How inventory management impacts your business
You already know that how you acquire, store and sell your products is critical to your success. As your business grows or changes, so do your processes for inventory management. Below we review the basics of inventory management, common challenges companies are facing today, cost reduction strategies, and why and when to consider new inventory management software.
What is inventory management?
Role within the supply chain
Inventory management is a crucial part of your supply chain. It addresses how you order, maintain and deliver your inventory, and is a key component of efficient distribution operations. Your stock, or lack thereof, can have wide-reaching effects on the rest of the supply chain. Three core parts of inventory management are:
- Purchasing: Acquiring finished goods awaiting sale or raw materials required to produce your product – the beginning of the inventory management process.
- Storage: Housing your inventory before it is sold. Businesses use inventory control practices to manage inventory levels and optimize supply levels. Tools such as regular inventory counts, optimizing shipping locations and automation are ways to improve your inventory storage efforts.
- Delivery: The last stage of inventory management – shipping your product to the customer. Logistics play a key role here, because evidence shows that one of the quickest ways to lose customers is through unreliable or late deliveries.
Overall, inventory planning helps you avoid three major problems: stockouts, overstocking and inefficient processes. Doing regular stock counts and leveraging technology are key to efficient inventory planning. Other processes – determining your organization’s economic order quantity (or EOQ), demand forecasting, consistent employee training, quality control and more – are additional ways to prevent inventory issues.
Common inventory challenges today
There are dozens of factors that affect your ability to manage your inventory. Common inventory management problems include:
- Low cash flow: Holding too much inventory ties up cash that could be used in other areas of the business.
- Need to bring inventory in-house: Using a third-party for your supply chain operations makes sense for some businesses. However, operational changes or business growth sometimes require you to reduce or eliminate outsourcing. Adopting best practices for inventory management will allow you to oversee your supply chain efficiently.
- Stockouts or overstocking: If you have low visibility or inefficient inventory control practices, poor demand forecasting can lead to too much or too little stock on your shelves. This can lead to lost revenue.
- Adding new products: Adding new products to your warehouse shelves without a system in place to locate and organize your stock can result in confusion and disorganization. Using a warehouse inventory management system, including barcoding and scanning, reduces error and increases efficiency.
- Little to no reporting: If you aren’t tracking your sales and operations, you’re missing out on critical data. Good inventory planning relies on up-to-date information in order to make accurate forecasting decisions.
Cost reduction strategies in inventory management
From capital spent on purchasing to overhead for warehouse storage and shipping costs to deliver goods to customers, there are a lot of opportunities to reduce costs when it comes to inventory management. Dependable cost reduction strategies in inventory management include:
- Quality control: Not only do you want to offer customers the best product, but you also want their quality to be consistent. Quality control practices help you monitor batches of inventory, make better sales order decisions, meet regulatory requirements and more, which in turn can lessen business costs.
- Shipping location optimization: You can use third-party distribution as a means to fill orders, such as distribution centers, in order to hold inventory closer to the customer can reduce costs in order to earn the lowest cost and fastest delivery.
- Regular inventory counts: Maintaining regularity when it comes to counting your inventory through a streamlined process attempts to identify and prevent issues before they occur. You can automate this process within an inventory management system.
- Economic order quantity: EOQ is a formula for ordering inventory based on the ideal order quantity. EOQ is most useful when demand, ordering and holding costs are consistent, but can be modified to compensate for different production levels. Using an EOQ formula can help you determine the optimal inventory level to target in order to maintain enough stock to satisfy orders, but not too much that you are incurring high holding costs.
- Reorder points: These establish a stock level at which it is necessary to reorder more inventory to prevent a stockout. Ensuring enough stock is on hand is necessary to building customer satisfaction and avoiding lost sales revenue.
- Elimination of underperforming suppliers: Suppliers who take a long time to fill orders, don’t deliver on time or fill orders inaccurately cost you money by requiring you to hold more safety stock. Using data to analyze supplier performance allows you to identify the best and most reliable.
- Technology: While only 22 percent of small and medium-sized businesses use inventory management software, more than half have saved time – which saves money – through automation. An inventory system streamlines tracking, provides real-time data, automates inventory counting and more.
- Picking optimization: When you know where in your warehouse your inventory is, your software is able to provide the most efficient picking flow. This saves you time, money and effort.
Inventory management software
Inventory systems are used to manage processes within your supply chain strategy. However, there are a few areas where an inventory management solution is a game-changer. Inventory software may be what helps take your business to the next level. Some top benefits of an inventory system include:
- Real-time data visibility: A key component of predicting accurate demand is current inventory. As products are sold, spoil or are removed from the shelf for any reason, having an accurate, up-to-date inventory count is critical to better demand forecasting.
- Automation: Inventory software allows you to set rules that trigger an action with little or no human involvement. An example is reorder points, which are established stock levels that alert you or automatically reorder a specific item in order to avoid a stockout.
- Easy integration with inventory tracking systems: Tools such as a barcode system, radio frequency identification (RFID) and QR coding make inventory tracking and counting more accurate and easier.
- Intuitive tools: Many inventory solutions use helpful features such as dashboards that contain information from across the supply chain in one place that is easy for you to access quickly. Additionally, artificial intelligence (AI) and machine learning-enabled software can use rules and other tools to handle routine tasks.
How to choose the right solution
When evaluating inventory management software, start by considering these factors:
- Assess your needs: Why are you looking for inventory management software? Determine which areas of your business will benefit the most from a solution and narrow your list of options from there.
- Pinpoint your problem areas: We discussed common inventory management problems businesses experience earlier in this post. What tops your list of issues you’d like to solve with an inventory system?
- Understand your priorities: Consider your goals for the future. Do you want to focus on growth? Expand your product offerings? Identify what your biggest priorities are for your organization and seek out solutions that may be optimized for that.
- Consider your budget: Inventory management systems vary in price depending on the features you want (number of users, equipment required, etc.) Evaluate each solution based on what they offer and decide whether the price is something your business can afford.
The right business software, combined with established processes that follow industry best practices, can transform your organization. Selecting the best software for your company will help you maximize the benefits you see as a result.