Small business owners make hundreds of decisions a day. Every choice is critical to the success of your business. Some of the most important decisions deal with inventory management.
Inventory takes up physical space and ties up cash. Stocking products can increase costs for security, business insurance and spoilage protection. Low stock can lead to unhappy customers, and excess inventory can lead to lost revenue down the road.
Effective stock management can make or break a business.
Learn how small business inventory management improves operations and efficiencies. Plus, discover how to pick the absolute best inventory management system for your SMB.
Do more, waste less and make more money.
What is inventory management, and why is it important?
Clear insight into product levels is a critical part of running a business. Good inventory management tracks products to understand what a business has in stock. Business leaders can use this information to make better decisions.
Inventory tracking tells you how much stock you have and when it’s time to order more. This prevents you from running out of popular items or re-ordering products that don’t move.
Implementing a proper inventory tracking system ensures maximum revenue.
Poor inventory management can lead to enormous business mistakes. During the holiday season in 2011, Best Buy issued a press release explaining that it had to cancel some customers’ orders. The culprit? Inventory management gone awry.
Because Best Buy had poor insight into its available stock, it had to tell customers just four days before Christmas that orders placed more than a month before would be canceled.
That’s not a great way to roll into the holiday season.
What to look for in an inventory management system
When weighing inventory management options, make sure you consider choices that fulfill inventory management’s basic goals.
The best inventory management systems will allow you to easily track two things:
- How much inventory you have on-hand at any given moment
- When and how much to order to meet customer demand
With this information, you’ll be equipped to make better, more informed business decisions.
Who needs an inventory management solution?
Any business that sells product should establish an inventory management process.
- Brick-and-mortar retail businesses
- eCommerce retail stores
- Automotive shops
- Restaurants, cafes and bars
What are some inventory management techniques?
Businesses can manage inventory in a variety of ways.
Managers and owners can adopt a mix of the following techniques to help them manage their inventory best. Each has its own place within a business’ processes and protocols.
ABC Inventory Analysis
This analysis puts each product into a category. Each category denotes the value of products within it.
- Category A: Most valuable inventory (20% of stock)
- Category B: Medium value inventory (30% of stock)
- Category C: Least valuable inventory (50% of stock)
An ABC analysis helps businesses understand how specific inventory influences its bottom line.
Best for: Complex businesses that need a way to segment their inventory data.
Just In Time (JIT) Inventory Control
Just in Time is a technique where you keep just enough stock on hand to please customers. This can cut down on problems with dead stock and improve cash flow. It can also cause delays in order fulfillment.
Businesses that have accurate forecasting models are well suited for JIT inventory management.
Best for: Companies with a strong, fast, and efficient network of suppliers. Businesses must have accurate forecasts to get the most inventory control out of a JIT approach.
Just in Case (JIC) Inventory Control
Unlike JIT, the Just in Case method is a way of managing your inventory that keeps plenty of stock on hand.
Instead of having to order products or materials as customers make purchases, products are in stock ready to sell as customers purchase them. JIC ties up more money and can lead to higher storage facility costs.
Best for: Businesses that have a difficult time accurately predicting customer demand and product popularity.
Dropshipping is a way to fulfill orders without keeping stock on-hand.
A business doesn’t own the items it sells and instead works with a manufacturer or wholesaler. With this inventory management technique, products are purchased or manufactured after a customer has paid. Often, billing is delayed until an order is fulfilled.
This decreases the amount of capital that a business needs and reduces risk.
Best for: eCommerce stores that don’t have space to store stock or that do not want to put up capital to buy product.
Inventory Cycle Counting
Cycle counting maintains inventory accuracy beyond the traditional physical inventory count.
With cycle counting, companies count only a small subset of SKUs at a time rather than taking a full inventory. Doing so makes taking inventory counts more manageable for a business. Instead of closing down shop for a few days or working after hours to count stock, cycle counting counts a little bit at a time.
There are many ways to decide which products to cycle count and when. A company that has completed an ABC analysis can benefit from this technique. It might count Category A products more often than others.
Best for: Businesses that need to regularly count their items and that cannot completely close the store to do so. Almost all businesses will benefit from cycle counting to ensure inventory numbers are accurate.
To prevent low inventory snafus, businesses, especially SMBs, set par levels. These dictate the smallest amount of each product to have available at all times. Once a product falls below its par level, a business owner knows to order more.
Seasonality can affect par levels, so checking them throughout the year is prudent.
