Loss of sales and escalating costs make poor inventory management a major problem.
Not having enough stock results in stock-outs. Orders come in, you don’t have the items the customer wants, and then a scramble ensues to expedite higher-priced replenishment–or, possibly even worse, you lose the sale to a competitor who has the desired stock available. Stock-outs carry opportunity costs: the opportunity to sell at the best price and the opportunity to sell at all.
On the other hand, holding excess stock carries costs because the inventory you stock has to be warehoused, insured, secured against shrinkage, depreciated and taxed as an asset. Excess items generally cost the business an additional 25% to 50% per year. Excess stock carries opportunity costs as well: The working capital tied up in unsold inventory is unavailable for other purposes.
Just-in-time Inventory Management
Just-In-Time Inventory Management (JIT) is a strategy used to increase company efficiency by stocking product only as it is needed for sale. Reducing the amount of inventory stored in the warehouse allows you to avoid product waste due to damage or expiration while decreasing the costs incurred in housing and maintaining unsold inventory.
How to improve inventory management
Improving inventory management requires improving command of your warehouse operations and the physical stock inside it. Here are four things you can work on right away that will improve your inventory management:
1. Evaluate your current practices.
Before you can make improvements, take an overall look at your current practices. Effective inventory management is purpose-driven. Understanding what each link in the chain does and its purpose allows you to hone in on the specific aspects of your system that need improvement. Try consulting with other members of your team to identify potential problem areas and start there.
2. Perform routine stock reviews.
A major part of inventory management is simply knowing the quantity of each item you have in stock. Tracking what you bought against what you sold will not give you the full picture. Items can get lost, stolen or damaged after they enter the warehouse and this is unavoidable. Quite often, lost items go unreported until the right person takes notice. Solve this problem by routinely reviewing your physical inventory for accuracy with your records.
3. Systematise stock replenishment.
Having a system in place for restocking your inventory ensures that you will never be completely out of stock. It is crucial for the smooth flow of product during busy periods. If you do not use the Just-In-Time Strategy, you should at least have the policy to replenish inventory at set levels. If the stock of an item falls below a certain number, get the order in. Systematising the replenishment process avoids having a lapse in product availability between the time you order and receive the shipment.
4. Learn customer behaviour.
Start keeping track of how often you restock certain items and try to identify any trends or patterns. There may be seasonal or other outside factors that affect your product flow, depending on your industry. Be aware of the periods when customers order more and when they order less. Having a solid grip on customer behaviour allows you to stay ahead of the dry spells and mad rushes so you can work on maintaining the right inventory balance at all times.