On its surface, the concept of inventory management might seem pretty straightforward — how much stock do we have on hand for each of the products we sell? But it’s much more complicated than that. Inventory management encompasses accounting for the products in your warehouse, the raw materials needed to make those products and other supplies to keep your business running.
Inventory management isn't merely an accounting of what is; it involves predicting what "will be" so the organization can ensure that it has enough product, raw materials and supplies to meet future demand. Carry too much inventory, and you're wasting valuable fiscal resources. Carry too little, and you risk losing money from lost sales.
Effective inventory management systems can help businesses save time and money and maximize sales. The right inventory management system automates some processes, accurately tracks incoming and outgoing goods and services and provides the real-time data needed to make purchasing and product development decisions.
What Is Inventory Management?
Inventory management looks at how much stock to order and when to order it. The inventory management process involves tracking stock from the point of purchase or creation through its sale.
There are many ways to plan and manage your inventory, each guided by your product and business needs. The pull strategy is based on customer demand, where you order small amounts of inventory as needed. The push strategy, on the other hand, relies on forecasting and is based on expected or predicted demand. The just-in-time strategy generates products at the time they are ordered. The strategy used varies by industry, type of business and the company’s inventory strategy.
Why Is Inventory Management for Small Businesses So Important?
Businesses of all sizes need to track inventory to help them manage costs and ensure they have an ample supply of products to meet customer demand. Effective inventory management allows businesses to save money and improve cash flow.
For example, purchasing products or raw materials that sit on shelves means that the benefit or value of the dollars invested in those materials is not being realized. On the other hand, not having enough inventory to meet customer demand can result in lost sales.
It’s critical for small businesses to reliably and cost-effectively manage their inventory.
17 Tips for Small Business Inventory Management
Ensuring an efficient, accurate and reliable method of inventory management is critical for small businesses. Here we look at 17 tips for small business inventory management.
Use the Inventory Method That’s Right for Your Business
There’s most likely an inventory method that works best for your business. For a business with a perishable product, such as flowers or food, that would involve selling the inventory first that they bought first — that is the first-in-first-out (FIFO) strategy. This strategy means the oldest products and materials deplete first.
FIFO is the standard inventory method used by most businesses. Using FIFO is one of the most common inventory management tips for businesses for a reason: it can have a big impact on your bottom line.
Understand and Accurately Forecast Demand
One of the key elements of effective inventory management is accurate forecasting. Inventory managers rely on data to help them track usage — including a record of historical sales, market trends, seasonality and technology like predictive analytics to help managers make data-informed decisions. However, inventory managers must also consider other factors such as weather, the health of the economy, shifts in demand and more.
The ability to accurately forecast demand can play a significant role in managing inventory costs and maximizing sales opportunities.
Identify Low-Turn Stock
Throughout the supply chain, the ability to identify low-turn stock helps inventory managers with orders for raw materials by adjusting production output and identifying products that may no longer be in high demand.
For instance, if your inventory management system identifies a specific supply that languishes on the shelf, that may be a signal that demand for the product has declined or additional promotion efforts are needed to boost awareness and demand. By identifying slow-moving stock early, businesses give themselves the best chance of selling it and avoiding it becoming obsolete. Tactics include running a special promotion, transferring the stock to another location where it sells through faster or selling the stock to a third party.
Track Stock Levels
Tracking how much of which specific items are on hand — whether used in product development or representing goods for sale to customers — can help inventory managers fine-tune their ordering processes. Establishing a well-documented and consistent inventory cycle counting process can help minimize errors that may impact stock availability and access. Building automatic reminders in your business's inventory management system can alert inventory managers when additional items may need to be ordered. Tracking stock levels also helps manage and monitor product demand.
Audit Stock Levels
Your inventory management system must be accurate. Ensuring its accuracy requires a combination of the right software and the right policies and practices. The levels shown in your inventory management software may not always perfectly match what is actually on hand. But the closer you can match the two levels, the more confidence you can have in your inventory management practices.
Inventory levels can be impacted by several factors, from not accurately receiving stock to damage and theft. Auditing stock levels through regular cycle counting helps you find errors in data entry, potential waste and other inventory management issues.
