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Last Updated on February 9th, 2023 by

business inventory management tips
If you own a manufacturing company, retail store, or restaurant, you’ve probably encountered a few inventory management headaches over the years. A customer is angry because you’re out of steak. You lose a long-time client because you can’t fill a rush order. Your employee doesn’t know if you have a size 10 dress in stock.
Inventory management refers to having the products available when you need them. You can lose out on business if you’re out of stock, and lose money if you’re carrying excess stock that doesn’t sell.

If you want to solve those inventory management headaches, don’t pop a pill. Instead, put into practice these ten best ways to manage inventory. Successful inventory management reduces the cost of carrying excess inventory and maximizes sales.

What is Inventory Management?

Inventory management is a component of supply chain management. Its goal is to have the right amount of products at the right time. In short, to meet customer demand in a timely fashion.

When a small business properly manages their inventory they avoid obsolescence and spoilage. Excess inventory can go bad before it sells, or tie up available capital and prevent you from taking advantage of other opportunities. If inventory hasn’t sold and you need to purchase more, you may have to take out an inventory business loan to maintain an adequate supply.

Successful inventory management reduces the cost of carrying excess inventory and maximizes sales.

Types of Inventory

Effective inventory management includes understanding the types of inventory your company holds. Some companies – particularly manufacturing businesses – could hold some or all of the types on this list. Each type of inventory could have different considerations when it comes to managing it.

• Raw materials – the materials used to manufacture your products.

• Unfinished products – works in progress that are not ready for sale.

• Finished products – products ready for sale, typically stored in a warehouse until sold or shipped

• In-transit goods – products no longer in the warehouse and are being transported to their final destination.

• Cycle inventory – products that are shipped to a business from a supplier or manufacturer, then immediately sold to customers.

• Anticipation inventory – excess products held in anticipation of a surge in sales.

• Decoupling inventory – parts, supplies, or products set aside in anticipation of a slowdown or halt in production.

• MRO goods – MRO stands for “maintenance, repair and operating supplies,” all of which support the production process.

• Buffer inventory – “safety stock,” which serves as a cushion in case of an unexpected issue or need for more inventory
It’s helpful to sort your inventory items into these categories because it helps you more effectively manage them.

For example, failing to manage raw materials inventory correctly could lead to production delays that then impact your finished goods inventory. If you receive an order that has to be filled, you could dip into your buffer inventory. But then, once the raw materials are in stock you have to fill both current orders and replace that buffer inventory you drew down.

The interdependent nature of the various forms of inventory shows why it’s important to successfully manage each type.

Best Practices for Inventory Management

Whether you use real-time tracking software or monitor your inventory in spreadsheets, small business owners need established inventory management practices. Implementing best practices based on your business’ inventory cycle helps you increase sales and reduce losses.

1. Forecast sales and demand

Accurate forecasting underlies the correct timing and quantity of inventory orders. Base projected sales calculations on historical sales figures, market trends, growth predictions, promotions, and marketing efforts. Place inventory orders on the basis of those forecasts.

2. Use First In, First Out

If you sell perishable products like makeup, flowers, or run a restaurant, use FIFO to manage your inventory. With first in, first out, you use the oldest inventory first. It keeps milk from spoiling or mascara from passing an expiration date.

Small business owners who don’t sell perishable items might want to consider using this method, too. The longer an item sits on the shelf, the higher the likelihood it’ll get damaged or otherwise become unsellable. Add new items to the back of the shelf and move older items to the front.

3. Audit your inventory and identify low-turn items.

Perform regular inventory counts to verify that what’s in the system matches what’s actually on your shelf. Some businesses perform an annual, year-end inventory where every item is counted, others perform periodic spot checks.

When you’re counting your inventory, pay attention to stock that hasn’t sold in the last six to twelve months. If it’s been sitting there for a while, it’s probably time to stop stocking that item. Try putting it on sale or promotion since excess stock wastes valuable floor or warehouse space and capital.

4. Track stock levels at all times.

Most small businesses have shifted to real-time inventory tracking. If you haven’t yet, consider investing in software that automatically updates quantities flowing in and out of your business. Knowing how much you have on hand at a point in time can mean the difference between winning a rush order and losing the business.

An investment in robust inventory tracking software, even if you have to borrow to implement the system, is worth it on many levels. No more will an employee have to respond to a customer – I don’t know if we have it on stock. You’ll have data on your most profitable profits at your fingertips, as well as inventory turnover metrics and other useful information.

5. Track all product information.

In addition to tracking stock levels, track product information. Track data like SKUs, barcode data, suppliers, countries of origin and lot numbers. This will help you identify trends like seasonal price increases or scarcity that may impact your inventory’s cost.

A business that tracks product information may see that one product consistently rises 15% in price during the pre-Christmas season. They can also see that customer demand for this product rises 20% during the same time period. Borrowing during the summer to stock up on inventory at a lower cost could be a wise financial move.

6. Track supplier performance.

Unreliable suppliers can cause inventory management problems. If a supplier of a key raw material consistently delivers orders late it can impact your whole production process. Or, if they deliver on-time but a certain percentage of their delivery is always damaged or unusable you could be wasting valuable time negotiating replacements.

Tracking supplier performance could give you the data you need to either work with a supplier on improved performance or find a replacement.

7. Cut back on equipment downtime

Manufacturing businesses know that idle time is death to profits. Broken machinery can put you behind on orders, deplete inventory, and cost you money. View essential machinery as an asset, and manage it accordingly.

Stay on top of regular maintenance and repairs, and monitor its normal lifespan so that you’re ready to replace the machine when it’s time. If one machine is consistently out of order, consider taking out an equipment financing loan to finance a replacement. You’ll likely recoup the interest charges in increased productivity.

8. Hire a stock controller

Stock control applies to all items – from raw materials to finished goods. If you have a large volume of products and carry a lot of inventory, hire a stock controller. This individual is responsible for processing all purchase orders and receiving deliveries. They check for accuracies in received and sent shipments, which helps you maintain accurate inventory.

9. Consider moving to a drop shipping model.

Holding inventory in a warehouse can be expensive – both in square footage costs but also personnel and equipment. Drop shipping is a model where a wholesaler or distributor is responsible for distributing your products. They carry your inventory and ship it directly to your customer when they place an order.

With drop shipping, you don’t worry about inventory holding, storage, or fulfillment, though you will pay the drop shipper for their services.

10. Group inventory into categories that reflect importance

Sorting your inventory into categories helps identify priorities and maintain tighter control over more-important items. Many small businesses use A, B, or C categories.

Items in category A have the largest annual consumption value but make up the smallest percentage of inventory. Annual consumption equals annual demand multiplied by an item’s cost. Products in category C are the least expensive, make up the largest percentage of inventory and have the lowest consumption value. B products fall somewhere between A and C.

When you prioritize your inventory you’ll know which items to always have on hand because they generate the most revenue.

11. Place reorders yourself.

Many suppliers offer auto-ship and replacement services. They promise that if you sign up, you’ll never be out of a key item. You also won’t have to worry about placing re-orders.

But when you think about it, a supplier’s best interest isn’t aligned with yours. They want to move products and you want to stock profitable products. Taking the time to check inventory and placing orders yourself ensures that you’re getting what your business needs – not what a supplier needs to offload.

If you’ve struggled with inventory management, start putting these tips into practice and see how quickly things improve.