With the increase of competition in the business sector, mainly in e-commerce, inventory management is crucial for businesses to have well-functioning retail companies.
A good inventory management strategy helps optimize the sales and profit of your business and offers a better customer experience.
If your business needs inventory management, you can avoid making several mistakes that result from human error and might affect your customers negatively throughout the journey. For the success of your business, you need to be up to date with the inventory levels and ensure you stay within stocks.
In this article, we will discuss what inventory is, the types of inventory, why you need to manage inventory, and the steps of inventory management. We will also share the best inventory management techniques for your business.
What is Inventory Management?
Inventory management is the method that businesses use in orders, stockpiling, and selling inventory. It is a crucial component, especially in supply chain management. It involves tracking stock levels and the movement of goods, whether processing finished products or delivering raw materials to manufacturers.
Inventory identification and response to trends ensure that your business has enough stock to meet all the customers’ orders and warn you if you are in shortage. After selling, the inventory turns to revenue; thus, before selling, it holds your cash. For example, the cash flow will be reduced if your business has less inventory.
There are four significant types of inventory, which include;
- Raw Goods: These are goods or materials that are used in the manufacturing or production of products. They are used to create the finished products. Raw goods can come from different producers and suppliers.
- Work in Progress: They are finished products waiting to be completed. The work in progress stands for production costs like machinery and labor.
- Finished Goods: This inventory entails the number of products in stock ready for customers to purchase. After the work is complete, it is included in the finished goods inventory.
- Maintenance, Repair, and Operations Goods: Equipment and materials are used during production but not in the finished product. Some of these include cleaning supplies, personal protective equipment, tech equipment, and office supplies.
Why Manage Inventory?
Inventory is crucial for business owners as it helps them achieve various things. It helps ensure that your business has enough stock, helping you reduce the risk of running out of stock.
Here are some reasons why you should manage your inventory.
- Limit Dead Stock: Having a dead stock on your business wastes resources as the stock won’t sell. Dead stock is a stock that is out of style, out of season, or even irrelevant to the consumer. If you manage your inventory correctly, you can avoid this mistake.
- Avoid Expiry: If your business sells products with expiry dates, you must remember that every sale opportunity has a time limit. Managing your business inventory helps you avoid unnecessary product spoilage by optimizing inventory control.
- Reduce Cost: The higher the inventory, the lower the cash flow. If you manage your business without tracking inventory, you can stock excess inventory that can impact your business negatively. Managing your inventory helps you cut costs by giving you detailed information on your stock levels. With this, you can maintain the right amount of inventory.
- Offer Better Customer Service: Great customer support is essential in ensuring the success of your business. Therefore, you need to have precise details on the products you sell. By understanding your inventory levels, you can offer your customers consistent and better customer service.
- Optimize Fulfillment: Good inventory management can improve your business order fulfillment. You can implement tactics like inventory distribution, which helps ensure you hold inventory in various fulfillment centers and that your products are available near customer locations.
The 5-Step Inventory Management Process with Ecommercebot
The Ecommercebot is an AI-powered tool that helps business owners to manage and track their inventory. It ensures you optimize your business’s inventory management process and have all the basics covered. The inventory management process involves monitoring and controlling your business stock as it moves through a simple process, from the suppliers to the warehouse to your customers.
Inventory Planning and Forecasting
During the first stage of inventory management, the business needs to research market trends and analyze historical data to predict demand and make strategic business decisions based on the information.
The process entails making decisions on the stock levels that give business owners sufficient and timely product deliveries to meet and satisfy customer demands. Precision in forecasting the market is essential, as it helps protect business owners from overstocking, which holds the cash flow, and stockouts that result in poor customer service.
Order, Receive, and Inspect Products
After analyzing which products are in demand, you need to order and purchase the products for your business. You need to get these products from your suppliers and follow up on the journey. Ensure you receive the correct order, which helps the other inventory steps function efficiently. Once your order arrives, you need to inspect the products thoroughly.
You must check the products and serial codes to ensure they are correct. Also, be keen on handling conditions like perishable goods to ensure the temperatures are accurate and every product you have received is in good condition.
Sort and Stock Products
Once you receive and inspect the products, you must store them well in the warehouse and add them to your leave management system. Be strategic in how your products are stored.
There are different warehouse techniques that you can use, such as arranging the products based on various factors like the product type and the SKU. You also need to minimize the distance of your best-selling products and store them in places where they can be accessed easily.
Inventory Tracking and Control
To have effective inventory control, you need to keep all the inventory levels tracked in real-time, track all the stock movements, take necessary measures to solve any challenges, and make adjustments—the tracking mechanism is essential for accurate financial reporting and enhancing the overall operations.
As a business owner, you need to utilize advanced tracking technologies, implement security measures, and do audits regularly. By doing this, you safeguard your assets and boost the efficiency of your business operations to ensure increased business success.
