According to an article in the Economic Times, nearly 81% of consumers experienced an “out-of-stock” situation in the past 12 months, resulting in lost sales for retailers and lots of disappointment for in-store shoppers. Moreover, retailers across the globe recorded losses of a whopping $1.75 trillion due to mismanaged inventory. The one thing that could have ensured that something so detrimental to the brand image and customer experience did not happen to these businesses is inventory management.
What is inventory management?
The same article defines inventory management as a part of supply chain management that involves all those processes which are utilized to oversee and organize your goods or materials in your facility.
In other words, it means overseeing the volume, diversity, pricing, and location of the products which are available with a business. A product that is in stock is counted as part of the inventory and its subsequent status is updated and managed as it moves through the supply chain.
So, suppose you run an e-store that sells clothes and you receive an order for 7 t-shirts while you have 12 t-shirts in stock. When you ship 4 t-shirts the next day to customers who paid extra for faster delivery, the size of your inventory will be 8, and 5 of these will be unsold t-shirts.
So, for you, basic inventory management will involve knowing which clothes you have in inventory, how many units of which product have been ordered, and how many units are being shipped out and brought in (or manufactured).
Also, it is important to note that while inventory management can include distinct components of a product that has not been assembled yet (for example, fabric, thread, and adhesive, may be part of the inventory for a handbags manufacturer), it does not include company property, manufacturing equipment, and other forms of business capital.
There are many ways to manage inventory and they usually depend on the nuanced nature of your business and your personal preferences. However, here are some of the most basic techniques that businesses use for inventory management:
First In, First Out (FIFO)
The FIFO technique is usually adopted by businesses that deal with perishable goods, for example, the food industry. As an inventory management technique, FIFO ensures that the first products received in the inventory are the first ones to go out of it, thereby ensuring that the products do not exceed their shelf life.
The JIT inventory technique works by restocking a product as soon as it is ordered by a customer. By doing so the inventory management system ensures that the inventory’s volume remains almost the same as the numbers of orders being fulfilled.
One of the main benefits of inventory management with the JIT technique is that by using it you only need to manage the items which need to be shipped out to the customers. However, if the size of your business is large and you deal with a wide variety of customers then in order to sustain the JIT technique you will need to keep a very close watch on the buying behavior of your customers.
Par Levels Technique
The Par Levels Technique provides one of the primary advantages of inventory management by ensuring that there is always a minimum stock of each product available in the inventory.
These minimum stock amounts are known as ‘par levels’ and they may vary from product to product depending on their relative demand and supply balances. Many businesses employ the Par Levels Technique along with other inventory management techniques like JIT to ensure a fail-safe system.
There are also many other inventory management techniques available to businesses, for example, the ABC Analysis, Dropshipping, Demand Forecasting, etc. Now, however, let us look at the 5 reasons that will convince you about the need of inventory management systems and why you should start thinking about adopting one as soon as possible.
- Tracking the inventory
As obvious as it might sound, being able to track your inventory is the primary importance of inventory management, simply because there is no way you can run a credible business without knowing the availability (or lack thereof) of your products. Using an inventory management system provides you with a centralized view of your stock across different channels and allows you to maximize the smooth running of your various business operations.
- Improving the customer experience
The loyalty of the customers for your brand depends directly upon the quality of experience you deliver them. So, if a customer places an order on your website only to learn later on that the product has gone out of stock, she is likely to wonder if she should check out your competition even though she is completely satisfied with the quality of your products.
An inventory management system improves the customer experience by ensuring that you are able to provide the customers with a clear picture about things like the availability of a product, the estimated delivery time, the time it will take for a product to come into stock again, etc.
- Optimizing the finances
Businesses often suffer from the problems of buying too many products that they do not need and too few that they do. This usually happens because of the lack of an inventory management system that can tell them the products which are low in stock and need to be replenished, and the products of which there is a surplus.
By managing their inventory businesses can not only ensure that products do not go out of stock, but also that they buy only as much of a product as is really needed. Being prudent like this while making business decisions can go a long way towards optimizing the running costs and contribute towards improving the return on investment.
- Forecasting the trends of customer behavior
To run a successful business you need to understand your customers in as much detail as possible. However, many small and medium businesses lack the resources necessary for investing in sophisticated technology that can analyze the data from various sources to arrive at accurate buyer personas. This is where an inventory management system can be of great help.
By looking at the inventory data you can observe many trends, for example, the most favored variants in a particular product category and the slowest-selling product category, which will provide you with useful insights about the shopping behavior of your customers. By leveraging this knowledge you can improve revenue, free up the cash flow, and minimize your holding and handling costs.
Learn more about how you can make sense of your customers’ buying patterns and trends
- Improving accuracy and consistency
By using an inventory management system you can ultimately improve your business operations to a point where managing inventory becomes an accurate and consistent task with very little in the way of overhead costs and human resource requirements. Moreover, with your inventory records in place, you will also be able to draw upon their data for arriving at long-term strategies.
We hope these reasons for inventory management will be helpful in taking further your understanding of how your business and your customers can benefit from it. By combining your experience with the business and your insights about the customers with a well-managed inventory you will surely be able to gain an edge over your competition and achieve lots of success.