Keep Track of Your Precious Cargo: Tips for Inventory Management

Business.com / Starting a Business / Last Modified: February 22, 2017

Managing inventory doesn't have to put a massive strain on your cash flow. Here are 3 tips to keeping what your customers want in stock.

Accurately managing inventory is an important function for a small business to ensure that the products customers want are available when they want them, and to provide the level of service that makes customers want to buy again. But, carrying inventory presents costs, and ties up cash you might want to invest in equally pressing business matters.

Here are three tips for how to manage inventory in such a way that ensures customers have a positive experience with your business, without putting unnecessary strains on your cash flow.

Consider inventory trends with marketing plans

Accurate inventory management incorporates what you know about customer and product demand from the past and present to (ideally) predict your best course of action in the future. A point of sale system can help quantify product level demand in tandem with recurring sales patterns, including those that fluctuate with some predictability (like seasonality, lifestyle occasions that impact your target audience and perhaps, local events).

Optimize the value of such information by coupling your inventory management and marketing promotions to work together. For example, such insights can reveal potential opportunities to leverage quantity-based pricing vendors may offer, while at the same time empowering you to offset times of lower demand with promotions or "packaged" deals that strategically drive sales, while moving the inventory that you acquired at a low cost.

Related Article: Turn Your Excess Retail Inventory Into a Marketing Opportunity

Honor the 80/20 rule

Inventory management can be daunting even for large corporations with dedicated inventory management teams, it's especially important for small businesses to prioritize the effort and time they spend on inventory management to translate analytics your point of sale system provides into actionable results. For example, just as the "80/20" rule typically applies to customers and sales (80 percent of demand stems from 20 percent of the customer base), the same formula is often applicable to inventory demand.

Examine your inventory-management efforts to identify which of your inventory is in fact driving most of the demand. Using your point of sale system, you can then focus on determining the optimal forecasting and replenishment formulas for those key products. Once you have a strong grasp of how to best manage those items, they can become the foundation you use to experiment with the rest of your inventory, and how you experiment with new product lines, or pricing strategies.

Be mindful of how you view inventory costs

Inventory management commonly classifies stock into two categories: Cycle and safety stock. Cycle stock consists of the inventory that sells regularly, and has demand you can reasonably predict. Safety stock, is the level of product businesses may choose to keep on hand to ensure inventory levels don't sell out to zero, due to demand variability, supplier lead time and similar events. Because cash flow is so important to a small business's financial viability, a common way to reduce inventory costs is to omit safety stock.

Related Article: 5 Order Fulfillment Software Packages to Help You Avoid Shipping Mistakes

Though carrying inventory does cost a business in many ways, including tying up cash and facility and warehouse space, recognize that today's customer has a large variety of merchant choices, online and off, and is highly vocal (and influential) regarding the level of service he or she receives from a business of any size.

According to social listening software provider Trackur, 96 percent of unhappy customers won't voice their feelings to you about a bad business experience, but they will tell as many as 15 other people about it. Before you presume that reducing the cost of inventory is the best solution for your business, consider the intangible cost of poor service.

Over time, your point of sale system can help you predict your business and inventory cycles so you can appropriately plan to accommodate a reasonable level of safety stock that will maintain your service levels, without costing your business unnecessarily. Until that time, inventory expert Jane Lee suggests that the optimal goal is to average a halfway point, half the time, your business will fall below the safety-stock level, and above it the other half.

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