8 Inventory Management Techniques


Inventory management is a modifiable part while doing business. The optimal inventory management system varies for each company. However, every business should work towards removing human error from inventory management as much as possible. This means utilizing the benefits of inventory management software. If you choose to run your business with Shopify, inventory management is already built in.

Regardless of the system, below are the eight techniques which help to improve your inventory management and cash flow.

  1. Set Par Levels

Managing inventory will be easy by setting “par levels” for each of your products. PAR (Periodic Automatic Replenishment) level in the inventory system is used to determine the quantity of inventory on hand that an organization should have at all times. When your inventory stock falls below the pre-determined levels, then it is time to place the order. Usually, you need to order a minimum quantity that will get you back above par level. Depending on how quickly the item sells and how long it takes to get back in stock; Par levels will vary for a product.

Although setting par levels will automate the ordering process, it requires some research and decision-making beforehand. It will also allow your staff to make decisions on your behalf. Remember that conditions are constant, they always change over time. Regularly monitor par levels throughout the year to confirm they still make sense. In the meanwhile, if something goes wrong adjust your par levels.

  1. First-In-First-Out (FIFO)

We all know about “First-in, first-out” is an important principle of inventory management. Which means your oldest stock (first-in) gets sold first (first-out), instead of your newest stock. This is essentially important for perishable products so that you won’t end up with wastage.

For non-perishable products, it is good to use FIFO. If the same stock is always residing at the back, they are more likely to get worn out. Additionally, packaging and design features change over a period. You do not want to end up with something obsolete that you can not sell.

In order to follow and manage a FIFO system, you need to organize your warehouse. This means pushing new products from the back or displaying old products at the front. If you have a tie-up with a warehousing and fulfillment company they must be already following this, but it’s a good idea to confirm.

  1. Manage Relationships

To make inventory management successful, we need to adapt quickly. It is important to have a good relationship with your suppliers for the following reasons:

  • To restock a fast selling product very quickly
  • To return a slow-selling item
  • To make room space for a new product
  • To solve manufacturing issues
  • To expand your storage area temporarily

If you maintain a good relationship with your suppliers they will be willing to work with you to solve your problems in the long run. Minimum order quantities can be negotiable. A good relationship is all about good communication. Give a regular update to the supplier regarding the sales variation, so that when you’re expecting a rise in sales they can adjust production and when a product is moving behind the schedule they can pause production or look for an alternative.

  1. Contingency Planning

A lot of issues or problems can arise related to inventory management. These types of problems can disturb the regular businesses processes. For instance:

  • Sales rise unexpectedly or overselling of the stock
  • Running out of cash and unable to pay for a product in need
  • Space constraints in the warehouse to accommodate a seasonal spike in sales
  • You bought fewer products than actual by miscalculating the inventory
  • All the storage space is occupied by slow-moving products
  • You have orders to fill but manufacturer runs out of your product 
  • Manufacturer discontinues your product without warning signs

It does not matter much if problems arise. But have to figure out where your risks are and prepare a contingency plan. Think about the steps that you will take to solve the problem and impact that another part of the business has. Keep in mind that solid relationships play a key role here.

  1. Regular Auditing

Regular reconciliation is essential. Many organizations in most of the scenarios depend on software and reports from the warehouse to know about the product stock. There are several ways to do it.

  • Physical Inventory

A physical inventory is a practice where you count the entire inventory at once. Most of the businesses do this at the year-end, because it is linked with accounting and filing income tax. Although physical inventories are done once a year, it is a tedious task. In case you find any discrepancy, it is difficult to figure out the issue when you’re looking back at an entire year.

  • Spot Checking

If you go for full physical inventory at the end of the year, there is a chance that you run into problems. If you have a lot of products go for spot checking throughout the year. This means choosing a product, counting it, and comparing the number with the estimated number. Here we do not follow any schedule; it is just supplementary to physical inventory practice. In some cases, you may want to spot check fast-moving products or problems.

  • Cycle Counting

Some businesses use cycle counting to audit their inventory instead of doing a full physical inventory. Using cycle counting spreads reconciliation throughout the year rather than a full count at year-end. Every day, week, or month various products are checked on a rotating schedule. There are various techniques to know which items to count, usually higher value items will be counted more frequently.

  1. Prioritize With ABC

Few products need more attention compared to others. Use an ABC analysis to prioritize  inventory management. Segregate products that require a lot of attention from those that don’t require attention. Do this task by going through a product list and adding each product to one of three categories:

A – Products that give high value with a low frequency of sales

B – Products that give moderate value with a moderate frequency of sales

C – Products that give low value with a high frequency of sales

Category ‘A’ items require regular attention as their financial impact is significant but sales are unpredictable. Category ‘C’ items require less observation because they have a less financial impact and they’re constantly turning over. Category ‘B’ items fall somewhere in-between.

  1. Accurate Forecasting

A good inventory management can accurately predict demand If you do not make mistakes.  Having zero error is incredibly difficult. There are so many variables involved in forecasting so you’ll never know exactly what’s going to come but you can be close to the actual number. Below are a few things to consider while projecting your future sales:

  • Market trends
  • Last year’s sales during the same week
  • The Growth rate of this year
  • Confirmed sales through contracts and subscriptions
  • Seasonality and the overall economy
  • Future promotions
  • Planned ad budget

If you miss out something which will help in accurate forecasting, include that also.

  1. Consider Dropshipping

Implementing dropshipping is a good strategy from an inventory management perspective. You need not carry inventory and ship products yourself, the manufacturer or wholesaler takes care of it internally or through third-party logistics. Basically, you completely forget about inventory management from your business.

Many wholesalers and manufacturers promote dropshipping as a service, but even if your supplier doesn’t mention, you have an option. Don’t hesitate to ask. Though products cost higher in this way compared to bulk orders, you need not worry about expenses related to storage, holding inventory, and fulfillment.

It’s high time that you take control of your inventory management and save money. Select the right inventory management techniques for your business, and start implementing from today.

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