8 Inventory Management Techniques for Modern Merchants
Only 18% of small- and medium-sized businesses utilize inventory management techniques and systems, yet these are the foundation of a well-functioning retail business.
To succeed as a retailer of any kind—ecommerce, brick-and-mortar, multichannel, omnichannel—you must have strategic inventory management processes in place.
If you don’t have a handle on your inventory activity—or worse, track it with outdated data entry methods and spreadsheets—the other pieces of your business can’t fall into place. Inventory management software tracks your inventory’s lifecycle, which helps you make smarter decisions related to your business’s inventory levels.
Keep reading as we look at the most common inventory management techniques to assist your business’s accuracy and efficiency.
What Are Inventory Management Techniques?
Thoughtful inventory management allows you to track stock from manufacturing to fulfillment.
Countless techniques help business owners control inventory and operate more efficiently—while offering higher levels of control and visibility. In the past, retailers accomplished this through old-school spreadsheet systems, but modern systems are far more robust.
With the right automation software, you can see how much inventory you or your supplier has left at any given time across all of your platforms. At the same time, you can utilize reporting functionality that provides detailed insight into your business and customer behavior.
Today’s inventory management tools can automate the inventory control process by integrating with other platforms such as your website, fulfillment, accounting, and other retail applications you use. These tools are typically married to point-of-sale (POS) systems in traditional retail.
Popular Inventory Management Techniques
There are several inventory management methods that you can use to identify the reasoning behind lost or missing inventory, which is critical to your business’s success. Let’s look at seven of these popular methods.
1. Stock Auditing
Inventory management issues commonly arise when an item isn’t labeled clearly, and teams work with multiple disparate systems. You can significantly reduce these errors with inventory management systems that work as a whole with automated functionality.
Regularly auditing inventory is essential to sustaining accurate stock levels and preventing excess inventory. You stand a better chance of achieving a precise level of data and making your KPIs and other targets when you connect all of your systems.
You can audit inventory in several ways. Aside from implementing an inventory management solution, you’ll still need to reconcile stock at times.
- Cycle counting is performed every couple of months. This is an excellent way to close the gap between what inventory you think you have versus what’s actually there.
- Physical inventory is typically audited once at the end of the year. These numbers are compared alongside the amount of stock you speculate to have on hand.
- Spot checking is performed various times throughout the year. This method isn’t completed on a schedule and is meant to help keep track of fast-moving inventory.
Regardless of the method you choose, stock auditing is a process that should take place at least once a year.
2. Inventory Reporting
Your inventory management software will generate reports based on the data it receives from your connected systems and platforms. Detailed reports are your biggest asset, as they provide insights into your warehouses, inventory, marketing, purchasing, and consumer behavior.
By allocating inventory based on categories and consumer behavior, businesses can better understand how products move in specific geographical locations, which items are moving, and more. Taking a good look at these reports helps you make more informed inventory decisions in the future.
For example, through reporting, Target figured out that 15% of their online sales were in-store pickups in 2015—many of the company’s brick-and-mortar stores were doubling as fulfillment centers.
You can also inform your suppliers of inventory trends to help them prepare properly. Suppliers are essential partners, so it’s ideal to give them proper notice whenever possible.
The data you receive from inventory control methods means nothing if you don’t do something with it. Many businesses face inventory management issues connected to a lack of information sharing between systems and throughout the company.
You can more accurately set low-stock thresholds and calculate reorder quantities with inventory reporting methods. This way, you’re suitably stocked with no aging inventory and no overselling.
Inventory forecasting is difficult even without an inventory management method in place. You can end up purchasing too much of an item even when you take precautions.
Dead stock can kill your bottom line, but there are inventory management techniques to assist with this, too. While product kitting and bundling is a technique often used to upsell, it can also help as a promotional tactic to move stale inventory.
You can bundle products effectively by adding a surprise free gift to orders. By keeping the “free item” a secret, you can switch the item out as needed depending on availability. Not only does this move aging inventory, but it delights your customer base as well. They’ll feel special when they feel they’re getting an exclusive offer, and you can avoid demand forecasting for this product.
You can also make your customers feel like they’re getting a deal by bundling a product to an order at a reduced cost—without heavily discounting the item.
First-in-first-out (FIFO) means exactly what it sounds like: an inventory management method in which the first items that enter your warehouse are the first to leave.
The first items you receive are the products you’ve held onto the longest, making them closest to expiry. When implementing a FIFO strategy, you move these first products before they become extra inventory—items that you cannot sell.
The idea behind this technique is that you sell items when they’re of optimal quality, which keeps happy customers coming back—and your inventory moving.
5. Bulk Shipments
You can successfully ship evergreen items in bulk if you’re forecasting inventory correctly. Bulk shipments are those that are loaded loosely and unpackaged. The transportation method becomes the cargo container, and mass measurements quantify the cargo.
Through bulk shipping, you can access vast amounts of inventory items and supply them to an extensive network. Without bulk shipping, access to such a large supply wouldn’t be possible. This provides you with the means to fulfill every order on time completely. However, you should only bulk ship high-demand items so that they’ll sell quickly.
