101 Inventory Management: How To Manage Your Business

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Inventory Management 101: How To Manage Your Small Business Successfully.

  • Prevent spoilage
  • Avoid obsolete stocks
  • Reduce storage expenses
  • Inventory management improves cash flow
  • First In, First Out
  • Manage Relationships
  • Contingency planning
  • Regular Auditing
  • Prioritize with ABC
  • Accurate forecasting
  • Take control of your inventory
  • Take control of your inventory

Effective inventory management system is important to ensure that your business has enough merchandise in store to meet the needs of your customers.

Poor inventory management can make you to loose your customers to your competitors because of stock outs.

Moreover, you can loose money by carrying excess stocks.

Furthermore, an effective inventory management system can also help your business in the following ways, among others:

Inventory Management: Prevent spoilage

Effective inventory management system can you to prevent losses on products with expiry dates.

Examples will be like food or makeup that can go bad within the validity period.

In other words, an good inventory management strategies can help you to prevent avoidable losses.

Avoid obsolete stocks

Obsolete stocks are items that no longer in demand because:

  • they are have gone out of fashion
  • have gone out of season
  • or have become irrelevant.

Thus, if you manage your inventory properly you can avoid buying stocks that nobody wants to put his money.

Reduce storage expenses

Warehousing costs can be optimized to ensure that you are not occupying a large warehouse that is more than what your business needs.

Simply put, if you are carrying a warehouse with excess space, you will loose money because you will be paying money for something that your business does not  really need.

Furthermore, you can loose money, stocking goods that are very difficult to sell.

In other words, the goods will be sitting on the shelves looking at you every morning and no one is buying them. But You  will still need to meet the warehouse rent, lighting and security expenses

Inventory management improves cash flow

Effective inventory management can improve your cash flow.

For example, if you lock up your business capital in stocks with low demand, it can hurt your ability to pay creditors when you are supposed to.

Remember, inventory is product that you probably have paid for with cash. They are goods you want to sell. But if they are sitting on the counters, it will affect your cash flow.

On the other hand, if you have rapid stock turnover rate because you stock what customers need, you will see cash flowing into and out of your business.

Besides, inventory directly determine how much cash you need to have on hand because:

  • You will have a clear picture of the stocks you have in the store
  • when they are likely to be exhausted
  • and plan how to replenish them when they get low
  • plus you will have cash in hand to make purchases
  • and maintain an uninterrupted flow of sales

Set par levels

Make inventory management easier by setting buffer stock level for each of your products.

Buffer stock levels are the minimum quantity of product that must be on hand at all times.

When your inventory stock dips below the predetermined levels, you know it is time to order more.

Furthermore, you can use Economic Re-order Level model (EOQ). This is level your stock must reach before you place order for more supplies.

Economic Re-order Quantity are based on how quickly the item sells and how long it takes to replenish stock.

Although setting par levels requires some research and decision-making up front, setting them will  make it:

  • quicker to place orders
  • easier for you to make decisions quickly
  • seamless for your employees to make decisions on your behalf.

However, you should remember that conditions change over time.

So you need to check on par levels a few times throughout the year to confirm that they still make sense.

Most importantly, if something changes in the meantime, you should not be afraid to adjust your par levels up or down.

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Inventory Management:First-In First-Out (FIFO)

“First in, first out” is an important principle of inventory management.

FIFO principle simply means that you should sell your older stocks before selling the ones you bought lately.

Beyond that, it is particularly useful if you are selling easily perishable products.

Moreover, this method allows you to prevent losses arising from items that you cannot sell.

It is also a good idea to practice FIFO for nonperishable products.

For example, if the same boxes are always sitting at the back, they are more likely to get worn out.

Plus, packaging design and features often change over time. You do not want to end up with something obsolete that you can’t sell.

Manage Relationships

Part of successful inventory management is being able to adapt quickly.

