Managing inventory can be a challenge. If your inventory levels are too high, you are tying up cash and creating cash flow problems. If you let stock run too low, you will have difficulty filling sales orders. Effective inventory management, then, is crucial to profitability.

Many businesses fail to manage their stocks of raw materials and finished goods adequately. Here are ten tips to help you manage your inventory levels more effectively.

1. Forecast Demand

To keep inventory levels at the optimum level, you need to forecast the demand for goods you hold in stock. To be able to predict the demand for inventory, you will need accurate sales forecasts. Historical sales data will be a good starting point for your inventory usage forecast. You will then need to consider what effect activities like marketing campaigns will have on inventory demand. External factors, such as the state of the economy, will also need to be considered.

2. Centralize Inventory Management

If you have multiple locations, it would be advisable to centralize your inventory management function. Centralized inventory management allows you to track your overall stock position and move inventory between sites when needed. The raising of purchase orders should also be centralized to avoid unnecessary overstocking.

3. Use ABC Analysis

ABC analysis, which is a way of categorizing inventory, allows you to prioritize your attention on the most critical stock items. Category “A” inventory items are the high-value or fast-moving items. Products categorized as type “B” are the moderate value items. “C” category stock items are the lower value goods that make less money and usually move slowly. The objective of completing an ABC analysis is to identify where you want your inventory dollars to be invested.

4. Track Inventory by Product Category

Different types of products may have peaks in demand at certain times of the year. So, it can be helpful to categorize inventory by product type. Organizing products by category will allow you to see when the demand for certain products increases or decreases, simplifying seasonal trend forecasting.

5. Inventory Counts

It is unwise to rely solely on inventory records to monitor inventory levels. It is advisable that you also carry out regular physical counts of your stock. Some businesses only complete physical inventory checks at the end of the financial year. But more regular counts will identify discrepancies in the stock records sooner and allow you to adjust your purchasing accordingly. If you have a large number of inventory items, frequent full stock counts may not be feasible. In these cases, a count of the higher value items in your inventory can go a long way to avoid inventory chaos.

6. Set Minimum Stock Levels by Item

Minimum stock levels will alert you when more stock needs to be ordered. To calculate a minimum stock level, you will need to consider the demand forecast and the lead time for delivery. If you always reorder products when the minimum stock level is reached, you should never be understocked.

7. Implement Strict Purchasing Controls

Strict purchasing controls will be needed for any of the above inventory management strategies to be effective. So, in some companies, the purchasing function will need to be centralized and a procurement procedure documented and enforced. If you are a small company, the same controls will apply but will be less formal.

8. Track Supplier Performance

How quickly a supplier delivers your orders will also, of course, have an impact on your inventory management. So, tracking delivery lead times is as crucial as monitoring demand. If a supplier often lets you down, you will lose sales. So, discuss any delivery issues you have with suppliers and be prepared to switch vendors to avoid shortages of critical inventory items.

9. Invest in Inventory Management Software

It is possible to manage a small business inventory on a spreadsheet. However, as the business grows, managing inventory manually will become increasingly challenging. The best way to manage inventory is to use an integrated inventory management software package.

10. Never be Complacent about Inventory Levels

Inventory is an asset on the balance sheet, so unused stock does not have an immediate effect on the profit of the company. However, slow-moving and obsolete inventory items will be costing money in terms of warehousing and finance costs, and high stock levels will put a strain on your available cash. Eventually, obsolete inventory will also need to be written off, which will impact profitability. So, all businesses need to be diligent in managing their inventory.

Conclusion

The optimal inventory management process will vary from company to company. The crucial goal is an inventory position that minimizes the cash tied up in stock but ensures that customer orders can be met on time. The above tips should help you develop a system that achieves these goals.