Inventory Management Guide: 10 Essential Practices for Retailers
by Abdul Aziz Mondal Management Published on: 17 September 2021 Last Updated on: 18 October 2024
Every successful retail business needs well-organized retail inventory management to thrive. It has many benefits for your company as it streamlines operations, ensures you never run out of stock, and provides a satisfactory customer experience.
To have a good grip on your inventory management, you must understand what it means, what it has to do with retail business, and the essentials your inventory management practices should have.
You also need great inventory management software to ensure you’re in line and the account books tally. This article will explain all this and answer most retailers’ questions about managing inventory correctly.
Follow this guide to get a grip on your inventory management processes quickly.
Retail Inventory Management Explained
Inventory management ensures that your retail company always has stock or merchandise that your customers want or that is relevant to their needs.
It involves monitoring and controlling the purchase of these items and ensuring that they are properly stored; you have enough of them (not too much, and not too little.)
Inventory management differs based on the type of products your company carries and the channels through which they are shared.
Proper inventory management ensures you can meet customers’ demands when necessary and not run at a loss by overstocking products.
Inventory management is essential because it allows retailers to better understand the sales patterns of their items. This allows you to get quality information on how to run your business, such as:
- The items that sell well
- Which products do your customers love most
- Which geographical locations order your product (based on the customers’ locations)
- How many products you should have in storage
- How often to reorder
- When to no longer carry a product (for instance, during specific seasons of the year)
- Your profit margins, etc.
The Essentials of Inventory Management for Retailers
For inventory management practices to be successful, you can leverage certain best practices. We have listed ten below to help you get the best results.
1. Invest in a Retail Inventory Management Software
Inventory management has become less tedious in today’s digital world, with retail inventory management software available to save the day. It eliminates human errors and inaccuracies and provides a simplified way of keeping track of stock and purchases.
Inventory management software will help you save time and automatically track necessary processes. For example, for a real-time count of your inventory, work with an inventory management software that is compatible with a POS integration, such as Lightspeed.
2. Create a Centralized Record of all Products
Make a list of all the products you have in one place. This list should include the product name, brand, wholesale cost, stock-keeping unit, economic order quantity, case order quantity, etc.
Images and product descriptions also make it easy for staff to identify products for eCommerce retailers. Finally, new products should be added to the records, and a clear guide for updating the central database with new information should be provided.
3. Develop a Purchasing Procedure
It’s important to have a smooth process for purchasing products to avoid lagging when you need to stock up on products. Set out times to review the inventory and reach out to suppliers to avoid running low on products when you need them most.
4. Set up Alerts for Depleting Stocks
This is essential to make number 3 above work. Depleting stock alerts informs you when your inventory is running out. This ensures you are notified when your stock goes below your indicated threshold.
Use inventory management software to set up stock alerts for your products.
5. Use the Best Stock Keeping Unit (SKU) Practices
Just because the demand for your products is skyrocketing doesn’t mean you should overstock on it because market trends can change quickly.
The best SKU practices will allow you to analyze the cost for every SKU item to determine how profitable it is for your business. If they are not performing well, discontinuing them is the best bet.
6. Take Stock Regularly
Your inventory management software effectively helps you keep a count of your stock, but experts still recommend that you conduct a quarterly or yearly counting of your inventory. This helps to eliminate errors and deviations, if any, to avoid surprises.
Inventory counting methods like physical counting or cycle counting are some effective methods you can try.
7. Figure out Your Stock Locations
Small retail businesses may not have difficulty with this, as your inventory/stock location may simply be the display room or your stockroom.
However, for large-scale businesses, stock locations may include warehouses, stockrooms, distribution channels, department store shelves, and lots more.
Identify where your products exist and fully map out the location of your inventory to avoid revenue loss or missing sales records.
8. Establish a Stock-Receiving Process
Without a smooth stock-receiving process, your retail company may suffer damages in terms of loss, misrepresented supply information, shortfalls, overpayments, and more.
Ensure that every delivery matches the order requested, confirm the product types, check that cartons, boxes, etc., contain the requested products, and count goods immediately when they arrive to reduce the amount of stock receiving errors your business incurs.
9. Establish a Process for Returns
Retail companies often allow customers to return goods and products based on certain exceptions and allowances. Set up a process to confirm the returned products’ state.
Check if they are deformed, resalable, defective, suitable for repair, or a complete write-off. This way, you can save costs on selling off items you can still profit from.
Resalable items should be added back to inventory and displayed for sale.
10. Monitor Your Inventory KPIs
To see if your inventory management processes are effective, you should carefully monitor your Key Performance Indicators (KPIs) to see the trajectory of growth or decline.
Some important metrics to look out for include:
- The stock-to-sales ratio
- Rate of return
- Product sales
- Turnover rate
- Your sell-through rate
This guide will show you the formulas to calculate over 30 valuable KPIs for your retail business.
Techniques for Efficient Retail Inventory Management
The right balance between supply and demand can be maintained when an efficient retail inventory management system is in place. The following techniques will help you achieve just that: ensuring customer satisfaction as well as maximizing profits.
Let’s check it out:
ABC analysis
The ABC analysis categorizes inventory into three groups depending on the value.
- A-Items: The first one, A items are high-value products that have low sales volume
- B-Items: The second one is moderate in value and sales frequency
- C-Items: These are the low-value products on the list at full stop; however, they significantly contribute to sales volume.
This technique is useful for retailers as we can prioritize and manage the most important inventory items efficiently, which shows that the critical stock is monitored closely.
FIFO Method
The first in, first out, or FIFO method is a great technique to ensure the oldest stock is sold first. This technique is particularly helpful in inventories holding perishable goods or products with expiry dates.
The method helps reduce waste and prevents outdated stock from sitting on shelves for too long until they are unusable. The method helps keep the inventory fresh and the customers happy, reducing the return rate to the inventory.
Just-in-Time Inventory technique (JIT)
The system focuses on reducing waste by ordering and receiving products only as per requirement. The technique helps minimize carrying costs; however, it requires accurate demand forecasting and a strong relationship with suppliers to avoid delays.
Retailers like yourself can use chit to keep stock level slow so that there is a low chance of overstocking and wasting it when the product sales are not high.
Safety Stock Management
This method of retail inventory management is more like keeping surplus stock in place to avoid any out-of-stock emergencies. Safety stock SD is extra inventory that retailers keep on hand to handle fluctuations in demand or supply chain deceptions.
As a retailer, this technique will be helpful when you use historical data to calculate the right amount of safety stock. This insurance ensures that you have a buffer during emergencies. For instance, during d-days from suppliers or when the demand spikes.
Economic Order Quantity (EOQ) Technique
This technique depends on a mathematical model that helps retailers determine the ideal order quantity. This helps minimize total inventory costs, considering the ordering and holding costs.
When calculating the EOQ, you can determine the order size that optimizes inventory turnover. Thus, you reduce the unnecessary costs related to large, frequent orders.
Conclusion
Retail inventory management looks different for different retail companies, but some key practices are general to most. We have highlighted these best practices to guide you as you take inventory of your products.
It will ensure accurate results and uniform information across all your stores and channels so you never run out of stock or overstock products.
Using efficient retail inventory management software will also help to keep you in line and improve your inventory processes.
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