Use Just-in-Time When Feasible
To minimize supplies on-hand and control operation costs, some businesses use just-in-time (JIT) inventory management. Inventory managers work closely with suppliers so raw materials arrive in time for production, but no sooner than necessary. Ultimately, the goal is to have as little inventory on hand as possible — but enough to produce what is needed when it's needed.
JIT inventory management requires a sophisticated inventory management system that can quickly process orders and manage the necessary details so you’re able to fulfill customer orders without a delay.
Focus on Quality Control
Throughout the inventory management process, a focus on quality control is critical — which is why businesses should implement quality inspections throughout the product lifecycle to minimize waste and ensure it meets standards. Embedding quality control into every aspect of inventory management, and precise documentation of the critical elements of quality control, such as accurate ordering and invoice matching, is vital. It’s also important to make sure every employee understands and adheres to the processes in place.
No list of inventory management tips for small businesses would be complete without emphasizing creating and maintaining a culture that focuses on quality for each step of your inventory process — from ordering to receiving, picking and packing. It's a culture that starts from the top and should be embedded across all policies, procedures and practices. Survey your employees about how they view the company culture as it relates to a focus on quality. After establishing a baseline across the survey, as well as other indicators, such as customer feedback, returns and other inventory management key performance indicators, set goals for improvement. Look at individual areas, as well as company-wide metrics of success and share progress as you achieve milestones.
Consider Drop Shipping
With drop shipping, suppliers ship products directly from their warehouses to the customer, eliminating the need to keep the product on hand and incur the related inventory costs. Instead of controlling each aspect of the product lifecycle, you’re primarily responsible for the marketing and sale of the product.
You eliminate warehousing and fulfillment costs, and your profit comes from the difference between the product’s wholesale price and retail price — minus the costs associated with marketing and selling the product. It's essential to have a stable relationship with a trusted drop-shipping partner to ensure product quality and the right inventory management software to help manage and monitor these transactions.
Set Up a POS
Point-of-sale (POS) technology can help your small business track inventory and stock in real-time. When items sell, your software automatically updates to show inventory levels and the cost of goods on hand. As the name suggests, POS technology is used at the point a sale is made, and it can be used in the manufacturing process to track supplies and raw materials as they are used. Your POS software should integrate seamlessly with your inventory management system to help you easily track ingoing and outgoing inventory. When done correctly and with integrated software, you remove data entry errors from your inventory counting and you have better reporting capabilities. For example, you can produce dashboards with information such as profit margins for specific items and inventory turnover.
Use a Barcode System
Although they were invented more than 70 years ago, barcodes aid with inventory management.
The black bars and alphanumeric characters you're likely familiar with represent encoded information that makes it easier, faster and more accurate for businesses to manage their inventory. Barcodes can be read by handheld scanners allowing inventory managers to track both incoming and outgoing inventory easily.
For items in your warehouse, the barcode identifies information such as size, color, location, when the item was produced and its expiration date and other details. Barcodes also impart more visibility into your products and help you use inventory more efficiently, such as using items expiring first to fulfill orders. It also helps you conduct a quick inventory count and fulfill orders more efficiently. In retail settings, the barcode can include product names and prices. The barcodes can live with the products throughout their life cycle — from when they’re manufactured all the way to service.
Use Purchase Orders
Businesses use purchase orders to track orders placed with vendors or suppliers. Purchase orders are documents with details of what was purchased, in what quantity and at what price.
When goods are received, they are examined and compared to the purchase order to ensure that the right item, in the right quantity, was received and that the price charged on the invoice is correct. Purchase orders play an essential role in receiving inventory accurately.
Receive Inventory Accurately
When inventory is received, it must be reviewed and compared against the purchase order to ensure accuracy. It’s essential to verify that you received the correct item in the ordered quantities and were charged the agreed upon price.
Receiving inventory is the first step in an accurate inventory count. While your inventory management system plays a significant role here, so will your staff. They need to be well-trained and understand the steps to take when receiving inventory and why this is important businesses of all sizes. Accuracy at the outset gets your inventory management process started on solid ground.
Formalize and Standardize Processes
The right technology can improve inventory management processes by providing data and information for making purchasing, manufacturing and sales promotion decisions. But there is also a "people side." Formalizing, standardizing and regularly reviewing processes can minimize human error and ensure that your processes work as efficiently as possible.
