BBA IV – L&SCM

Topic : Inventory Control

What is inventory control / management?

Inventory management is the act of keeping track of a company’s
stocked goods and monitoring their weight, dimensions, amounts, and
location. The goal of inventory management is to minimize the cost of
holding inventory by helping business owners know when it’s time to
replenish products, or buy more materials to manufacture them.

Why inventory management is important

Effective inventory management is essential for ensuring a business has
enough stock on hand to meet customer demand. If inventory
management is not handled properly it can result in a business either
losing money on potential sales that can’t be filled, or wasting money by
stocking too much inventory. An inventory management system can also
help you prevent a number of other mistakes:

Inventory management saves you money

1. Avoid spoilage

If you’re selling a product that has an expiry date, like food or makeup,
there’s a very real chance it will go bad if you don’t sell it in time. Solid
inventory management helps you avoid unnecessary spoilage.

2. Avoid dead stock

Dead stock is stock that can no longer be sold, but not necessarily
because it expired—it could have gone out of season, out of style, or
otherwise become irrelevant. By managing your inventory better, you
can avoid dead stock.
3. Save on storage costs

Warehousing is often a variable cost, meaning it fluctuates based on

how much product you’re storing. When you store too much product at
once or end up with a product that’s difficult to sell, your storage costs
will go up. Avoiding this will save you money.

Inventory management improves cash flow

Not only is good inventory management more cost-efficient, it improves
cash flow in other ways, too. Remember, inventory is product that you’ve
likely already paid for with cash (checks and electronic transfers
included) and you’re going to sell it for cash, but while it’s sitting in your
warehouse it’s definitely not cash. Try paying your landlord in dog collars
or iPhone cases.

This is why it’s important to factor inventory into your cash flow
management. Inventory directly affects sales (by dictating how much you
can sell) and expenses (by dictating what you have to buy), and both of
these elements factor heavily into how much cash you have on hand. In
short, better inventory management leads to better cash flow
management.

When you have a solid inventory system you’ll know exactly how much
product you have, and based on sales you can project when you’ll run
out and make sure you replace it on time. Not only does this help ensure
you don’t lose sales (critical for cash flow), but it also lets you plan ahead
for buying more so you can ensure you have enough cash set aside.

Money spent on inventory is money that is not spent

on growth. Manage it wisely.

8 essential inventory management techniques

Inventory management is a highly customizable part of doing business.
The optimal system is different for each company.

However, every business should strive to remove human error from

inventory management as much as possible, which means taking of
advantage inventory management software. If you run your business
with Shopify, inventory management is already built in.

Regardless of the system you use, the following eight techniques to will
help you improve your inventory management—and cash flow.

1. Set par levels

Make inventory management easier by setting “par levels” for each of
your products. Par levels are the minimum amount of product that must
be on hand at all times. When your inventory stock dips below the
predetermined levels, you know it’s time to order more.

Ideally, you’ll typically order the minimum quantity that will get you back
above par. Par levels vary by product and are based on how quickly the
item sells and how long it takes to get back in stock. Although setting par
levels requires some research and decision-making up front, having
them set will systemize the process of ordering. Not only will it make it
easier for you to make decisions quickly, it will allow your staff to make
decisions on your behalf.

Remember that conditions change over time. Check on par levels a few
times throughout the year to confirm they still make sense. If something
changes in the meantime, don’t be afraid to adjust your par levels up or
down.

2. First-In First-Out (FIFO)

“First-in, first-out” is an important principle of inventory management. It
means your oldest stock (first-in) gets sold first (first-out), not your
newest stock. This is especially important for perishable products so you
don’t end up with unsellable spoilage.

It’s also a good idea to practice FIFO for non-perishable products. If the
same boxes are always sitting at the back, they’re more likely to get
worn out. Plus, packaging design and features often change over time.
You don’t want to end up with something obsolete that you can’t sell.

In order to manage a FIFO system, you’ll need an organized warehouse.

This typically means adding new products from the back, or otherwise
making sure old product stays at the front. If you’re working with
 a warehousing and fulfillment company they probably do this already,
but it's a good idea to call them to confirm.

3. Manage relationships
Part of successful inventory management is being able to adapt quickly.
Whether you need to return a slow selling item to make room for a new
product, restock a fast seller very quickly, troubleshoot manufacturing
issues, or temporarily expand your storage space, it’s important to have
a strong relationship with your suppliers. That way they’ll be more willing
to work with you to solve problems.

