Essentials of inventory management

Your business is on a roll. Your sales figures are on an uptrend, the customer count is growing steadily, and the profit seems to be good. Everything seems to be perfect until that point when you try to analyze how individual items in your inventory performed.

This is where you’ll discover the flaws in your business. Maybe the stock count does not tally with the sales figures, or you can’t tell which variant of a particular product performed the best. Or one of your regular customers is displeased to know that you’re out of stock of her favorite item and it will take another seven days to reorder it.

Can these issues be avoided? Well, a more reliable and disciplined stock management approach always helps. This article focuses on some simple tips you can follow for more efficient inventory management.

1. Identify your items

Giving each stock item a unique identifier is very important for effective inventory management. In supply chain management, this unique identifier is known as an SKU (Stock Keeping Unit).

The two prime reasons for assigning a unique identity to your items are to track the movement of each product and to analyze each item separately. As your list of items grows, it becomes more and more difficult to differentiate amongst them just by name or description. Moreover, if you sell items in various colors or sizes or similar items obtained from different suppliers, it is essential to identify each unique variation. Here’s an example of how you can assign SKUs for the items in your stock:

Determining SKU for your items

Here you can see that the SKU includes each aspect of the product. It’s organized using a ‘trickle-down effect,’ moving from the broadest information to the most specific details:

Cascading method of naming items

It is pretty clear that SKUs make it very easy to understand which item someone is referring to just by looking at the code. This system is even more effective when it’s paired with inventory management software. Most inventory software, such as Zoho Inventory, allows the user to bundle two or more items and sell them together as a separate product on the market. You can create a new SKU for the bundled or composite item and track it, while still monitoring the constituent items separately based on their individual SKUs.

If you maintain stock in an inventory management system, there are two important rules to follow while deciding on SKU for your items:

i) KISS (Keep It Simple, Stupid)

Keep your SKUs as simple as possible. Each member of your team should be able to quickly look at an SKU and recognize the information in it. For instance, if you source items from multiple vendors, including the initials of the vendor in the SKU will make it easy to spot how many items were purchased from each vendor.

ii) Use alphanumeric codes

Special characters can make your codes confusing and difficult to remember. Use letters and numbers to represent your products’ attributes and avoid special characters like #, *, or |.

2. Keep enough stock on hand

An out-of-stock situation is a nightmare for any business, and it can arise due to poor inventory planning or a lack of inventory control measures. As your business grows, it becomes more and more important to implement controls to reduce the occurrence of out-of-stock situations. But where do you start? Here are a couple of simple formulas to help you get your stock management on track.

i) Reorder point

A reorder point acts as a trigger for your business — when the stock level for a particular item reaches the reorder point, it means that it’s time to order more items from your vendor. You can determine the reorder point based on your sales trends and lead times. If your inventory consists of many items, you should calculate and set a reorder point for each item.

So, how does a reorder point help?

a) It helps you avoid out-of-stock situations

Out-of-stock situations happen when a seller fails to pay attention to the stock levels and doesn’t place an order until it’s too late. Setting a reorder point means that the seller is always notified when it’s the right time to reorder.

b) It helps you avoid overstocking

Ordering items before you need to can lead to overstocking, which can also be hazardous for your business. Overstocking eats up a lot of your storage space and a lot of your funds. A reorder point helps you strike a balance by buying items at just the right time. This saves you storage space and money, both of which are limited resources for small businesses.

c) It helps you retain customers

If your customers notice that their favorite items are always available in your store, they’ll be more likely to continue ordering from you. Keeping your existing customers happy through good stock management is much less expensive than acquiring new customers

ii) Safety stock formula

Safety stock acts as an extra layer of padding for your inventory so you can absorb sudden shocks. If there’s a delay in your supply or an unexpected surge in demand, you can dip into your safety stock instead of losing sales.

Suppose that, for example, your bestselling item reached its reorder point three days ago. You promptly reordered it, but now you’ve been informed that there’s a delay on the supplier’s end and your items won’t arrive for another week. Under normal circumstances, you’d get new stock in plenty of time, but now you could lose up to a week’s worth of sales while you wait for the delayed shipment. This is where safety stock comes into play. By calculating your safety stock ahead of time and factoring it into your reorder point, you’ve ensured that you still have some stock to sell during the delay.

To calculate the right amount of safety stock, you need to consider your average demand, the variability of your demand, and your lead time. Here’s a tiny glimpse at how it works: Safety stock formula e-book

3. Review what you have

It’s been some time since you started your business. You have named your items and implemented your control measures, and now it’s time to move on to the next step: stocktaking.

Stocktaking is a significant part of stock management. After a certain amount of time, usually a year, you need to tally your physical stock and compare it to your inventory records. Although it sounds painful and time-consuming to sit down and count the stock manually, it is important and worthwhile. Stocktaking helps you to reconcile the stock record in your inventory management software with the actual shelf count. It helps you to identify any discrepancies and take corrective actions.

Here are answers to a few of the questions you may be asking about your next stocktaking process:

i) What to count?

Only count items that you currently own and that have been recorded in your inventory system. You might have items in your store or warehouse that have already been purchased and invoiced but haven’t shipped out yet. Or you might have a new consignment of items that have arrived in your warehouse but not yet been entered in your inventory system. In the first case, since the sale has already been made, the goods now belong to the buyer. Your inventory system isn’t counting them as part of your stock, so counting them in your stocktaking will lead to misleading numbers. In the second case, if the items have not been recorded in the system but are included in the physical counting, there will obviously be a mismatch. So it is very important to separate those items from the rest before you start counting your stock.

ii) Where to begin?

Creating a map of your store helps a lot. If you have stocked items in different areas of the store based on their type or quantity, you’ll be able to predict which section will be most time-consuming to count. That will help you allot the most experienced staff to cover those areas so that they can be completed quickly and accurately.

iii) How to value stock?

After you have reviewed your stock, you need to figure out how much it’s worth. A lot of managers make the mistake of valuing their stock based on the price they paid when purchasing it. But to get a more accurate and reliable figure, the valuation should be based on the current market price.

How is stocktaking good for your business?

a) It helps you review your stock management practices

Even if all of your records tally, stocktaking raises some important questions that you should probably be considering. Have I been stocking too much? Should I recalculate my reorder point? Or should I move my warehouse to a bigger property?

b) It helps you spot broken items and take measures to mitigate them

If you deal with fragile or perishable items, then stocktaking can be very useful for discovering how many items have been broken or spoilt while in storage. If the rate of breakage and spoilage is high, then it is vital to revisit the way you stock items in your warehouse or store.

c) It helps you plan your next course of action

Stocktaking may reveal trends that go unnoticed during regular business days. For instance, it can show that you were able to sell very few units of a particular item and now you are left with a huge overstock. To clear this stock, you can bundle the slow-selling item with a fast-selling product and offer the bundle to your customer at a discount. You’ll also know to be more cautious in the future while ordering additional units of that product.

Putting it into practice

So, we’ve covered some simple tips which can help you get started with stock management. Use SKUs to keep track of every item in your inventory, use control measures to avoid running out of stock or overstocking, and use some basic preparations to make your stocktaking more efficient. If you follow these steps, you can streamline a lot of your inventory and order management activities. Inventory management software such as Zoho Inventory can also be very helpful in making your stock management more effective. Inventory management software helps you avoid duplicate entries while selecting the SKUs for your items, gives you automatic reminders when your items reach their reorder levels, and uses barcoding to save you a lot of time during stocktaking. With good inventory software and these simple stock strategies, your business will be ready for success.

Tanoy
Marketing Analyst