In theory, the idea of managing your business’s inventory seems pretty simple. You place products and materials into your inventory when you receive them, and remove them from your inventory when you sell them, and everything balances out perfectly at the end of the day or quarter or year.
In reality, inventory management becomes more complex with each passing day. In the 21st century, globalization has made the world a much smaller place in some ways, but has presented new challenges and opportunities for companies. You’re no longer just managing a location or a town or region – you’ve got customers around the globe.
With more customers, global supply chains, multiple warehouses and shipping points, along with ecommerce, managing inventory is more challenging than ever.
But it doesn’t have to be.
Today, we’re going to go over what inventory management is, why it’s so vital for your business’s success, and talk about some of the best ways to make a seemingly Herculean task much more manageable.
What is Inventory Management?
If you’re not entirely sure what inventory management is, here’s a quick definition:
In simple terms, inventory management is a system used for sourcing, storing, and selling both finished products and the raw materials used to make those products.
In practical business terms, this essentially means to ensure you have the right materials and the right products in the right locations, and that they are acquired (for materials) and sold (for products) at a fair price.
Inventory management is one of the most important elements of your business. Whether your inventory tracking system uses Excel, an inventory tracking spreadsheet, or an inventory tracking app, inventory management can help you save and make money.
How Does Poor Inventory Management Affect Your Business?
As mentioned above, inventory management can have a dramatic impact on your business.
With good inventory management practices, you guarantee that you have the products and materials you need on-hand, in the proper amounts, in the right locations, at all times.
However, if your inventory management isn’t optimized, it can wind up costing you money. Let’s look at how.
Product and Supply Shortages
If you’re not on top of your inventory management, you might find yourself out of your most popular items when they’re most in demand.
You may also wind up without the parts, components, or raw materials required to make your products.
Running out of stock on items that customers want to purchase not only costs you money, it can cost you the customer as well. If they can’t get it from you, they’ll get it somewhere else.
On the flip side of the coin, without good inventory management practices it’s entirely possible to wind up with too much product or too many of the materials and components you use to make your products.
You may be wondering why this is a problem – some would consider it being prepared and planning ahead.
While a little excess inventory may not be a terrible thing, carrying significantly more than you need or can sell will cost you money – maybe even more money than the lost sales created by potential shortages.
All of that excess inventory accrues carrying costs – you will have to store it until needed, pay for it when you purchase it (or over time), and so on. Why spend money you don’t need to spend? Good inventory management practices eliminate this issue.
Companies lose billions of dollars a year in shrink and theft. If you’re not tracking inventory, how will you know if you have a shrink problem? How will you know how much it’s costing you? How will you know it needs fixing?
Expired or Outdated Inventory
If you run a business where stock must be rotated regularly and expired products must be removed, good inventory management is essential.
Without a proper inventory management system, your business could be losing millions of dollars as stock expires on the shelf.
When you track inventory, you’ll know what products you have, when they expire, and when to rotate those products that are closer to their expiration date into the mix so you’re not throwing that money away.
Customers come to your business wanting to buy your products – but if you don’t have the product in stock, they can’t complete their objective.
Sometimes, it’s inevitable that you will simply run out of things (ask anyone who was trying to get toilet paper in March and April of 2020), but poor inventory management presents an avoidable problem when it comes to making sure you have adequate stock to meet the needs of your customers.
Beyond that, housing inventory in the wrong warehouses can create shipping delays and other issues that lead to disappointed buyers. Inventory management covers everything from the purchasing of your materials, to getting the product into the customer’s hand. Dropping the ball in shipping is every bit as bad as not having proper inventory in the first place in the customer’s eyes.
The good news is that inventory management practices can eliminate these problems, leading to more sales and happier customers.
How to Track Inventory
Hopefully you’re seeing how important inventory management is and how it can impact your bottom line. Before you dive in headfirst, here are some guidelines to help you make managing your inventory simple and painless.
1. Pick the Right Tool for the Job
When it comes to managing your inventory, you have a lot of options – and choosing the one that best meets your needs is important. Choose something that’s too simplistic and you’ll run into problems keeping everything organized and tracked. Choose something too complicated and you probably overpaid and won’t use a lot of the features.
