If you find that inventory-related tasks take up a major portion of each day, it’s probably time for a review and reboot. Good inventory management is more than increasing stock accuracy, it makes your day more efficient. Once you have good processes and procedures in place, you’ll soon find more time for business-building activities.
Here’s a seven-step approach to creating an inventory management plan with procedures, controls and tools tailored to your business’s unique needs.
1. Define Product Sourcing and Storage Methods
How you source and store the various products you sell determines how you manage your inventory. If you stock all products in your own facility, your inventory controls and processes are handled internally.
However, if you store goods externally in fulfillment centers or supplier warehouses, or if you use dropship suppliers, you need to tie inventory processes and data tools to their systems.
2. Decide How To Track Inventory Data
Whether you stock goods yourself, use a fulfillment partner or focus on dropship vendors, keeping close tabs on inventory data is vital to inventory management. For this, spreadsheets and inventory management systems are invaluable tools.
Square POS is a free system with a full suite of inventory tools that help you track all types of product data.
The inventory data you’ll want to record and track generally includes:
- Internal and supplier product numbers: product numbers are called stock keeping units (SKUs) and many suppliers also use universal product codes (UPCs)
- Quantities on hand (QOH): the current amount of stock per item in your shop or facility
- Product storage location: assigned areas where items are stored or displayed
- Supplier information: contact information, order minimums, case quantities and delivery times—called lead times
- Product costs: wholesale costs per supplier and quantity discounts
- Retail pricing: current and promotional sale prices for goods
You can use a spreadsheet for simple inventory tracking needs, say for less than 100 items. However, integrated inventory management systems such as Square POS, Lightspeed or Clover are very cost-effective and make handling small business inventory a snap from day one.
These systems streamline customer orders, inventory tracking, supplier data, purchase orders and stock receipts within one system. Plus, most seamlessly connect to retail point-of-sale (POS) systems, online sales channels, fulfillment centers and dropship partners for real-time inventory updates.
3. Create an Internal SKU System
Creating an internal product SKU system is helpful for quickly identifying and tracking products during daily activities. SKUs generally use a combination of letters and numbers which are arranged to deliver key details about an item at a glance.
For example, BW066-3201_RASP is an internal SKU that’s coded to communicate specific information for a home goods company.
- BW: is the internal supplier code for the supplier BentleyWare
- 066: is the internal category code for a dinner plate
- 3: is the internal material code for plastic to direct display, handling and packing
- 201: ties to the last four digits of the supplier’s UPC to cross-check reorders and stock receipts
- RASP: is the internal color code for Raspberry
So, with a glance at the SKU, employees know exactly what an item is and other key details such as where it’s stored and how it displays or ships.
4. Organize Inventory Storage Areas
Having a place for everything and everything in its place makes all of your inventory-related tasks quick and efficient. If you handle inventory in your own facility or store, first organize and identify storage areas, such as racks, shelves and bins, then assign each product to a specific area.
Small inventory items can be sorted and stored by SKU in labeled bins or on sections of shelves, while larger products can be stored on pallets.
Here’s where internal SKUs come in very handy. You can easily connect certain areas of the retail floor, stock room or warehouse using your SKU’s vendor or category codes.
5. Use Forecasting To Order Inventory
Forecasting is predicting how much inventory you’ll need on hand to meet upcoming demand. Naturally, this involves many factors, such as product sales velocity, upcoming promotions, market trends, seasonality and business growth, to name a few.
The goal of forecasting is to have just enough inventory on hand to cover predicted sales for a prescribed period of time, such as 15, 30 or 60 days. Understanding sales velocity for products is critical to forecasting and inventory management systems greatly help with built-in forecasting tools in purchase orders.
Understanding supplier lead times also plays a key role in forecasting. Reliable suppliers that ship quickly let you stock fewer items and order more often, which helps with cash flow. With slower-shipping suppliers or seasonal purchases, you’ll have fewer and larger purchases, which ties up more cash in inventory.
6. Set Up Inventory Receiving Procedures
Promptly receiving inventory shipments is another key element of learning how to manage inventory. You can’t sell or ship inventory that’s not checked in and properly shelved or displayed. So, it’s wise to make inventory receipts a priority in your inventory management plan.
Stock check-in must be accurate, too, since errors directly impact your product QOH data and lead to over-ordering, false backorders and unsold stock. All of this impacts your bottom line.
The best procedure is to receive stock against your purchase order, and open and check all cases and containers to make sure everything is correct. Don’t rely on box labels and supplier packing slips since their staff can make mistakes, too.
After receipt, stock should be quickly shelved in its assigned space. Or, if it’s overstock or seasonal goods, note temporary locations in your inventory management system so you can find it when needed.
When shelving or stocking new inventory, you can use methods such as “last in, first out” (LIFO) or “first in, first out” (FIFO). Generally, it’s smart to use the FIFO method, which stocks new goods behind older stock, so you sell older goods first. This is especially important with perishable foods and goods with expiration dates, such as cosmetics.
7. Keep Track of Inventory Levels
Most inventory-driven businesses do an annual inventory count, called an audit, for tax purposes. This compares a physical count of all goods in stock to the inventory quantity on hand (QOH) shown in the data records. However, discrepancies found in annual counts are nearly impossible to trace and account for since it may be months after the errors occurred.
Physical, hands-on inventory counts spot errors that even the best technology can’t catch.
That’s where interim counts such as cycle counts and spot checks fill the gap. These help you find and remedy small inventory inaccuracies before they become big problems.
- Cycle counts: Break your full inventory into sections that are counted on a rotating schedule. Cycle counts can be run by supplier, item category, stock location or whatever works for your operation.
- Spot checks: Periodic counts of a few items help to spot random errors in stocking, ordering, storage or theft losses.
Simply put, when in doubt—count. Closely monitoring inventory is key to improving your cash flow, spotting theft or other loss issues, and boosting that bottom line.
