Inventory management processes include end-to-end oversight of stock items, from the point of purchase to sales. Successful tactics reduce product loss, improve cash flow and enhance customer experiences; however, there are many ways to track stock levels, and choosing the right one is critical to profitability.
As the cost of goods continues to rise, increasing visibility into supply chain operations and adjusting inventory control methods can help your business remain resilient. Explore five ways to optimize your stock management strategies.
Select the right inventory management processes
Several stock management strategies affect inventory turnover (the length of time between receiving new inventory and selling or using it). How you choose to manage your stock depends on your industry and business type.
The three main inventory systems are:
- Pull technique: This is a lean manufacturing principle used by companies like Toyota. Factories manufacture products based on customer demand (existing orders).
- Push method: This system relies on forecasted demand. Retailers purchase seasonal items based on expected sales.
- Just-in-time (JIT) strategy: This method keeps minimal manufacturing components on hand and produces products when a customer orders them.
[Read more: 6 Inventory Management Terms You Should Know]
Consider using the LIFO inventory method
Many small businesses rely on the first-in, first-out (FIFO) inventory valuation technique. This method assumes that you use or sell the oldest products first, and it is the easiest and most accurate way to count inventory for cost accounting purposes.
On the other hand, the last-in, first-out (LIFO) method is typically used by companies that sell expensive items, such as auto dealerships. Grocery stores and pharmacies also use LIFO to protect their finances against price changes. LIFO provides additional tax advantages during times of climbing expenses, such as in times of economic inflation.
According to PwC, “when costs are rising, LIFO generally results in higher cost of goods sold and lower taxable income.” Talk to your tax advisor to weigh the pros and cons of switching to LIFO, as you’ll need to adopt the method and file IRS Form 970, Application to Use LIFO Inventory Method, with your tax return.
When costs are rising, LIFO generally results in higher cost of goods sold and lower taxable income.
PwC
Standardize your inventory control methods
Process standardization is the key to inventory management improvements. It involves documenting methods for tracking incoming and outgoing stock. Inbound systems include receiving, unpacking and counting products, whereas outbound measures focus on picking, packing and shipping products.
Here are ways to optimize your procedures:
- Develop a consistent inventory cycle counting process.
- Audit physical stock levels by comparing them to your inventory management reports.
- Implement quality inspections throughout a product’s lifecycle.
- Create a system for estimating how much inventory you need.
- Organize your stock rooms and warehouses.
- Train employees on the proper methods for receiving the merchandise.
- Centralize stock and vendor information in one database.
Categorize your stock
Placing your inventory into groups based on priority levels helps set periodic automatic replenishment (PAR) levels and prioritize stock management tasks, like spot-checking.
Then, separate your goods into three categories:
- High-margin items with unpredictable sales, which include goods that return a high gross profit.
- Low-margin products with high-frequency sales, which include inexpensive items with a lower markup.
- Low-margin products with low-frequency sales.
When time is limited, focus on your high-margin products first.
Use inventory technologies
Technology plays a crucial role in your inventory management processes. It increases the visibility of logistics, stock turnover and costs. The best software systems provide automation and data analytics features. Automation tools alert managers when it's time to reorder based on PAR levels. Data analytics identify market trends and display historical sales records.
There are several applications you can use to improve oversight and daily operations, such as:
- Sales forecasting tools: Accurate sales projections help determine how much inventory to keep on hand, when to order and how quickly you can move the products.
- Point of sale (POS) systems: A POS automatically updates the cost of goods on hand and inventory levels during every sale.
- Inventory management software: View real-time data like supply levels, rate of product turn and restocking costs. Integrate inventory systems with your POS for maximum visibility.
- Barcode scanners: Handheld scanners and mobile apps make inventory counting quicker and can reduce human errors made through manual tracking.
[Read more: Big Brands’ Inventory Management Partners Share Top Tips to Slay Supply Chain Snarls]
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