Warehouse managers can expect to deal with overlapping priorities. Maximizing profits, increasing velocity and decreasing inventory on hand are all common goals for inventory management. Inventory management techniques and approach help you prioritize your work and goals and increase revenue and customer satisfaction.
What Is Inventory Management?
Inventory management helps you understand how much inventory you have in your warehouse and how much more you need. It includes the purchase of all the goods and raw materials and how you manage them until they are used or sold. Inventory management also includes other processes, such as auditing inventory levels, setting par levels and ordering or reordering inventory.
How do you manage inventory effectively? There's no single set of inventory management rules that fits every organization. Your warehouse's size, its SKUs and the kind of inventory you use influence your inventory management practices. So, whether you're starting with the ABC method or are experimenting with advanced analytics, the world of inventory management is dynamic and exciting, especially with advanced software and evolving best practices to help you boost your bottom line.
21 Inventory Management Tips
Changing demand, supply chain complexity and increasing competition are just some of the common inventory management challenges. To overcome them and succeed, you’ll need to stay on top of the latest trends in the industry. Here are a few to get you started.
Inventory Basics
Sound inventory management can be a solid foundation for a well-run business. Making sure you have enough stock on hand to meet customer demand in an organized warehouse is vital for success. Here are some tips to refresh your memory about the basics of inventory.
- Learn about the four kinds of inventory
Different companies hold different quantities and types of inventory. In general, the term inventory describes the parts, materials and finished products your business uses, makes and sells. What are the four types of inventory? Raw materials, unfinished products, finished goods and maintenance, repair and operating supplies are the classifications you should be familiar with. Manufacturers may store all four kinds. Other warehouses, such as those specialized in e-commerce, may only hold the latter two.
Raw materials
This is what’s used to make the products you sell. Iron ingots, crude oil and rough lumber are all kinds of raw materials. Some businesses will never see the raw materials used to make their products, and instead store finished products in their warehouse. But some businesses, such as refineries and vertically integrated manufacturers, will need to manage not just their finished products, but also their component parts. Raw materials should be carefully stored, as some may be volatile or sensitive to changes in temperature.
Unfinished products
Companies hold but don’t sell unfinished products because they’re used to create finished goods. For example, thousands of components go into making cars — airbags, brakes, steering wheels, engines and more. All these goods need to be stored and managed in a warehouse but will not be sold individually. These are somewhere between the raw materials and finished goods.
Finished goods
A finished good is anything that can be sold directly to another business or consumer. If it's listed for sale on your website or is available in a retail store, it's a finished good.
Maintenance, repair and operating supplies (MRO)
All the materials needed to keep your warehouse running smoothly, MRO supplies aren’t used directly to make products, but are still essential. Think about how disruptive a down assembly line is because of a broken part. Having the materials on hand to keep your production up and running is a vital part of your business and managed through similar inventory practices as finished goods and raw materials. Some examples of this would include tools, safety gear and fuel for machines.
- Manage vendor and supplier relationships
Without your vendors, your business will struggle. It’s essential to maintain good relationships with them. Often, you'll have to ask your vendors for help or other considerations, and their prompt and positive responses might save your organization some severe hardship.
Here are a few tips that can help boost your relationships with vendors.
Communicate: Do it often and do it well. Keep your vendors in the loop as you’re making decisions or noticing trends about your stock. If you anticipate a promotion that could result in higher inventory turnover, let the vendor know well in advance. Don’t tell them about a holiday sale in December. Instead, let them know in July. Also, share key performance indicators you’re tracking so they can help you reach goals.
Remember the golden rule: Treat your vendors like valuable partners. Give them plenty of lead time whenever possible, pay your bills on time and don’t burn bridges when terminating relationships, you never know when you’ll need to use the same vendor in the future.
Get to know them: Learn about their processes and what it takes for them to produce the goods or materials you purchase from them. This creates trust and helps you have a better understanding of challenges they might come up against.
- Plan for the unexpected
Customers are fickle, and global supply chains are prone to disruption. Contingency plans allow you to change when new issues crop up. Some to keep on your radar include:
- Consumer demand increases drastically, causing a stock shortage. To plan for stock shortages, look at your lead time. If you’re able to produce your goods quickly and efficiently, it makes it easier to ramp up production in times of high demand. Also, consider your forecasting abilities. Software to manage your inventory can help you look at historic sales and forecast future demand, while also improving your supply chain and warehousing capabilities.
