For businesses that deal with the sale of physical goods, inventory management is one of the most important skills to have. Good inventory management will result in less storage costs, less wastage, and more opportunities.
It’ll also ensure a good customer experience, as your customers will always have access to your products, and receive them promptly, at a good price.
But, what exactly is inventory management?
Whether you’re in the early stages of running a business or are looking for some best practices in regard to inventory management, you’ve come to the right place.
In this article, we’ll begin by taking things back to basics by defining inventory management and explaining why it’s important. Then, we’ll discuss how inventory management works, and answer some key questions we’re often asked by clients and readers.
In this article
What is inventory management?
Inventory management is the process of tracking, organising, and optimising stock in order to reduce operational costs, meet customer demands, and maximise profits.
It’s a data-driven process that involves analysing historical data to identify trends, patterns, correlations and anomalies to better prevent shortages and ensure that you always have product in-stock for customers to buy.
Inventory management also requires optimization work, such as placing inventory in the right geographical locations, working to reduce the number of returns your business gets, and other continuous improvement strategies.
Why is inventory management important?
For a business, inventory is everything. It’s your assets and your reputation, your pathway into a successful future. But if managed poorly, it can also be your greatest enemy, and even spell your downfall.
Okay, enough of the dramatics.
Inventory management is important because it affects every area of your business, whether it be your bottom line, supply chain efficiency, or customer satisfaction.
Not having enough inventory on-hand can mean disappointing your customers, or failing to win customers in the first place. This results in lower sales, lower retention, less loyalty, and more business for your competitors.
On the other hand, having too much inventory can result in you paying for storage space you don’t need. Inventory can end up sitting in storage for weeks, months, even years, which can result in large unnecessary costs. Similarly, larger inventories can result in more wastage due to damage or obsolescence.
There’s also the somewhat complex task of having the right amount of product in the right place at the right time. This is important because strategically placed inventory can result in more customers and better profits due to quick and cheaper delivery times.
Crucial elements for effective inventory management
Inventory tracking is the process of logging all inflows, outflows, transactions, and stock levels in real-time. Today, most inventory tracking systems are powered by a centralised cloud-based platform, and use barcodes to identify SKUs.
Inventory tracking is the most important aspect of inventory management. Without accurate inventory tracking, it’s impossible to run a business efficiently. Stock will get lost, orders will get missed, and costs will be unpredictable.
When we talk about inventory positioning, we’re usually referring to the physical location of inventory. Strategically placing the right amount of inventory in the right place at the right time is vital for meeting customer demand and minimising costs.
For example, businesses who ship worldwide but only have a warehouse or fulfilment centre in a single location are missing out on tonnes of opportunities. A UK-based business is unlikely to win customers from the USA when their shipping times and costs are hugely higher than a domestic business.
However, if this same UK-based business knew there was interest in the USA for their products, they could send stock over in bulk, shortening the last-mile delivery time and reducing costs for both themselves and their customers.
For obvious reasons, smart inventory positioning results in more sales.
Order management and fulfilment
Order management helps businesses to fulfil customer orders accurately. Thanks to inventory tracking, the centralised inventory management system can check stock levels in real-time, and prevent orders being placed for out-of-stock items.
Order management systems (OMSs) can also support the fulfilment process by automatically communicating updates to customers, by facilitating secure payments, and supporting the returns process.
A good order management system can help improve customer satisfaction by eliminating disappointment and through keeping customers up-to-date with the status of their order.
Perhaps the most ‘active’ aspect of inventory management is data analysis. Spending time with your inventory data allows you to identify trends and patterns that can be used to inform business decisions.
To promote a culture of continuous improvement, data analysis is vital. By having a good understanding of what’s working and what isn’t, you can effectively cut down storage costs by prioritising SKUs that you know work well.
Similarly, you can use historical inventory data to plan for peak periods, ensuring that you avoid stockouts. On the other hand, you can use the numbers from slower periods to avoid over-stocking, thus avoiding wastage and avoidable storage costs.
Shipping is the final part of the fulfilment process, and is a hugely important area of inventory management. Poor carrier management can result in shipping delays or inflated shipping costs, which impacts your bottom line.
Shipping management involves making sure the right labels are printed, the correct packaging is used, and that you adhere to requirements of your chosen shipping services. It also necessitates nurturing relationships with carriers to get the best rates, whether that be through economies of scale or loyalty.
What are the most common inventory management methods?
Businesses use different methods to manage their inventory effectively. Which method they use will depend on preference, industry, customer demands, and more.
Put simply, an inventory management method is the systematic approach a business uses to monitor, control, and organise the flow of goods.
Here are some of the most common inventory management methods used today.
Just-in-Time System (JIT)
The Just-in-Time inventory management system was pioneered by Toyota in the 1960s and 1970s. This system aims to operate with a lean model, whereby the optimal amount of stock is in the right place at the right time. This allows businesses to reduce storage costs and they never have excess inventory in storage.
Other advantages of this system include reduced wastage due to obsolescence and damage, lower production costs, cheaper first-mile shipping, lower insurance costs, and fewer resources needed for handling.
The JIT inventory system is an example of a ‘pull’ system, which means it is driven primarily by customer demand. Therefore, while JIT can result in lower logistics costs overall, there is a greater risk of stockouts if demand suddenly and unexpectedly spikes.
Economic Order Quantity (EOQ)
Economic Order Quantity (EOQ) is a formula based inventory model. The formula is used to calculate the optimal amount of inventory that you should have in stock over a given period, largely based on historical data and assumptions.
