Before we talk about how to manage inventory, we need to talk about what inventory is and the different kinds it can take. We all know that inventory is the total number of goods you keep on hand, and inventory management is the process of keeping this stock in order. But when it comes to managing inventory, you have to pay attention to a lot more than just making sure everything is in order.
Good inventory management can help you with many parts of your business, such as improving your cash flow, reducing the amount you spend on storage and warehousing, and finding new wholesale stock. All of these things then affect your ROI (return On investment), so it’s clear that inventory management is an important skill for your business. If you keep track of your inventory correctly, you can enjoy a number of benefits. For example, if your profit margins go up, you’ll have less extra stock and inventory costs. You’ll also find it easier to keep track of your stock, which will help you work more efficiently.
Different kinds of stock
In your business, you might be in charge of more than one kind of inventory at once. Starting with raw materials, which are just the materials that are needed to make something, and goods that are in the process of being made. When you have a lot of work-in-progress inventory, you want to make sure that the goods don’t stay in this stage for too long and get finished as soon as possible so they can go straight to your shelves. As the owner of an online or physical store, you probably won’t have to deal with these two types of stock. But you will have to deal with finished goods and goods that have been sent back to you to be fixed or refunded. You can buy finished goods from a supplier or make them yourself, but when you make your inventory management plan, you should focus on finished goods. At the same time, you don’t want to lose track of your goods that have been sent back to you to be fixed or refunded. These are the ones that can hurt your profit margin in a big way.
Why is it important to keep track of your inventory? How do you know how much to buy?
It is pretty clear that if you manage your stock better, you will make more money. Not only will you have less extra stock at the end of the season, but keeping track of what sells and what doesn’t can also tell you a lot about what your customers like. This way, you’ll not only be able to understand them better, but you’ll also be sure to invest in products that will sell and keep customers happy in the long run. Also, once you know how fast each product sells, you can plan and budget your future purchases in a way that makes sense. For example, if you have something that sells quickly, you could buy it in bulk. This will give you a better chance of getting a discount when you talk to your supplier.
Plan how much you’ll need.
When you keep track of your inventory, you’ll have a lot of information that you can use to guess how much of each product you should buy. This is especially important if you want to buy a lot of something. You can do this with the help of the economic order quantity (EOQ) formula.
EOQ Formula
Q=√[(2DS)/H]
See what each letter stands for below to understand this formula.
- Q – will be the optimal number of items you want to buy;
- D – Bis the amount of demand for that product over time;
- S – is the order’s cost per purchase order;
- H – is the cost of keeping the inventory for the same amount of time as demand.
With better planning, you can keep track of your stock better and avoid having too much of it. If you still have too much inventory, you should figure out how to get rid of it and still make some money or at least lessen the effect it has on your profit margin. But you should definitely try out the following inventory management techniques to improve how you keep track of your stock levels and future orders.
You need to know how to manage your inventory
Using the weighted average
This can be helpful if the price of the item you are looking for doesn’t change much. To figure out your weighted average, you add the cost of your new purchase to the pool cost of the product. Then, you divide this total cost by the number of products you’ve bought over a certain amount of time. This will give you an average price for the product you are selling, no matter how many of each batch you bought. This method is pretty straightforward, which can be both its biggest strength and its biggest weakness. It does make figuring out prices easy, but there are other ways that are more accurate, like the next one on our list.
FIFO and LIFO stand for First In, First Out and Last In, Last Out.
LIFO means “last in, first out,” while FIFO means “first in, first out.” FIFO is used more often than LIFO, especially by retailers. It is also important to note that the International Financial Reporting Standards have banned LIFO in some parts of the world. FIFO is a great way to organize your inventory, especially if you sell seasonal items or items whose cost of sourcing goes up over time. With the FIFO method, you’ll always get rid of the oldest items first, so the market value of the rest of your goods will be better reflected. In this way, you can assume that the cost of buying the first inventory will be paid off first. For example, your company bought 50 items for $10 each and then bought another 50 items for $15 each. When you start selling, the price of each item will be $10 until you’ve sold all 50 units you bought at this price. After that, the price will go up to $15 for the next 50 units. This will be the best way for most retailers to show off their stock, especially in the fast-paced fashion industry.
Regular reconciliation
This method shows that you always know what is happening with your inventory. To do this, you will need to compare your inventory records with the actual stock you have on hand often. We all know that physical stock rarely matches what you have on file, so this is an important step if you want to keep track of your inventory levels.
The best and most accurate way to see what you actually have on hand is to do a full physical inventory count. Even though these values are the best way to show how much inventory you actually have, it takes a lot of time to do. Even if you don’t do it often, you should do it at least once a year when your SKU levels are the lowest to save time. Cycle counts let you keep track of your stock between full physical counts. This means that you would have to count less inventory more often and make changes to your records to reflect this. Choose one or two product categories to count at a time, depending on how big they are. With these counts, you can save time and still keep an eye on your stock levels all year long.
When you want to find out about a strange change, you can also choose to check some parts of your inventory on their own. When you do this, you regularly count a certain part of your inventory at different times. This will help you find patterns that you need to pay attention to.
ABC analysis
Activity Based Costing is what ABC classification stands for. The idea behind this method is that 80% of your income will come from 20% of your best-selling products. When using this method, your inventory should be split into three groups.
- Group A: Your top 20% best-selling products bring in 80% of your revenue.
- Group B: 30% of your products bring in another 15% of your revenue.
- Group C: 50% of your products bring in only 5% of your revenue.
This method can not only help you figure out which products sell faster and which ones you should buy in bulk, but it can also help you figure out which groups of products you should check on more often. Even though Groups B and C still bring in money, you wouldn’t want to waste your time counting them as often as Group A. But don’t forget about them either, and make sure you count them every so often.
Conclusion
When you have a good inventory management system in place for your business and the industry you work in, you are less likely to be surprised. You will also know more about your business and your customers’ needs and wants, which will help you serve them better. Last but not least, keeping track of what is going on with your inventory can help you find ways to grow and new business opportunities. Make sure you have a good system in place and are ready for the unexpected so that you don’t have to worry about going out of business because of how unstable the retail world is today.