If you’re a new small business, you may find that the old school pen and paper method is good enough to get started. This is the simplest method, but it doesn’t scale well when you get to multiple locations and start adding in large supply chains, but for a beginning business owner just getting their feet wet, this is a viable option.
If your business is a little bigger, or you need more functionality, the classic Excel spreadsheet is a tried and true solution that will serve you well for as long as you want to use it.
For larger companies with more complex supply chains and multiple locations, an inventory app or inventory management software can provide a better way to track inventory without spending a ton of time and energy.
Selecting the right option is key, and the size of your company, amount of inventory you need to manage, and your goals will play a key role in determining what’s right for you.
The best way to find the right inventory management approach is to try them all. Apps and software are plentiful and offer a wide range of options that can be scaled to fit your specific needs. Most companies will happily give you a demo of their product designed to showcase how it could help you specifically, and many provide free trial versions so you can take them for a spin.
Don’t rush to choose a solution. Picking the right inventory management tool is one of the most important parts of the process. Take your time and get it right so you only have to do this step once.
2. Embrace the Cloud
If you still think of billowy white things in the sky whenever someone mentions the cloud, it might be time to join us in the 21st century.
The cloud is all the rage these days, and with good reason – it allows your entire team or company to have access to everything they could ever need for work…from anywhere in the world.
The benefit, even for small companies, is that the cloud has not only given us flexibility, but it allows us to get more done with less time. All of your inventory management and tracking in the cloud can be accessed and worked on by your entire team collaboratively.
The cloud isn’t just some pie in the sky dream – it’s a valuable tool to help your teams be more effective. Storing all of your inventory management data in the cloud means your team can be more efficient without having to be in one central location.
3. Organization is Key
The bigger the amount of inventory you’re managing, the more important your organizational skills become.
Excel is an excellent tool to help you keep things in order and make sure your inventory levels are right where they need to be at any given moment.
As mentioned earlier, ensuring you have the right amounts of inventory on-hand can save you money, keep your customers happy, and help you spot problems before they turn into major headaches.
If you want to take your inventory management to another level, consider an app or software-based inventory management program, which can give you even more ways to track and control your supply chain.
4. Barcode and RFID Tech Will Make Life Easier
One way that poor inventory management can impact your business is in the form of human error. No matter how great your employees are, the simple fact of the matter is that people make mistakes.
Mistakes when tracking inventory can be costly – a transposed number, missed items, and a number of other mistakes can quickly add up, which is bad news for your business.
Luckily, technology has come to the rescue again.
Barcode and RFID technology make it much easier to track items.
Barcoded inventory simply requires a quick scan to track it in your system. No need to write or manually enter numbers into a computer or spreadsheet.
RFID, which stands for Radio Frequency Identification, operates similarly – you can simply install RFID readers in your warehouse and always know your levels.
Of the two, barcode technology is cheaper to install and a little more reliable. RFID has a higher cost to set up and maintain and there can be issues of interference between the chips and readers in some locations.
However, if you’re looking to track high value inventory, RFID is a great option.
No matter which method you choose, barcode and RFID can streamline your inventory tracking and help eliminate human error. If you’re managing large amounts of products and materials, these technologies can be a lifesaver.
5. Audit Regularly
Once you’ve got your inventory management system of choice set up, make sure you’re auditing your results regularly. Tracking inventory serves no purpose if you aren’t checking the results.
How often you should audit your inventory depends on your company and personal preferences. Smaller businesses do it daily. Others have an annual inventory audit.
One advantage to using more advanced options like inventory management software or apps is that you can generate detailed reports more easily, meaning you’ll be likely to check the numbers more often. This is highly beneficial if you’re hoping to spot issues before they become full-blown problems.
What other things should you be looking for in inventory reports?
- What to reorder
- What products are selling
- What products aren’t selling
- Profits from goods sold
- The total dollar value of the inventory you still have on hand
These are some general items to monitor. You might also monitor for things like shrink and other issues depending on the specific needs of your business.
Another advantage of using software: if you use technology to help manage your inventory, you’ll be able to create very detailed reports tracking the metrics that matter to you without having to wade through a bunch of analytics that aren’t particularly valuable to your business.
What to Look For in Inventory Management Software
As your company grows and technology advances, it’s all but inevitable that you’re going to want to consider inventory management software at some point.