You should be able to manage relationships effectively in each of the following circumstances:

  • make room for a new product,
  • restock a fast seller very quickly,
  • troubleshoot manufacturing issues,
  • or temporarily expand your storage space.

Furthermore, effective relationship management can help you to solve problems seamlessly.

Moreover, having a good relationship with your product suppliers is very crucial to the success of your business.

A good relationship is not just about being friendly.

It is also about clear, proactive communication.

Consequently, you need to let your supplier know when you are expecting an increase in sales so that they can adjust production.

Most important, let them know when a product is running behind schedule so you can pause promotions or look for a temporary substitute.

Inventory Management: Contingency planning

A lot of issues concerning inventory management can pop up.  These types of problems can catch you unaware with severe consequences on your business.

Examples can be that you:

  • experience unexpected rise in demand for your products
  • run into a cash flow shortfall and can’t pay for products you desperately need
  • do not have a warehouse that accommodate all your products
  • have miscalculation in inventory that leaves you with less products than you thought
  • allow a slow moving product take up all your storage space
  • have a manufacturer that runs out of your product and you have orders to fill
  • have to contend with a manufacturer has discontinued your product without warning

More importantly, in business, it is not a matter of “if problems will arise, but it is when”.

Most importantly, you need to figure out where your risks are and prepare a contingency plan:

  • How will you react? What steps will you take to solve the problem?
  • How will this impact other parts of your business?

In all circumstances good relationships go a long way here.

Regular auditing

In inventory management, regular auditing and reconciliation are very important.

In most cases, you will be relying on software and reports from your warehouse to know how much product you have stock.

However, it is important to make sure that the facts match up. There are several methods for doing this.

Inventory Management: Physical count of inventory

A physical inventory is the practice of counting all your merchandise at once.

This is especially necessary at year ends when you will need to prepare your annual accounts and file your tax papers.

Although you can do physical inventories counts year, it can be incredibly disruptive to your business.

However, you can use the continuous stock counts so that your business activities cannot be disrupted the business.

Alternatively, if you do a full physical inventory at the end of the year and you often run into problems, or you have a lot of products, you may want to start spot checking throughout the year.

This simply means choosing a product, counting it, and comparing the number to what it is supposed to be.

Spot check can be done on random basis.

In particular, you may want to spot check problematic or fast moving products.

Prioritize with ABC

Certain products need more attention than others. Using an ABC analysis lets you prioritize your inventory management by separating out products that require a lot of attention from those that do not.

You can do this by going through your product list and adding each product to one of three categories:

  • High value products with a low frequency of sales
  • Moderate value products with a moderate frequency of sales
  • Low-value products with a high frequency of sales

Items in category A require regular attention because their financial impact is significant but sales are unpredictable.

Furthermore, items in category C require less oversight because they have a smaller financial impact and they are constantly turning over. Items in category B fall somewhere in between.

Inventory Management: Accurate forecasting

A huge part of good inventory management comes down to accurately predicting demand.

In inventory management, it is extremely difficult to forecast accurately because there are countless variables involved. This is because you can never tell what is coming next.

Bur you can try to get close. Here are a few things to look at when projecting your future sales:

  • Trends in the market
  • Last year’s sales during the same week
  • This year’s growth rate
  • Guaranteed sales from contracts and subscriptions
  • Seasonality and the overall economy
  • Upcoming promotions
  • Planned ad spend

If there is something else that will help you create a more accurate forecast, be sure to include it.

 

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Take control of your inventory

Remember that with an effective inventory management system in place you can:

  • help reduce costs,
  • keep your business profitable,
  • analyze sales patterns and predict future sales,
  • and prepare the business for the unexpected.

With proper inventory management system in place, your business can stand a better chance for profitability and survival.

It’s time to take control of your inventory management and stop losing money. Choose the right inventory management techniques for your business, and start implementing them today.

 

About Samuel Ijenhi

A graduate in Accounting, University of Benin, Benin City, Edo State, Nigeria.
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