The Importance of Inventory Management for Small Business

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Just as you need balance in your life, so too do you need to create the right balance of inventory in your warehouse.

 

Why is inventory management important?

 

If you have too much or too little inventory, you’ll pay the price in many ways that can make or break your business. You’ll either let a customer down by not having enough stock or if you overstock your warehouse with slow-moving products, your margins and profit will suffer.

 

To avoid such scenarios, there are number of basic principles that can help you find the right balance of inventory in your warehouse. While the principles outlined here can help small businesses, the truth is businesses of any size need to implement them in order to improve profitability.

 

8 Ways to Prioritize Inventory Management

 

Let’s jump into the different ways your small business can emphasize and master inventory management.

 

Use Inventory Management Software

Today’s buyers expect the same level of service they get as consumers. As a result, by digitally transforming your company and using inventory management software, your wholesale distribution business will have a better chance for long-term survival. You’re also indirectly putting the customer first by making what matters a priority: inventory. If you can’t deliver your buyers an exceptional experience by delivering on time, every time, you’ll lose them to a company that can.

 

Trust, but Verify with Cycle Counting

If you’re using inventory management software at your small business, performing random cycle counts is a great way to validate the processes and workflows you have in place. This method requires that a portion of your inventory is hand counted on a regular basis. Wholesale distributors often opt to do it on a monthly basis. Cycle counting is a great way to verify that you’ve got your inventory management software set up correctly and that personnel are using it the way you’ve designed it to be used. If you are regularly finding discrepancies for what is in your software versus hand count results, you’ll need to dig for the why. But, you’ll likely find a person or process that is part of the problem.

 

Implement ABC Analysis

The ABC approach requires that you label products inventories in your warehouse as one of three categories: A, B or C. Typically, A products are your most valuable. These products are your best sellers. B products have a medium consumption value. Finally, C products are purchased and consumed the least. You can calculate what the annual consumption value of a product is by multiplying the annual demand by the item cost per unit. Naturally, products designated as A should undergo tight inventory control and should never be out of stock, since these are your most frequently ordered, in-demand products.

 

Measure Inventory Management KPIs

Key Performance Indicators (KPIs) are a quantifiable way to measure how well you’re doing when it comes to inventory management. One of the most important inventory KPIs to manage as a wholesale distributor is inventory turnover ratio. This number reflects how often inventory is sold and replaced within a given time period. Divide the cost of goods sold (COGS) or net sales by your average inventory. The resulting number indicates how many times your company has sold and replaced that inventory within the time period you selected. It basically helps you measure how fast you’re selling inventory. Compare your average with the industry average and you’ll be able to tell if there’s room for improvement. If you’re moving inventory faster than the industry average, then you’ll likely outpace your competitors in terms of sales and profitability in that category.

 

Reduce Inventory Shrinkage

Inventory shrinkage is the difference between actual, on-hand stock and what is recorded in your inventory management software or hand counts. Inventory shrinkage may be due to lost or stolen stock, broken workflows or human error. Such inaccuracies occur more often when inventory is hand counted versus using inventory management software. In fact, many companies overlay cycle counting, a form of hand counting, with their inventory management software to ensure inventory is always accurate and never in doubt.

 

Analyze Your Warehouse Design

Because things are constantly changing for you as a wholesale distributor, especially in your warehouse, you should constantly analyze whether you’re doing your best in how it’s laid out. For example, is your pick and ship station near your dock? Ideally, this is the case so that carrier pickup is easy and smooth. Also, place high-volume SKUs in an area that is easy to access. Location is truly everything in your warehouse, so constantly be on the lookout for ways to improve the flow in it.

 

Put the Customer First

If you do make a mistake with a customer or run out of stock, a great way to win that customer over again is to either provide the item for free once it’s in stock or provide them with a discount on their next order. The lesson here is that if you do make an error, own it, apologize and ask the customer what you can do to make it right. This is especially important to do with your larger customers. Rather than lose a valuable customers due to one mistake, make it right and their loyalty will remain.

 

Establish a Reorder Point (ROP)

In order to avoid being out of stock, establish a reorder point, especially for fast moving products. A reorder point is the minimum stock level that is maintained for a product or product family. Be sure to establish a reorder point, or minimum stock level, that takes into account for the lead time to get new inventory. In fact, your reorder point should be slightly higher than your reorder point. In essence, your reorder point should help you ship orders to customers without interruption, which naturally is a factor in your customer repurchase rate. You can calculate your reorder point by multiplying the average lead time (in days) by your average daily usage of that item. Add what safety stock you have available to that number and you have your reorder point.

 

Ready to Use a Inventory Management System to Grow Your Small Business?

 

Tired of inventory templates? Systum is the only software platform you need to succeed and win repeat customers as wholesale distributor. From customers to employees, allow everyone to view and access real-time inventory levels. If you’d like to learn more about how Systum can help you track inventory in real time, fill out the form below.

 

Categories: Inventory, Software

Tags: inventory management, inventory, inventory software, KPIs

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Hope Davo

VP of Marketing at Systum, Hope is responsible for marketing, communications and branding. When she’s not building marketing programs, chances are she’s running around after her two kiddos or enjoying an indoor cycle class.

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