- You have customer demand for a product that you can't purchase due to cash flow issues. Cash flow concerns are common, especially for small businesses. But you can start planning now to address this issue if it arises. Some of the tips to improve your cash flow include setting up a line of credit, improve the efficiency of accounts receivable so you get cash in the door sooner and look at places in accounts payable where you can adjust payment terms to net 60 so you can hang on to cash longer.
- Your facility unexpectedly runs out of space. Warehouse management is an important component of your inventory. Some of the steps to take now to address possible warehouse issues include boosting warehouse space with more vertical storage or mezzanines, reducing aisle widths and implementing a barcode scanner system to better sort, track and store products. Ideally that barcode system would integrate with the software you use to manage your inventory.
- You purchase too much inventory, and it doesn't sell fast enough. The best way to address this issue is to avoid it all together. Software can help you forecast demand so you don’t overstock. If you do end up with too much inventory, consider bundling products and have plans in place for possible promotions and sales. Also, consider re-marketing the items to new audiences or with a different approach, when possible.
By looking at these and other issues before they’re a problem, you can make plans to overcome them, so you’re not caught unawares.
Inventory policies
What do you do with your inventory once you have it? Setting consistent intake procedures and knowing when to restock ensures that your warehouse can scale to meet future challenges.
- Prioritize your inventory
Slot inventory that moves faster in ways that make it easy to move — and conversely, inventory that moves more slowly can be stored further away from the loading dock. Also, order faster-moving inventory more frequently. To efficiently store and order your inventory, you need to understand your inventory's characteristics — like the cost, lead time, minimum and maximum order quantities and size — and then sort and store it by priority.
- Understand the 80/20 inventory rule
What is the 80/20 Inventory rule? Most businesses find that 20% of their stock generates 80% of their profits. The solution isn't to eliminate the less-profitable 80% of your inventory but rather ensure that the more-profitable 20% meets its full potential. In other words, you should always have enough to sell. And these products should be handled carefully to avoid damage and they should be easy to access in your warehouse or facility.
- Be consistent in how you receive stock
When you receive stock, verify the number of pallets, boxes and storage keeping unit (SKU) it consists of and enter this information in a warehouse management system (WMS) and physically put the stock inside the warehouse. Doing this the same way every time can reduce the discrepancies between what your system says you have and what you actually have on hand. And integrating your SKUs with your warehouse management software can be an important step that sets up your receiving processes for success by assigning a SKU to track the amount and location of your product. Successful inventory management starts with accurate and reliable intake policies so you can have product on hand to meet customer demand.
- Order restocks yourself
Rather than having vendors manage your re-orders, control those yourself. You can better track customer demand and forecast future sales. Additionally, software to manage your inventory can help by setting automatic re-order points and providing updated sales history. Although it may mean more work for you, overseeing ordering yourself can save time, ensure you have the goods on hand to meet customer demand and help you better manage your warehouse space by having the appropriate amount of product on your shelves.
Inventory Methods
Inventory methods include a set of three priorities:
- Sell inventory for maximum profit.
- Hold the smallest possible amount of inventory.
- Keep your customers happy.
Here are some tips to help you navigate these priorities.
- Don’t take a one-size-fits-all approach
Sophisticated inventory control is a delicate balance. You need to keep enough inventory on hand while not tying up all your cash in goods and warehouse space. There is no one universal approach to managing inventory that’s successful across all enterprises. What may work well for some may not work well for you. After all, inventory often brings together a wide array of challenges — from geopolitical events to technology transformations, it all can impact your supply chain and inventory. And you may even need to treat some inventory within your own company differently than others, e.g., perishable versus non-perishable goods. To find the best method for you, keep good records as you try different approaches and use software to help track metrics and generate reports and dashboards to find which approaches best fit your business.
- Audit your inventory
Controlling your inventory means counting it first, and understanding inventory levels is the first step toward proper management. So how do you perform an inventory audit and what benefits come from it? Auditing your inventory starts by looking at your actual inventory on hand, versus what’s shown in your software. You can perform the audit yourself or hire a third-party to help. A thorough audit goes beyond just a physical count and looks at other performance metrics, such as your inventory turnover ratio and your inventory costs compared to historic trends. An inventory audit helps you find areas where you could improve, such as inefficiencies in receiving, and it helps keep an eye on shrinkage.