Best for: Businesses of all stripes will see benefit from setting par levels. Many inventory software systems alert you when products dip beneath their respective par levels.
FIFO (First in First Out)
FIFO is a technique where businesses sell products in the same order they stock them.
For SMBs who worry about spoilage, FIFO is especially important to cut the chance of lost revenue.
Best for: Restaurants, bars and cafés—all businesses that rely on ingredients that are prone to spoilage.
Forecasting is essential when it comes to stock control. Businesses forecast sales by watching market trends, seasonal trends, marketing spend and more.
Knowing these gives a clearer picture of how much product to have on hand.
Best for: All businesses should have some sort of forecasting integrated into their processes.
How does proper inventory management help a small business save money?
Keen insight into inventory levels will save money in the long run.
If a business isn’t aware of inventory levels, it might fail to stock enough of what people are asking for.
This leads to lost revenue and jeopardizes customer satisfaction. When customers can’t count on you to have what they want in stock, they might think twice about coming back.
Knowing the difference between too little and too much inventory is critical. Businesses strive to find the Goldilocks of inventory levels –not too much, not too little, but just right.
This reduces business costs, improves cash flow and helps you avoid lost sales.
What mistakes can a business make with poor inventory management?
Businesses can make a handful of mistakes when it comes to managing inventory. This leads to headaches, hardships and lost profit.
Manual Inventory Management
Relying on manual inventory counts is a common mistake. Manual inventory management often leads to human error and gaps in knowledge. Businesses need up-to-date insight into what stock they have.
Talus Tip: Implement a cloud-based inventory management system that tracks inventory in real-time.
Spoilage and Dead Stock
Spoilage and dead stock are easy to overlook without proper inventory controls. This can lead to more costly mistakes for businesses.
For restaurants and cafes, spoiled products are lost profits. For retailers that sell trendy or seasonal products, dead stock is as distressing. There’s a big difference between the profit that Halloween candy brings in on Oct. 29 and Nov. 1.
Talus Tip: To prevent spoilage, choose an inventory software that can track stock at the ingredient level (more on this later). One that also provides insight into sales trends can keep dead stock to a minimum.
How can a small business keep track of inventory?
There are a variety of inventory management tools to use to check inventory. Large businesses with many warehouses might use Radio-Frequency Identification (RFID), a technology that uses radio waves for communication between a product tag and reading device. This technology can track product to report back to an Enterprise Resource Planning (ERP) system.
For SMBs, inventory needs are different.
Using custom spreadsheets might seem like enough for small business inventory management. But a cloud-based inventory management software system is a better choice. Business owners gain a deeper understanding of their business.
What to look for in inventory software solutions for small businesses
Inventory management systems improve processes in many ways. With inventory software, a retail business knows what it has available in real-time. This can help support promotions and high-traffic occasions.
Some inventory tracking software can report inventory on a micro-level, reducing human error. For bars and restaurants, tracking individual ingredients is critical. Tracking inventory at the ingredient level rather than menu level leads to better inventory management over time, even if customers modify food items.
This allows restaurant owners and managers to know what’s selling best and under what conditions. For example, a spike on one Sunday in sales will be easy to distinguish from a dramatic trend in increased sales over time.
Liquor is particularly hard to track in most inventory systems.
Don’t settle for a system that tracks by the bottle. Make sure you can account for every ounce of alcohol that gets poured. If a bartender rings up a margarita and uses 2 oz. of tequila, an automated system can deduct these 2 oz. from their systems. This leads to better visibility into liquor sales, trends and shrinkage.
With these details, business owners understand how product is moving and when to reorder. This knowledge can also be used to advertise specific foods and drinks based on seasonality, time of day or day of week.
A good software system should do the following for small business inventory optimization:
- Track inventory in real-time
- Forecast demand for products
- Use PAR levels to avoid product shortages
- Manage inventories for many locations
- Include reporting and analytics features
- Offer a GUI that is easy to navigate and easy to understand.
- Include image tracking
Choosing a point of sale system that has inventory management integration is smart. Many offer inventory management add-ons… and there are even a rare few (like ours) that include inventory management at no extra cost.
Using a POS system with inventory management adds insight into the health of a business.
Inventory management solutions are as unique as each small business. The best inventory system for you is the one that runs your business with greater efficiency.
Inventory management software helps to automate business processes and reduce user error. This frees up time and energy to focus on other aspects of your SMB. With insight into stock levels, you can uncover business patterns and increase revenue.