Managing Business Inventory as a Small or Medium Sized Business

Introduction

Have you experienced any of the following before?

Customers ask for a particular product, but you are out of stock. Does your best-selling product finish at the peak of demand? You have some products that have been tying up your money for months! You lose money because of excess stock that ends up deteriorating. Having multiple sales to sell off products that refused to sell out for months!

If you relate to the following scenarios, then you need to start paying attention to your inventory (i.e., finished goods at hand)

Why should I be concerned about inventory management? 

Without a doubt, holding inventory is very important in every product-centered business. It helps you to meet any sudden increase in demand and always meet the needs of your customers, even when there are issues like late delivery with suppliers, but holding inventory indiscriminately is very expensive and detrimental to the growth of your business. Inventory takes up storage space, requires protection, security, and insurance, and ties down cash that could have been used for something else.

This makes inventory management very important.  Inventory management is an important part of supply chain management. (Aside: you can read our article on supply chain management here, enjoyyyy!)  

The goal of inventory management is to ensure that you have the right products in the right quantity available at the right time. When you have too much inventory, you might have a cash-flow problem as you have less cash to spend on other parts of the business. When you have too little inventory, you risk losing sales and customers who might port to a competitor because of your inability to fulfill order requests. However, when you have the right product at the right time in the required quantity, you avoid losing revenue and customers, improve your cash flow, and have a more organized and optimal supply chain.

What are the highlights of proper inventory management? 

Paying attention to how you manage your inventory is one of the best things you can do for your business this month. Managing inventory would help you get a good grasp of your sales, production or order time, supply and demand curve, customer base, time of order, and forecasted time for restocking (especially important for those who deal with goods needed periodically), business or product trend, best sellers, and least sellers, etc.

Here are a few highlights of having good inventory management:

1. It improves the experience of your customers as your brand is perceived as reliable, as you always deliver when the need arises. 

2. It helps you forecast demand, which also improves customer service, as you can always estimate when your customers are running out of stock and follow up. 

3. It makes your business more profitable as it reduces the costs involved in holding inventory and improves cash flow.

4. It prevents waste and minimizes risk and loss associated with holding inventory. 

5. It enables you to decide the appropriate quantity of goods to have per time.

6. Tracking the number of items you sell helps your bookkeeping.
7. It helps you assess the performance of the various products in your product line and spot trends or seasonal changes that inform good business decisions.

I am interested, how do I go about putting in place good inventory management?

Step 1: Know and apply the following techniques.

1. Use the First-in-First-out (FIFO) Approach

With this approach, goods should be sold in the same order they are bought or produced. This is especially important for perishable goods but it is also very important for non-perishable goods so as to avoid old goods getting damaged, expired, or stale. Sell existing products before new ones.

2. Use Data to Forecast Demand

If you have been keeping your sales data since you started your business, that data would be of good use in managing inventory. If you don’t keep sales data, don’t be discouraged, the best time to start is now.

This sales data is good historical data that you can use to predict or forecast your future demands. Check this data and you’ll notice some patterns. You’ll discover that some products sell better at a particular time of the year, your busiest week of the year, seasonal variations in sales, bestsellers, etc. You should study these patterns and use them to decide on the minimum stock to hold per product, reorder time, etc.

In trying to predict demand, you should also pay attention to other things like the growth rate of your business, the trends in your industry, planned increase in marketing spend, a new contract of sale, pre-orders or subscriptions, seasons.

3. Use the 80-20 rule

This rule simply states that 80% of your sales come from 20% of your products. So, find that 20%. Think about the goods that contribute the most to your sales and prioritize them. Your cash investment in inventory should not be spread equally amongst all your products. It is better to never run out of your highest-grossing products in exchange for occasionally running out of the lowest-grossing products. You should study the sales cycle of the high-grossing products and ensure they are always available.

You can use the ABC analysis to execute this. Categorize your stock into the following:

A- The % of stock that makes up 80% of your sales

B- The % of stock that makes up 15% of your sales

C- The % of stock that makes up 5% of your sales

The A stock is the most profitable and should always be available. The C stock is the least profitable or “dead stock”. Its quantity should be minimal.

4. Set a Minimum Quantity Level

For each of your products, you need to set a minimum quantity that must be at hand at all times. When your quantity drops at this or below this level, you know that it is time to reorder or produce. Your minimum quantity should not be O.

Deciding on the right minimum level requires some form of research. You should look at how quickly products get sold, the distribution of customer order time, and how long it takes to restock or produce new ones. Note that this level can change based on various circumstances. For instance, based on a seasonal hike in demand, you might want to increase the minimum quantity level.

5. Manage Relationships

Having a great relationship with your suppliers helps in managing inventory. Sometimes, you’ll need to restock a product more quickly than anticipated, need a quick fix in your production process, or reduce or increase your minimum quantity level. Having a strong relationship, transparent and consistent communication with suppliers would be helpful.

6. Audit your Stock

Periodically, you should count your stock to ensure that it is in line with what you have on records: either on your spreadsheet or inventory management software.

Step 2: If you run a micro or small business, create an inventory spreadsheet, otherwise, automate the process and use good  inventory management software. (e.g Zoho, square)

Template please?

We are happy that you are willing to become more responsible with your inventory management. We’ve created a template that can guide you. You can send us a mail to request it businessmeetsmedia@gmail.com. Remember that as your business grows, it would become impractical to manually fill in a spreadsheet. When that time comes, please port to an inventory management software.

Have questions or need more help in managing your business inventory? Leave a comment or send an email @ businessmeetsmedia@gmail.com