In particular, having a good relationship with your product suppliers goes

a long way. Minimum order quantities are often negotiable. Don’t be
afraid to ask for a lower minimum so you don’t have to carry as much
inventory.

A good relationship isn’t just about being friendly. It’s about clear,
proactive communication. Let your supplier know when you’re expecting
an increase in sales so they can adjust production. Have them let you
know when a product is running behind schedule so you can pause
promotions or look for a temporary substitute.

4. Contingency planning
A lot of issues can pop up related to inventory management. These
types of problems can cripple unprepared businesses. For example:

 Your sales spike unexpectedly and you oversell your stock

 You run into a cash flow shortfall and can't pay for product you
desperately need
 Your warehouse doesn’t have enough room to accommodate your
seasonal spike in sales
 A miscalculation in inventory means you have less product than you
thought
 A slow moving product takes up all your storage space
 Your manufacturer runs out of your product and you have orders to fill
 Your manufacturer discontinues your product without warning
It’s not a matter of if problems arise, but when. Figure out where your
risks areand prepare a contingency plan. How will you react? What steps
will you take to solve the problem? How will this impact other parts of
your business? Remember that solid relationships go a long way here.

5. Regular auditing
Regular reconciliation is vital. In most cases, you’ll be relying on
software and reports from your warehouse to know how much product
you have stock. However, it’s important to make sure the facts match up.
There are several methods for doing this.

Physical inventory

A physical inventory is the practice is counting all your inventory at once.

Many businesses do this at their year-end because it ties in with
accounting and filing income tax. Although physical inventories are
typically only done once a year, it can be incredibly disruptive to the
business, and believe me, it’s tedious. If you do find a discrepancy, it can
be difficult to pinpoint the issue when you’re looking back at an entire
year.

Spot checking

If you do a full physical inventory at the end of the year and you often
run into problems, or you have a lot of products, you may want to start
spot checking throughout the year. This simply means choosing a
product, counting it, and comparing the number to what it's supposed to
be. This isn’t done on a schedule and is supplemental to physical
inventory. In particular, you may want to spot check problematic or fast-
moving products.

Cycle counting

Instead of doing a full physical inventory, some businesses use cycle

counting to audit their inventory. Rather than a full count at year-end,
cycle counting spreads reconciliation throughout the year. Each day,
week, or month a different product is checked on a rotating schedule.
There are different methods of determining which items to count when,
 but, generally speaking, higher-value items will be counted more
frequently.

6. Prioritize with ABC

Certain products need more attention than others. Using an ABC
analysis lets you prioritize your inventory management by separating out
products that require a lot of attention from those that don’t. Do this by
going through your product list and adding each product to one of three
categories:

1. High-value products with a low frequency of sales

2. Moderate value products with a moderate frequency of sales
3. Low-value products with a high frequency of sales
Items in category A require regular attention because their financial
impact is significant but sales are unpredictable. Items in category C
require less oversight because they have a smaller financial impact and
they're constantly turning over. Items in category B fall somewhere in-
between.

7. Accurate forecasting
A huge part of good inventory management comes down to accurately
predicting demand. Make no mistake, this is incredibly hard to do. There
are countless variables involved and you’ll never know for sure exactly
what’s coming—but you can try to get close. Here are a few things to
look at when projecting your future sales:

 Trends in the market

 Last year’s sales during the same week
 This year's growth rate
 Guaranteed sales from contracts and subscriptions
 Seasonality and the overall economy
 Upcoming promotions
 Planned ad spend
If there's something else that will help you create a more accurate
forecast, be sure to include it.
8. Consider dropshipping
Dropshipping is almost an ideal scenario from an inventory management
perspective. Instead of having to carry inventory and ship products
yourself—whether internally or through third-party logistics—the
manufacturer or wholesaler takes care of it for you. Basically, you
completely remove inventory management from your business.

Many wholesalers and manufacturers advertise dropshipping as a

service, but even if your supplier doesn’t, it may still be an option. Don’t
be afraid to ask. Although products often cost more this way than they
do in bulk orders, you don't have to worry about expenses related to
holding inventory, storage, and fulfillment. You can test out dropshipping
today, with Oberlo, for free.

Take control of your inventory

Remember that with an effective inventory management system in place,
you can help reduce costs, keep your business profitable, analyze sales
patterns and predict future sales, and prepare the business for the
unexpected. With proper inventory management system in place, a
business has a better chance for profitability and survival.

It’s time to take control of your inventory management and stop losing
money. Choose the right inventory management techniques for your
business, and start implementing them today.