shipments
- Lack of warehouse space for an order
- A turn in market trends which leave a surplus of unsold product
- A sudden rise in sales which causes unfilled orders
- You need more cash to move a product for a large order
If a business isn’t ready, it can be dead in the water. These are issues that need to be considered with organized contingency plans in place to deal with them to minimize losses. Don’t forget that when these things happen, having good business relationships can really pull a business through difficult times.
5. Audit Regularly
Usually, companies will be using inventory management systems to keep track of product items. However, it’s still necessary to perform physical checks as well. Sometimes issues fall through the cracks. Inventory management systems minimize human error, but they don’t eliminate them.
- Annual Audit- Some businesses will perform annual inventory checks that fall on the same timeline as account or income taxes, and this can sometimes turn into an unexpectedly large task.
- Cyclical Audit- Other businesses will perform cyclical inspections throughout the year which helps to keep any corrections on a small scale rather than one giant audit at the end of the year.
- Snap Checks- Performing random spot checks in high traffic areas is also a great way to keep the inventory moving efficiently and mistake free.
Depending on the range of products your business offers, some items may require priority over others. Here’s a good way to classify products in your inventory:
A – High valued items with a slow sales rate
B – Moderately valued items with a moderate sales rate
C – Low valued items with a high sales rate
Items in category A will need special attention because if one were to be lost, the financial loss would be greater than an item from category C. The type of business model will also determine where attention is given.
Some businesses focus mostly on high-value items while others rely on frequent sales from low-value items to drive the business forward. Both styles have risks, and both can be very successful.
7. Accurate Product Prediction
Supply and demand drive business and every business tries to predict the perfect amount of supply for the demand. Unfortunately, it’s just impossible to do it perfectly every time. However, there are some things to consider which can help:
- Sales trends from previous years
- Growth rates
- Seasonal sales
Every business is unique, and no one knows your business like you do. If you notice a pattern that can help, take note and capitalize on it.
8. Think about drop shipping
Drop shipping is an inventory manager’s dream. Put simply; the supplier manages all of the inventory, not you. At that point, the business focuses only on sales and leaves all of the inventory management to the supplier.
If you decide to drop ship, you can usually expect products to be more expensive, but you will save money by leaving all of the inventory management to the supplier. Not every vendor offers drop shipping, but it never hurts to ask, and the benefits can be game changing.
With these eight steps, it’s up to you to start making your inventory work for you. Take a step back and consider if these techniques could be what takes your business to the next level and help you maximize your profits and cash flow through inventory management.
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