The good news here is that there is no shortage of options on the market. Modern inventory software comes in all sorts of different configurations designed to fit your needs – from simple apps and Shopify add-ons to full featured modular tools that can be custom configured for your exact needs.
There’s a product for every budget too, from free software to modestly priced packages to enterprise solutions that will make your wallet beg for mercy.
The key point here is to not be afraid of the technology solutions out there. Even the smallest businesses can benefit from inventory management software. It’s just a matter of exploring your options and finding the right solution for you.
With that in mind, here are some of the key things inventory management software should do for you:
Reduce costs, improve cash flow, and boost your bottom line
Let’s start with the most obvious solution. While it’s nice to streamline your inventory management system, at the end of the day it’s really all about saving money and making money.
Good inventory management software helps you do both by ensuring you’re not carrying excess inventory you don’t need and by helping you keep adequate stock on hand at all times so customers aren’t disappointed.
Ideally, it’s all about balance.
Keep track of your inventory in real-time
Using things like barcode and RFID technology has a lot of benefits. It eliminates a great deal of potential human error, it streamlines your operations, and it’s great for tracking inventory across a number of locations.
That being said, one of its greatest benefits is that it supports real-time updating. The second an item is scanned into or out of inventory, it’s logged into the system. No muss, no fuss, and no way for someone to get sidetracked and forget to do it later.
Real-time inventory updates are useful for businesses of any size, but if you have multiple locations, a variety of shipping centers, and different warehouses, this is essential.
Help you forecast demand
Good sales management software shouldn’t just update you in real-time on stock levels and the like, it should also provide analytic insights that allow you to forecast for the future.
Spotting trends early – either positive or negative – can help you be better prepared for the future. Again, this can help you save money or increase your bottom line.
Prevent product and production shortages
It feels like this one goes without saying, but software can help you avoid running out of products and materials by alerting you to low stock situations. It can also alert you of soon-to-expire products so you can rotate them through your inventory before they’re out of date and no longer sellable.
Prevent excess stock and too many raw materials
Running out of products and materials is bad, but having too much stock on hand is not good either.
We’ve talked a bit about the costs of excessive stock – it often involves carrying fees, storage fees, and other costs as well.
If you understand your inventory levels, and have software that allows you to forecast for the future, you can avoid the overburden of products and materials you don’t need.
Allow for easy inventory analysis on any device
In the 21st century, there’s no excuse for an inventory management software service not to provide an app that allows for mobile access and control.
The best software out there often utilizes cloud storage and can be accessed anywhere on a wide range of devices – from laptops to tablets to smartphones – with no decreases in utility.
Be accessible right from your retail point-of-sale
Inventory management that connects seamlessly with your point of sale system is highly useful. All the inventory information you need is right there, without requiring you to go to a different device.
Inventory alerts that appear as you sell or ship items on through your point of sale system is one more way you can prevent running out of product.
Optimize warehouse organization and precious employee time
Inventory management software can help you organize your warehouse operations, ensuring you know where the product is, in which warehouse, and at what inventory levels at the press of a button.
This is not only good to prevent losing track of products and raw materials, but it frees up your employees. If they know where things are, they’re not required to spend time looking for them, tracking them, or finding them.
Offer quick and painless barcode scanning to speed up intake
We talked earlier about the benefits of barcode and RFID tracking. You’ll want an inventory management program that can utilize this information.
Barcode scanning is a reliable way to track items at each stage of their journey, and it’s significantly faster than having your employees manually enter data (and as a bonus, it eliminates the potential for a lot of human error).
Allow for multi-location management
You might only have one location now, but as companies grow they tend to expand with more locations and warehouses. You need an inventory management software solution that can grow with you and track all of your inventory no matter the location.
Remember, you may not need it now, but it’s often good to plan ahead with inventory management software. Once you start using a service you like, swapping to new software can be a pain. So, find one that suits your current needs, but that can grow with you as your business expands.
Keeping track of your inventory is a guaranteed way for almost any business to improve their bottom line.
Whether you’re still doing it old school with a pen and paper, have mastered the art of the Excel spreadsheet, or have taken the plunge and purchased inventory management software, knowing the amount of product you have on-hand can save you money.
There’s no one “correct” way to keep track of inventory, but hopefully this article has given you some insights and ideas on how to make your inventory management process more efficient and effective.
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