8 Inventory Management Techniques

Inventory management is a highly customizable part of doing business. The optical system is different for each company. However, every business should strive to remove human error from inventory management as much as possible. This 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.

Set Par Levels

Inventory par levels are the minimum quantity of a given item that must always be in stock. When an item hits below par levels, an order should be placed to meet the par level.

Par levels are created in order to ensure that the product is always stocked at the optimal, not too little so you’ll run out and be able to deliver the dishes you advertise and not too much that you’ll have excessive stock which will lead to waste. Usually, par levels are set to meet short-term demand, meaning that it’s important to be aware of inventory stock levels and make sure that you are meeting your par.

First In, First Out (FIFO)

FIFO was the traditional method used by most businesses before inflation became common. Under FIFO, the goods you receive first are the goods you sell first. Under this method, you value inventory at its most recent price. FIFO is usually used during periods of relatively low inflation since high inflation and increasing replacement costs tend to skew inventory accounting figures.

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 good relationship with your suppliers.

A good relationship isn’t just about being friendly. It’s about good 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.

Contingency Planning

A contingency plan is a course of action designed to help an organization respond effectively to a significant future event or situation that may or may not happen.

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 the product you desperately need
-your warehouse doesn’t have enough room to accommodate your seasonal spike in sales

It’s not a matter of if problems arise, but when. Figure out where your risks are and prepare a contingency plan.

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 that the facts matched 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, items of higher value will be counted more frequently.

Prioritize With ABC

Some products need more attention than others. Use an ABC analysis to prioritize your inventory management. Separate 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:

A - high-value products with a low frequency of sales
B - moderate value products with a moderate frequency of sales
C - 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.

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 so many variables involved and you’ll never know for sure exactly what’s coming—but you can 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 and spend
-If there's something else that will help you create a more accurate forecast, be sure to include it.

Drop shipping

Drop shipping is a retail method in which you don't keep products in stock. Instead, you partner with a wholesale supplier that stocks its own inventory - you transfer customer orders and shipment details to them, and they ship the goods directly to the customer.