- Understand economic order quantity (EOQ)
EOQ is the ideal quantity your company would purchase to have just enough product to meet customer demand without having too much stock on hand. If you're dealing with a fast-selling item, you'll want a large quantity, and you’ll need less of valuable, slower-moving items. Velocity, or how quickly items sell, isn't the only variable, however. The EOQ changes based on how much the item costs to produce, ship, store and handle. Learn to calibrate EOQ and you'll be able to buy less overall inventory — keeping storage and handling costs down while optimizing profit.
- Learn how EOQ relates to minimum order quantity (MOQ)
EOQ is the ideal quantity of product to order. And MOQ is the minimum number of units that a supplier will sell. For example, you might only be able to order a specific product in one-pallet or one-container increments. If your MOQ is higher than your EOQ, you may need to select a different vendor or product, or you may have to accommodate a less than ideal situation. This is also where your relationships with vendors might come into play by creating custom ordering or lowering the MOQ in other ways.
- Set par levels
A par level is the smallest amount of inventory you can have before you must reorder.
When taking a par-focused approach to inventory, instead of reordering your EOQ, you usually only order the amount you need to get back above par. You'll also want to make sure that the amount you need exceeds the MOQ for that kind of stock. To calculate your par level, you’ll want to take into account the average number of units used over a defined time period, often a quarter. Next factor in safety stock for spikes in demand. This may change by industry, but a good rule of thumb is 25% of the stock used during that same period. Consider how frequent and reliable deliveries are. And finally, analyze the MOQ. Would your order be at least the minimum amount? Use this formula to calculate your par level:
Par level = (Average inventory used in a time period + safety stock) / number of deliveries per time period
The advantage of par levels is that once set, there's no need for complex decision-making — all you need to do is keep track of your inventory. On the other hand, par levels aren't set in stone. If your products change in velocity or exhibit seasonality, then you may need to adjust them.
Inventory Control
There are a few different inventory management techniques to help you boost efficiency. So, what are the three major inventory management techniques? The pull strategy, the push strategy and the just-in-time (JIT) strategy are all different methods you should be aware of. The pull strategy lets customer demand dictate inventory levels. The push strategy is based on forecasted demand. And with the JIT strategy, you generate products as they are ordered. Which strategy you select will change by industry, business and your approach to inventory management.
- Know when to use ABC analysis
ABC analysis can be used in both inventory cost management and warehouse slotting. In a nutshell, your inventory can be divided into three categories. If you're talking about cost management, category A represents the top 25% of your inventory in terms of profit, category C is the bottom 25% and category B is everything in the middle. To use this principle in inventory management, replace "profit" with "velocity." Your fastest-moving items may or may not be the most profitable. By identifying which products are selling more quickly, you can adjust your ordering and stocking approach to find savings with things like bulk-buying discounts and more efficient warehouse management.
The point of ABC analysis is maximization. Your goal is to make your most profitable items even more profitable or to make your fastest-moving items move even faster. ABC analysis helps you do this, but if you have a significant amount of different inventory types and competing priorities, ABC analysis may not be for you.
- Weigh the benefits of just-in-time (JIT) inventory management
If you're a manufacturer, JIT is an excellent method to keep storage costs low by ordering only what you need in the production process. For example, you may know that you need to produce 13,000 widgets by a specific date and doing this takes 13 tons of W2 steel. You know that making the widgets takes seven days. With JIT, you order your steel so that it comes precisely seven days before the order is due, you move it onto the assembly line as soon as it arrives, and you ship it out the door as soon as it's done. You never have to hold raw materials or finished goods in inventory or incur their storage costs. As a downside, however, this method can be vulnerable to supply chain shocks.
- Preserve perishable goods with first expiring, first-out (FEFO)
Businesses that often deal with perishable goods, such as foodstuffs, should make fair use of FEFO. FEFO means the inventory expiring first in your warehouse — often, but not always, the "first in" — should be the first items out the door when an item is sold. FEFO helps goods with a limited lifespan have a better chance of getting to the customer before they're spoiled.
FEFO concepts can be used for non-perishable inventory as well as, as first-in, first-out (FIFO). The longer an item stays in your inventory, the more likely it could be damaged or become obsolete. Getting your older inventory out the door first means that it'll still be desirable and relevant.