Receive Customer Orders and Ship
After setting everything up, the next step is to accept customer orders. All the orders will go directly to the point of sale system (POS), which processes your order and accepts customer payments. Your POS system needs an in-built inventory management feature to enable your warehouse staff to view the order details.
Once you receive the order, you must meet the package and ship the order to the customer. When packing the customer’s order, you must pack the correct products and quality ones. Furthermore, when shipping the products, ensure you send the customer an email confirmation that entails the tracking information.
The process of inventory management repeats from step one all the way to step five. You must also update your inventory regularly and automatically with Ecommercebot and share it with your stakeholders. Every time you are almost out of stock, make sure you restock on time to offer a better customer experience.
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Best Inventory Management Techniques
One good thing about inventory management is it keeps you updated with your inventory levels and ensures you never run out of stock or order excess stock. It also helps business owners meet their objectives and track critical inventory KPIs. Here are some of the best inventory management techniques you must look for.
ABC Analysis
ABC analysis technique helps you split your products into three categories based on different factors like consumption value and how the product impacts the annual inventory costs.
Here is a breakdown of how the ABC analysis technique works;
- A: You must include the most valuable products in your business and the least expensive to store long-term. These are the best products that contribute the most to your business profitability.
- B: This category involves the middle products that are essential sales to make, but they are more minor tickets like the A category.
- C: Category C is the most miniature ticket item with a high turnover. These products’ sales are less essential to business than those in the A or B categories. Still, the volumes of the category are critical to the profitability of your business sales.
FIFO vs. LIFO
Another inventory management technique is the FIFO (First in, First out) and LIFO (Last in, First out) accounting methods, based on how products circulate through your warehouse.
FIFO is a perfect system for businesses that focus on selling the oldest inventory first. If a particular product was the first in your warehouse, you need to ensure that the product is the first to leave your warehouse when you get orders. With this, your inventory stays as fresh as possible and is essential, especially for expiring or perishable goods.
On the other hand, LIFO is the opposite of FIFO; you sell the recent products you have received in your warehouse and ensure they are the first to leave the door. FIFO is suitable for businesses selling expiring and perishable goods, while LIFO is suitable for companies that don’t deal with perishable goods.
Demand Forecasting
Demand forecasting is a technique that helps your business accurately predict future demand for your products. If you strategically forecast the market correctly, it ensures you have the proper inventory to meet all your customer demands.
You can use different ways to forecast your demand, such as exponential smoothing, judgmental forecasting, moving averages, and time series analysis. The uniqueness of your business will determine the proper technique. With the demand forecasting technique you choose, you need to remember your demand forecasting will never be exact; sometimes, you may overstock or have stockouts.
Safety Stock Inventory
Safety stock inventory is connected to your sales projections and influences the quantities of your reorder. The technique is best for essential or bestselling products.
Safety stock means the extra inventory you order over the expected demand. For your business, there are more suitable elements than over-ordering. However, having additional stock over the one you desire is good, mainly if you sell a product in season and in high demand.
Dropshipping
Dropshipping is a business model that allows business owners to sell products without holding inventory. It is also a good technique for inventory management. The dropshipping model allows the seller to work with third-party suppliers who ship products once a customer orders directly to them.
The business model is a popular online business that helps reduce upfront investments and inventory costs. However, it gives the business owner less control of their business and gives you small profit margins varying with the dropshipping fees.
Other techniques include:
- Just-in-Time inventory.
- Setting par levels.
- Implementing Six Sigma.
- Managing relationships.
- Conducting regular auditing and cross-docking.
Final Thoughts
A streamlined inventory management process helps your business, giving it a competitive advantage in the business sector. Additionally, it is crucial for any company that deals, buys, and sells goods. You need to follow all the steps of the inventory management process and ensure you restock inventory on time.
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Ecommercebot is the perfect AI tool that can help you automate the inventory management process and ensure it keeps you up to date with the latest inventory levels. You can integrate the tool with your Shopify store, which will help you stay on top of your store’s operation with real-time inventory tracking. One advantage of Ecommercebot is you can try the tool for 30 days free and see if it aligns with your business needs and goals.
Frequently Asked Questions (FAQs)
What are the four major types of inventory?
The significant types of inventory include raw materials, work in progress, finished goods, maintenance, repair, and operational goods. You can better optimize your business’s inventory management operations by understanding the four types.
What are the five steps of inventory management with Ecommercebot?
There are five steps that businesses take when doing their business inventory management. These include inventory planning and forecasting, ordering, receiving, and inspecting products, sorting and stocking products, tracking and controlling, and receiving customers’ orders and shipping.
Which are the best inventory management techniques I should use?
There are various inventory management techniques that you can use for your business. Some major ones include FIFO and LIFO, dropshipping, safety stock inventory, demand forecasting, and ABC analysis.