Similar to JIT inventory, the aim of EOQ is to strike the balance between having enough stock on hand to meet customer demand, without paying unnecessary storage costs. Calculated per patch, EOQ helps businesses to reduce the frequency of times orders need to be made while minimising the risk of stock outs.
It’s a great model for businesses comfortable with data analysis, however there are some disadvantages. For example, most of the assumptions of this model are based on historical data, which doesn’t anticipate unprecedented rises – or reductions – in demand.
So, if you run a particularly successful marketing campaign, you may end up not having enough stock in place to meet demand.
However, EOQ is a very effective inventory management method as long as you’re aware of the potential fallbacks.
ABC Analysis serves as a widely used inventory management technique for both eCommerce and trail brands. It allows inventory analysts to pinpoint the most impactful SKUs for their success. ABC analysis is often presented as a graph, classifying SKUs based on their cost and quantity.
To help demonstrate, here’s a graph from our inventory management platform, ControlPort:
Each SKU is represented by a colour:
- Green, referred to as ‘Class A’: These rapidly-moving items significantly drive sales, constituting a major part of turnover. Their availability is crucial, necessitating well-considered restocking plans and reliable suppliers to avert stockouts.
- Amber, denoted as ‘Class B’: These SKUs hold intermediate importance. While not as vital as Class A, they still contribute decently. Maintaining buffer stock helps prevent shortages, with Class A lines given precedence.
- Red, known as ‘Class C’: These are sluggishly moving items with marginal sales impact. They could be add-ons, less popular goods, or outdated stock. Regular review is recommended to optimise storage usage.
By regularly conducting ABC analysis, businesses can get a much better understanding of which lines are most important to their success, and so can prioritise those lines accordingly.
Days of Sale Inventory (DSI)
Days of Sale Inventory (DSI) is a financial model that measures the average number of days it takes to turn new inventory into a sale. DSI is a useful model to have at your disposal because it can help you stock inventory optimally while also giving you a good indication of business health, marketing effectiveness, and more.
In most cases, you’ll want a shorter DSI because it indicates that you’re selling inventory at a quicker rate. From that, you can infer that there’s a good demand for your products and that your marketing and sales strategies are working well.
A longer DSI usually points to issues. It implies that you’re struggling to shift stock, or could mean that you’re overstocking. With a longer DSI, you’re probably overpaying on storage costs, and you’ll have less flexibility due to capital being tied up in inventory.
Other inventory management methods
Some other inventory management methods you can look at for further reading include:
- First in, First Out (FIFO)
- Last in, First Out (LIFO)
- Materials Requirement Planning (MRP)
- Reorder Point Formula (ROP)
Tips for improving inventory management
Invest in the right technology
Your inventory analysis can only be as accurate as the data you have at your disposal. That’s why you need inventory management software that will give you clean, accurate data in real time.
Investing in the right technology allows you to use one platform as the central source of truth, enabling stakeholders at all levels to track stock, sales, and performance. Because so much of the data collection is automated, it eliminates the need for complex number crunching and makes the data accessible to everyone in the business.
Some popular inventory management technologies include:
- ControlPort (best overall)
- Zoho Inventory
Forecasting demand, also known as demand planning, involves taking historical data and using predictive analysis to anticipate future demand for your goods.
When demand forecasting is done accurately, you can ensure that you always have products on-hand to meet customer needs. You’ll also be able to plan your resources more wisely.
Demand planning is particularly important for eCommerce brands that experience spiking order volumes due to seasonality. If you have a good amount of historical data – generally more than a couple of years – you’ll be able to better plan around busier and quieter months.
Re-order at the right time
In inventory management, timing is key. If you re-order too early, you could end up with overstocked products and all the issues that could accompany it. You risk products going out of date, which then leads to wastage. Even if your inventory has no risk of going obsolete, you can still end up paying storage costs for inventory you don’t necessarily need.
On the other hand, if you re-order too late, there’s a good chance that you will need to endure stockouts and your customers’ disappointment.
Rather than going with a ‘gut’ feeling, you can use the Reorder Point Formula (ROP) to calculate the best time to re-order stock.
Review poor performing stock
Sometimes, certain stock simply doesn’t sell. Perhaps the price point isn’t right, or perhaps you haven’t shouted about it enough during your marketing campaigns. Or, at times, there simply isn’t a demand for the product.
While it can be demotivating to see lines performing poorly, it’s often best to retire those products if the demand simply isn’t there. While you can always do a marketing push, lower the price, or include them in bundles, sometimes that isn’t enough to clear lines that are moving at a glacial pace.
Rather than having obsolete lines take up storage space and cost, consider recycling or donating your poorly performing products to make way for stock that performs better.
Work with a fulfilment partner
Outsourcing your fulfilment to an experienced fulfilment partner can be the most effective way to improve your inventory management.
Modern 3PL (third-party-logistics) partners don’t just fulfil your orders for you, they’ll also use their expertise in inventory management to help you get the most value out of your inventory.
Most fulfilment partners are tech-enabled, too. This means they’ll have custom-built inventory management tools that can integrate with your shopping channels and give you real-time inventory data.
Optimise your inventory with James and James Fulfilment!
At James and James, we have all the tools you need to optimise your inventory without headaches.
Our award-winning inventory management platform, ControlPort, has been designed from the ground up to offer eCommerce brands an accessible, time-efficient way to make the most out of their inventory.
We also offer industry-leading fulfilment services powered by a global network of fulfilment centres.
Get in touch today to learn more.