For instance, something as simple as being consistent in how you receive stock can help you minimize errors and control costs. A standard process for everyone to follow, in the same way, to receive, verify, unpack and count products — and a similar process for picking, packing and shipping products — can minimize variation, reduce waste and add revenue to your bottom line.
The organization of the stockroom has a significant impact on supply chain management efficiency. Time is wasted if inventory can't be found or takes too long to find. In addition to considering how inventory is received, stored and accessed, supply chain management must also consider other inventory management challenges, such as special requirements for perishable or fragile stock.
Warehouse space is an essential element of efficient inventory and order management. Managing your space well means you can store more inventory and take full of advantage of your warehouse which helps you control costs and boost sales.
Make Data-Driven Decisions
One of the key benefits of a robust inventory management system is the data it can provide in real time to help you make data-driven decisions. Your inventory management system should provide up-to-the-minute information on supply levels and products on hand, the costs of stocking those products, the rate of turn for products and the optimum time to restock certain supplies.
Data can also help predict future sales levels based on sales history and monitor vendor performance. Making data-driven decisions means you're combining the art of inventory management with the science of critical data elements to help you minimize costs and maximize revenue.
Analyze Supplier Performance
The right inventory management system can also help you evaluate and analyze supplier performance. Ask yourself:
- Which suppliers consistently deliver goods on time?
- Which suppliers have the lowest level of shipment errors?
- Which suppliers offer the best rates?
A supplier with unstable performance adds costs to your inventory management processes. The right system can help you with inventory analysis and quickly and accurately identify problematic suppliers, such as vendors that are habitually slow or send lower quantities than ordered.
Invest in Inventory Management Software
Businesses use inventory management software to manage and optimize their supply chains. Inventory management software helps small businesses make sure they have enough inventory on hand and at the correct locations to meet customer demand and ensure efficiency in their manufacturing activities.
Investing in the right inventory management software provides accurate, up-to-date information to make critical purchasing decisions, such as when to replenish stock and which vendors to use.
Effective inventory management is essential for businesses of any size. For small businesses in particular, though, effective inventory management can help manage limited resources, ensure accuracy at each point of the supply chain and aid in making decisions about product development and marketing to build and sustain a successful business.
Businesses can save time and money and maximize sales with an advanced inventory management system. It automates the process to minimize costs, accurately track incoming and outgoing goods and services and provide the real-time data needed to make purchasing and product development decisions.
Small Business Inventory Management FAQs
Small businesses organize their inventory based on its use — inventory used in the production process, inventory purchased by consumers and inventory used in the business's daily operation (supplies).
Inventory should be stored in warehouses and organized to ensure ease of access while minimizing effort. For instance, supplies used in the production process should be near where they are picked and used.
Effective inventory management requires a combination of the right technology; the right policies, procedures and processes; and well-trained staff who follow a consistent process for receiving and managing raw materials and processing orders. The inventory management process begins when receiving items into inventory and ensures a consistent process for removing items from inventory, managing waste and continually monitoring stocking levels.
There are four types of inventory that small businesses manage — raw materials and components, finished goods, work-in-progress and MRO (maintenance, repair and operating supplies) goods. Raw materials and components are the inputs necessary to make the products the company sells; finished goods are available to sell to customers, work-in-progress goods are manufactured, MRO goods run business operations — e.g., supplies.
The three primary inventory management techniques are the pull strategy, the push strategy and the just-in-time (JIT) strategy. The pull strategy is based on customer demand. The push strategy is based on expected or predicted demand. The just-in-time strategy produces products at the time they are ordered. The strategy used varies by industry, type of business and the owner’s strategy.
Inventory turnover is a measure of the length of time between when inventory was received and used or sold. The shorter the time between these two points, the more efficient and cost-effective the inventory management process is. Inventory that stays on hand for longer than necessary represent costs to the small business. These costs can be managed and minimized with an effective inventory management process.
Inventory analysis is the process of reviewing data to determine the right amount of stock — supplies and products for customers — to keep on-hand. The goal is to minimize time on hand to drive down inventory costs while ensuring enough product is available to meet both production requirements and customer demand.
Spreadsheets are woefully inadequate for managing inventory. Before inventory management software technology developed, spreadsheets were commonly used. However, they are subject to error and not sophisticated enough to automate aspects of the inventory process to allow you to ensure optimum ordering times and provide up-to-the-minute reporting.