Inventory is the life and blood of any retail supply chain. Making an accurate estimate of inventory means the difference between profit and loss. Not stocking enough inventory of popular items can be as damaging as trying to offload overstocked products. Ultimately, inventory availability impacts on your customers’ perception of your business.

Inventory management is the end-to-end process of tracking stock from ordering, receiving and stocking to packing and shipping products. To maintain adequate stock levels, you need to have a full understanding of how much inventory you have as well as how much you will need to fulfil upcoming orders.

While data analysis has always been an important part of supply chain management, manual data like paper spreadsheets and shipping manifests takes time to be compiled and analysed. In an increasingly fast-paced industry, this approach is simply no longer sustainable. Prompt and accurate forecasting and planning are crucial to responding to clients’ demands and ensuring profitability.

There is more than one way to manage your inventory. In this article, we summarize the main practices you can follow to better manage your inventory, with a focus on automating your supply chain. Consider all options and select the ones that better suit your business needs.

Choose a Inventory Management Model

ABC Analysis

Created by Italian economist Vilfredo Pareto, ABC analysis is a method for categorizing inventory into a hierarchy of most to least valuable items. The Pareto principle states that 80% of the overall consumption value is based on only 20% of total items.

Not all the products you offer are valued equally; this strategy will help you with concentrating time and resources on big ticket items.

A Items – the smallest category comprising your most valuable products
B Items – slightly larger category comprising of middle range products, slightly less valuable then A
C Items – biggest category with smaller value products

Cleverism supplied a great example of Pareto’s ABC analysis applied to Inventory Control:

Instead of ordering your entire stock through the same method, you might save the most sophisticated ordering system for your category A items. It is also best to improve the managerial oversight of these items to make sure that the purchase orders are correct. It is okay to decrease your supply level of category A levels and employ more man hours because these are the products most worth your while.

For category B items, you might consider ordering more stock to include a safety stock level. This will reduce delivery costs, ordering time and the amount of time dealing with stock.

Leave C items on automated ordering to avoid allocating too many resources to them. Keep plenty of the C products in the warehouse so that you don’t have to worry about ordering them.

Economic Ordering Quantity (EOQ)

“Economic order quantity (EOQ) is the ideal order quantity a company should purchase for its inventory given a set cost of production, a certain demand rate, and other variables. This is done to minimize inventory holding costs and order-related costs.” - Investopedia

The formula calculates the most economical number of items a business should order to minimize costs and maximize value when re-stocking inventory. However, it assumes that demand, ordering, and holding costs all remain constant.

Inventory turnover ratio

My Accounting Course defined the inventory turnover ratio as a ratio that shows how effectively inventory is managed by comparing cost of goods sold with average inventory for a period.

Inventory Turnover Ratio = Cost of Goods Sold /Average Inventory

This ratio is important because total turnover depends on two main components of performance. The first component is stock purchasing. If larger amounts of inventory are purchased during the year, the company will have to sell greater amounts of inventory to improve its turnover. If the company can’t sell these greater amounts of inventory, it will incur storage costs and other holding costs.

The second component is sales. Sales must match inventory purchases otherwise the inventory will not turn effectively. That’s why the purchasing and sales departments must be in tune with each other.

Fast-Moving Items: high demand / high inventory ratio
Slow-Moving Items: lower demand / low turnover ratio / keep minimum inventory levels
Obsolete Items: zero demand / items that should be liquidated

Just in Time (JIT)

JIT is an inventory management approach that supports that companies need to only keep inventory in the right quantity at the right time with the right quality. The goal of JIT is to improve a company's return on investment by reducing non-essential costs.

Optimize your fulfilment processes

Many businesses don’t have effective systems for processing and fulfilling their orders. Read this article for a full description of fulfilment models and how the right tecnology can streamline your fulfilment.

Forecast demand

Demand forecasting means predicting your inventory requirements. There no easy one-size-fits-all formula for demand forecasting. Each business has its unique set of SKUs, pricing, sales channels and seasonal fluctuations to account for.

Automating your supply chain an give you access to sophisticated algorithms that accurately calculate demand based on historical and real-time sales data.

Calibrate your reorder point formula

A reorder point formula tells you approximately when you should order more stock – when you’ve reached the lowest amount of inventory you can sustain before you need more. These quantities are not meant to be static and should be adjusted in response to market fluctuations.

Redesign your warehouse layout

At the core of an efficient warehouse lies a carefully designed storage system. Managers need to be vigilant when planning and designing racking solutions, to ensure that the facility’s floorspace is utilized to its optimal capacity. Your operational processes will drive your storage design.

Tecnology can help you optimise the layout of your Warehouse by making recommendations such as changing your product slotting philosophy away from conventional product value-based ABC categorization toward often counter-intuitive yet highly efficient methods like floating inventory warehouse layouts.

Streamline cycle counts

Regardless of the controls your business uses, regularly scheduled audits will help you mitigate errors and uncover discrepancies. Loss can be incurred by theft, but more commonly goods are simply misplaced, miscounted, or damaged. Over time, missing items can add up to a major dent in profits.

By automating the cycle counting process with a WMS, you can reduce time and costs to your business.

Reduce Your Inventory

Your inventory level primarily depends on the type of products you sell, and order size. However, all businesses need to find the minimal amount of inventory they must carry without being understocked. Additionally, you want to be aware of the maximum amount of inventory you need to stock, so you don’t run out of top sellers during peak seasons.

Improve Quality Control

Regardless of what business you’re in, investing in quality far outweighs the cost of mistakes. Unfortunately, for many businesses, quality control is often overlooked, resulting to returns, damaged products, losses, and customer dissatisfaction.

For warehousing, that investment can take on many forms:

inspecting inbound receipt of goods
verifying outbound sales orders
quality inspections on material handling

Read this article to dive deepeer into automated QC.

Inventory visibility

Inventory management technology can offer the ability to visualize, manage and report on inventory in real-time across all channels. You can see the precise pattern of goods moving in and out of your warehouse system, whether you manage your own product line or are carrying goods for others.

An inventory management system will help you learn what inventory levels would be the most beneficial to the flow of your unique business. You can track important data, including seasonality, sales patterns, and past turnover and make more educated business decisions as you grow.

iWMS Australasia and HighJump

HighJump provides inventory control assistance for the toughest warehouse and shipping organizational tasks. With a modular, customizable design that can be built to suit your needs and budget, HighJump inventory tracking software lets you take control of all aspects of supply chain management, from precise inventory control to powerful analytics.

Designed specifically to suit the needs of a variety of warehouse and shipping operations, HighJump inventory control software allows you to meet your needs as a third-party logistics provider.

iWMS Australasia utilizes HighJump technology to produce solutions that can be scaled and tailored to meet any business needs. The core software architecture can be easily adapted in a fraction of the time of conventional systems, and at a fraction of the cost! And because all changes are external to the core software, upgrades and support are not compromised. This guarantees low total cost of system ownership.