With a FEFO (and FIFO) approach, organize your warehouse slotting processes to get your oldest inventory closest to the loading dock to make it easier to pick and pack.
- Use last-in, first-out (LIFO) methods sparingly
LIFO is a way for warehouses to hedge against rising prices. Some products, such as cars, are subject to constant increases in price. That means that the inventory you bought most recently is always more expensive than your older items.
Selling these high-priced, last-in items first means that you'll generate a smaller profit on them — which means that you'll be able to report a smaller taxable income and thus lower your tax burden. That is one of the only reasons that using LIFO makes sense. The only country using LIFO is the United States and is discouraged by generally accepted accounting standards (GAAP).
Inventory Reporting & Analysis
Advanced warehouse optimization starts with data. Collecting, sharing and analyzing inventory management data across the organization — and even outside the warehouse itself — lets you make predictions about how to prepare your warehouse for the future.
- Start your analytics with accurate data collection
Inventory managers optimize their warehouse storage, costs and processing speeds using data from various sources. Examples include supplier information, lot numbers, SKUs, picking levels and more. Tracking this information can give you an invaluable data store representing a foundation for your analytics practice. Software that manages your inventory can help you create, track and store this information accurately, integrating with universal product code (UPC) scanners and other RFID devices to cut down on manual data entry. Furthermore, that software can help serve up data insights with simple-to-understand dashboards that display inventory management metrics and KPIs.
- Use your data to start forecasting
Once you've gathered enough information, you can embark on the next step in your analytics journey — forecasting. Software to manage your inventory can provide reports and dashboards that look at historic data and sales velocity for specific items and project future demand. The best business intelligence tools are incorporated into your inventory management platforms and scale with your business as it grows.
Some areas to help start forecasting include the following.
Calculate your lead time demand: How long does it take for a vendor to fill your order? This information will help you better make predictions about how much stock to have on hand to cover demand during that lead time. Calculate it with the following formula:
Lead time demand = Average lead time in days X average daily sales
Monitor sales trends: Look at recent sales trends in the last several weeks — sometimes called micro trends — as well as more historic trends over longer time frames — also known as macro trends. Look for patterns and seasonality.
Create a re-order point: Software will help you automate this process. Setting a re-order point, particularly for your top-sellers and high profit items, helps keep key stock on hand. Calculate your re-order point with this formula:
Re-order point = (Lead time X average daily sales) + safety stock
Software to help you manage your inventory is critical to accurate forecasting and can automate many of the important steps and reports.
Inventory Management Technology
With inventory management technology, warehouse managers can take the final step toward optimization and automation.
- Consider investing in software to manage your inventory
Likely, your business has already evolved past the need for clipboards and spreadsheets. If you find that you spend more time managing and auditing your inventory than you do managing your employees, then it's probably time to start automating. The right kind of inventory management software can automatically collect data from intakes, monitor stock levels, alert on price changes and more. The platforms let you get back to focusing on your core competencies.
- Build stable integrations
Enrich your data by looking beyond just your inventory management system. For example, you can use sales data to understand when items are beginning to gain and lose velocity. If there's an item that isn't explicitly seasonal — but still starts to exhibit seasonality — you can change its par levels accordingly. If you incorporate marketing data, you can understand how promotions and email campaigns translate into increased order volumes and optimize your warehouse based on this information. Enterprise resource planning (ERP) software with inventory management features can help you integrate data from these disparate sources so it’s all available in one digital ecosystem.
- Expand your technological horizons
To automate your warehouse, invest in advanced inventory management software tools and integrating them with the rest of the business. For example, retail inventory management can benefit from that type of integration because as soon as an item is sold in the front of the store, it automatically deducts from inventory in the warehouse. And as levels dip below par, you can trigger automatic reorders from your inventory management system. There are areas beyond just the POS that can benefit from integration. Combining your business services into an overall ERP can help you connect disparate areas of your company, such as accounting, marketing and inventory management.
Award Winning
Cloud Inventory
Manage Inventory Effectively With NetSuite
Juggling the warehouse's shifting priorities can be one of the most challenging aspects of running your business — and it's something that software helps simplify. With features that include inventory tracking across multiple locations, automatic replenishment that takes lead times into account and traceability covering the entire product life cycle, NetSuite ERP with inventory management can help you better optimize each step — from your supply chain through storage, sales and even returns and repairs.
