Imagine a fully functioning retail store with low costs, high-profit margins, smooth audited stock movement and close to zero dead inventory. A holy grail of perfect inventory management!
That sounds like next to impossible, right?
With lots of discipline and techniques that are listed in this document, you can run your store with low costs and high-profit margins.
Retail stores often experience unwanted situations such as high input costs, loss, and less revenue. But such chaos can be avoided by simple methods of controlling inventory.
Why should you control your inventory costs?
The prime aim of a business is always is to make a profit. A business only runs smoothly when its profit margin or/ and revenue are satisfactory. To attain this, one needs to make sure that his firm’s input costs are minimal. Therefore controlling inventory cost is a necessary activity for the betterment of the firm.
Inventory control helps in maintaining the right quantity of inventory in the store. Too much inventory can increase your working capital requirement. If the inventory is not moving it can result in expired products or stale inventory that is just occupying space in the store.
Top Inventory Management Techniques
In this article, we have jotted down ten important techniques for inventory management which will help in inventory control, cutting cost and provide effective inventory management:
- Track sales to forecast demand
There always exists a cycle of demand and supply, but the important part is that this cycle should be smooth. To make sure that your firm’s cycle runs smoothly, without any disturbance one should track its historical sales.
This would help in predicting the demand. Planning promotions, following the industrial trends and developing marketing campaigns are some other way to control cost.
- Centralize Inventory management
This refers to inventory that a firm holds in a single hub, through which it distributes inventory to its consumers in a large area. Often one large storeroom/warehouse is used in centralizing inventory systems with different sections used for different product categories.
Centralized Inventory helps the company save money, focus on their inventory management techniques and help get products to customers in the most efficient way possible.
- Maintain Dynamic Reorder point
A reorder point formula tells you approximately when you should order more stock. That is when you’ve reached the lowest amount of stock in hand that you can sustain before you need more.
(Average Daily Unit Sales x Average Lead Time in Days) + Safety Stock = Reorder Point.
The reorder point should be dynamically calculation based on your current selling velocity. Average Lead Time depends on your supply chain lead times.
Do not stop with just calculating the reorder point. Make sure you set up a system in place for reorder alerts. This will allow you to work with lean inventory and save on your ordering costs.
- Safety Stock Inventory
It is always good to take safety measures, especially with stock. Safety stock level is a small surplus amount of inventory that we keep on hand to guard against variability in market demand so that the supply-demand cycle is not disturbed.
- Batch Tracking
Batch tracking allows you to associate a set of inventory with a batch identifier. This system allows you to monitor a set of stock that shares similar features. With this strategy, one can track the expiry of items in inventory.
It also helps in tracking defective items back to the batch that it belonged in.
- ABC analysis
ABC analysis of inventory is a method of sorting your inventory into 3 categories. The categories are according to how well they sell and how much they cost to hold:
A-Items – Best-selling items that don’t take up all your warehouse space or cost.
B-Items – Mid-range items that sell regularly but may cost more than A-items to hold.
C-Items – The rest of your inventory that makes up the bulk of your inventory costs while contributing the least to your bottom line.
ABC analysis of inventory helps you keep working capital costs low because it identifies which items you should reorder more frequently. It also helps identify items that don’t need to be stocked often – reducing obsolete inventory and optimizing the rate of inventory turnover.
- Just In Time Inventory
It is the type of lean methodology designed to increase efficiency, reduce inventory costs by receiving goods only as they are needed. JIT help reduce your inventory space requirement and reduces the capital requirement for inventory.
- Schedule inventory audit
It is an analytical procedure to check a company’s inventory and confirm that the financial records and actual count of goods match with each other. Cycle count is a process where you will take a portion of the inventory and verify with physical inventory.
This helps in maintaining inventory accuracy and reduces shrinkages.
- Demand forecasting
This is the process in which historical sales of a specific/similar product is used to develop an estimate of an expected forecast of consumer’s demand. This helps to give an overall idea about the number of goods that can be demanded by the consumer in the future.
This method minimizes the inventory carrying costs. When a store sells its products it purchases that item from a third party and directly shipped to the consumer instead of storing it in a warehouse. This system is known as drop shipping and is very useful in reducing/controlling costs.
Take Control of Your Inventory
Inventory cost involves keeping the capital cost sunk in inventory to minimal. Reducing inventory kept in the store reduces your working capital requirements. In the above section, we got to know some of the methods to control cost.
While some of the methods listed in the above sections require you to implement a strong process, it is also recommended that you use cloud-based inventory management solution like Easyops which comes with all the techniques integrated into the product.
These strategies outlined in this article can be very useful if one wants to increase the profit margin and decrease the cost.
Do let us know in the comment section below as to how much did this help you in cost controlling.