The just-in-time inventory technique allows you to decrease your amount of obsolete inventory by keeping low stock and only replenishing raw materials as needed. You order products that will be delivered only a few days before you’re expected to run out of stock. JIT is an effective way to reduce inventory costs.
If you tend to get stuck with aging inventory, using this method helps you make more informed decisions to keep stock levels low. You can then avoid the cost of having dead stock in your warehouse. You can master this method using real-time analytics to optimize inventory operations. Inventory management tools give you clear visibility into your inventory—across all channels and at any time.
7. Economic Order Quantity
Economic order quantity (EOQ) is how to calculate the ideal order quantity you need to purchase for inventory with a set of variables like demand rate, total costs of production, and other factors. You use this rate to minimize related costs—it helps you identify the greatest number of product units you should order to identify minimum order quantities.
The EOQ formula also factors the number of units in the delivery and storing of inventory unit costs, which helps free tied up cash in inventory for most retailers.
8. Tracking KPIs
Through tracking KPIs, you can identify your business’s pain points and figure out what to do about them.
If stockouts are a frequent occurrence, customer experience suffers. Likewise, if you’re experiencing shrinkage, you’re losing money, and you’ll want a solution for that. It’s vital to think of both short- and long-term goals when developing KPIs:
- Sell-through rate: will help you retain customers as you compare received stock to how much is sold (sales/beginning of month (BOM) stock on hand x 100)
- Stock-to-sales ratio: helps you forecast inventory (BOM stock/month’s sales)
- Forward weeks of supply: enables you to understand how long inventory will sit on your shelves, when to reorder to avoid out-of-stock items, and when products need to be repriced
- Average inventory: helps you know how much inventory you store over specific periods (current inventory + previous inventory/2)
Keeping track of these inventory management variables can be confusing and time-consuming. Most businesses need support in these areas—especially when certain operation areas are lean. There’s no question that issues will arise, and having the proper inventory management tools in your back pocket can help you stay competitive.
Inventory Management FAQs
Still curious about the most effective inventory management techniques? Let’s take a look at some common questions related to inventory management.
Who Is Accountable for Implementing Effective Inventory Management Techniques?
When it comes to inventory analysis and inventory management effectiveness, it’s all hands on deck. Everyone on your team should work together on their portion of the process to ensure success.
Your purchasing department is responsible for making sure they purchase enough—but not too much— raw materials and have to reconcile each purchase order.
Your merchandising team is responsible for adequately listing, promoting, and pricing your inventory to move.
Your warehouse team, inventory manager, or warehouse manager must handle all inventory, delegating proper stock levels and keeping storage costs low. This team is also responsible for receiving orders, picking and packing orders, and shipping the correct items to your customers.
How Do I Measure the Success of My Inventory Management Techniques?
As an inventory manager, your proof is in the numbers when measuring the success of your inventory management strategy. After analyzing your current methods, it’s time to compare the data.
Have your levels of out-of-stocks, shipment errors, or packing errors decreased? Are you seeing improved cash flow? Have your customer satisfaction levels improved?
If the answer to these questions is “yes,” you’ve implemented a successful method of inventory management. As a result, you can expect to see improved customer loyalty, better customer reviews, and a more efficient supply chain.
How Do I Determine Order Frequency?
You can correctly identify order frequency by accurate reporting, especially during peak season. You can use historical reports from previous sales seasons and throughout the year to determine your optimal order frequency during the busy season. To make the most accurate purchasing decision, look back on what you sold the most and least compared to which items are currently popular.
To better understand which products sell best on which channels, break down your sales reports by sales channel. This will give you a better look at customer demands and the order frequency you should establish.
How Do I Prepare for Peak Sales Seasons?
Your peak season is when you’ll make the bulk of your revenue, so you must have an effective inventory management system in place before peak season to succeed. If you’re heading into your first peak season, you should:
- Ensure that you have adequate shipping supplies on hand and ready to ship products (don’t forget to inventory these, as well!)
- Perform a cycle count to confirm inventory levels are correct
- Hire extra staff to help out with increased order demand
- Utilize historical sales reports to ensure you’ve ordered the right amount of inventory for consumer demand
- Use proper warehouse management best practices to ensure all of your inventory is organized in its proper location
- Implement effective inventory management software that will streamline all of the points above.
With the right software systems, you can better manage the demand fluctuation across your entire supply chain—much better than a spreadsheet ever could.
Putting Inventory Management Techniques into Action
Scaling through multi or omnichannel methods is now crucial as your business grows. It becomes harder and harder to control inventory efficiently when selling across multiple channels and platforms. An essential factor in inventory management is automating manual tasks and syncing inventory effectively.
You may be using some or all of these techniques already in your current processes. In that case, an inventory management platform that integrates with your existing systems would be beneficial. With a fully connected system, you’ll have access to eye-opening insights into your business. You’ll also have new checkpoints to recognize discrepancies and ensure accuracy across your organization.
Research will play a significant role in figuring out what works best in your industry and your brand. Once you’ve decided which inventory management techniques make sense for your business, try them.
Achieving inventory visibility helps business owners sell more flexibly while avoiding issues such as unfulfilled orders and stockouts.
Implementing the right inventory management and ecommerce operations software can provide a more accurate picture and improve your bottom line and customer experience. Talk with an expert to discover how Flxpoint can help you get there.