Few would claim inventory management is the fun part of running a business. But even fewer successful business managers would deny it is essential. Inventory costs money. And old inventory is often hard to move.
So, if you spend too much on inventory, you could damage your cash flow and end up with too much stock – which you then also need to spend money warehousing!
Yet it is also dangerous to be too conservative with inventory. If you run out of popular items, you could lose sales, profit, and quite possibly the confidence of your customers.
These are just a few of the pitfalls of poor inventory management. Fortunately, there are tried and tested methods to help you get it right.
Here are five essential inventory management tips to get you started.
One size does not fit all when it comes to inventory.
Across your product or part range, different items always have different demand patterns. If you segment your range into groups based on demand, you can set an inventory policy that fits the behaviour of each group. This can significantly reduce your risk of having too much, or too little, inventory. If you are short on time, focus your attention on the high cost items. Even a simple ABC analysis can have a huge impact.
You can never produce a totally accurate forecast. However, striving for accuracy in forecasting future demand will increase your chance of having the right level of inventory at the right time.
Use the segmentation created in Tip 1 to focus your attention on the parts that matter most – for example, items that sell in the highest volume or generate the biggest value.
Having a clear set of inventory management rules will help everyone in your business to manage inventory well. Start by using your segmentation and forecast accuracy assessment to understand the risk of stock-out, or over stocking, and determine your approach and settings.
There is no standard approach, as each business has its own dynamics. However, some useful examples are shown below: