The Importance of Inventory Management
The types of inventory management businesses need take a different form for every business, depending on factors such as size, type of product, and how quickly a brand is growing. Many retailers start out with spreadsheets, and for some, this critical operational task may evolve into a task handled by an entire team, in combination with other inventory control methods. Regardless of where your business stands today with how to manage inventory effectively, it’s imperative to your growth. Without the visibility to know where your inventory is, across channels, at all times, you’re making critical business decisions with incomplete information
The importance of inventory management is increasing as brands are now expected to sell across multiple channels. Days inventory outstanding has risen 8.3 percent the past five years, and the number of warehouses is on the rise. That’s a lot more inventory and stock to keep track of. Still, almost half (46 percent) of small businesses don’t use an inventory management solution at all.
How to Manage Inventory Effectively?
While inventory management is the process of tracking stock from manufacturing through fulfillment, inventory management tools make that process more efficient while providing you with higher levels of visibility and control. Essentially, inventory manager systems consist of the business applications that manage inventory for you.
Inventory control is far more robust than the old-school spreadsheet system. Often, inventory management software (IMS) will use barcodes and/or radio frequency identification (RFID) to track stock. Not all inventory management options have the same features. Some systems are focused on the manufacturing process, others in the warehouse, and more robust ones take a holistic approach to managing inventory. In many cases, you can monitor how much inventory you have at any given time across all your sales channels while utilizing reporting capabilities that provide insights into your business and customers.
Management tools automate and streamline the inventory management process while integrating with other tools, such as your eCommerce site, accounting, fulfillment, and shipping tools. In retail, inventory management techniques are typically tied to point-of-sale (POS) systems.
Importance of Inventory Management
In a study conducted by the University of Chicago, 65 percent of one retailer’s inventory records were inaccurate. Without accurate data, your views into your business are skewed—and you could end up making costly business decisions.
The need for accuracy only heightens as you consider omnichannel retail. Almost half (44 percent) of American consumers shop across multiple channels. The more complex consumer behavior gets, the more difficult it becomes to track manually. The right inventory management platform can gather data from all of your selling and fulfillment channels and sync it together.
Additionally, integrating your inventory control techniques with other systems retailers have in place, there’s a reduced risk for human error and a better chance at identifying discrepancies in the data. In fact, 15 percent of inventory distortion issues are because the management mediums can’t talk to each other.
Inventory management tools and techniques often generate reports based on all the data it receives. These reports can provide insights into your inventory, warehouse(s), purchasing, marketing, and even consumer behavior. For instance, Target was able to understand how its brick-and-mortar locations were turning into fulfillment centers: 15 percent of their online sales in 2015 were in-store pick-ups.
It’s imperative to remember to do something with the data you receive from your inventory management techniques. 25 percent of retailers face issues with inventory management methods that they attribute to the lack of information-sharing throughout the company. An objective of inventory management is to make it easier to glean actionable insights from the data, as opposed to presenting a bunch of raw numbers in a spreadsheet from which you must draw conclusions and trends yourself.
Save Time With Automation and Increased Efficiency
Another objective in inventory management is to automate many tasks related to tracking and managing inventory. This frees up time that you or your employees could be spending doing something else, something to grow your business. Time is money, so any tool that can increase efficiency is also going to help you be more profitable. According to one Stitch Labs customer, James Hargett of Chubbies Shorts, “It used to take me 4 hours every time I wanted to upload our inventory. Now, it’s a 15 minute process. That’s 3 hours and 45 minutes of my day, thanks to Stitch, that I can spend on other, more important tasks. And when you release new products as often as we do—sometimes up to three times a week—that’s a lot of time saved.”
Many inventory management systems will categorize products for you, reorder inventory when below par levels are reached, and generate reports that someone would otherwise have to do manually.
The bottom line? IMS helps to increase your bottom line. “Entrepreneur” reports that retailers can see up to a 50 percent increase in profits with careful inventory management. Whether that figure’s accurate or not, there’s no doubt that it provides an abundance of ways to increase profitability.
In addition to reducing labor costs, inventory control techniques contribute to your retail business’s profitability. By having deep insights into your business, you can make informed business decisions to help you continue to grow. Looking at things like your inventory turnover ratio, average order value, and other key metrics—across all your selling channels—gives a holistic view of your business. And that means you can forecast more accurately and avoid costly issues, such as backorders and out-of-stocks.
How to Choose an Inventory Management Technique
Every inventory management system has different features that may or may not be well-suited to your business. It all comes down to your needs and goals and finding a program that can fit that. Here are five steps to help you choose for your retail business:
1. Identify your goals
Do you have specific needs or pain points that you need to address? Talk to the employees who will be using it the most, and find out what their needs are. If you’re experiencing a lot of shrinkages, you’re losing money. Likewise, if out-of-stocks are a frequent occurrence, the customer experience suffers, so you’ll want a fix for that. It’s also important to think of both short- and long-term goals. For the growing retailer, it’s often easier to find a tool that will scale with your needs than to migrate to a new one as your business grows.
2. Choose your features
After you’ve identified your needs, you’ll have a better understanding of which features you need in an inventory management system. Recognize that you won’t find one eCommerce system with every feature you want, so it’s important to look for systems that integrate with each other. If you’ve built your website on Shopify, for example, look for inventory management systems that can integrate easily with their platform. Common features you’ll want to think about when considering an inventory management method include the ability to track inventory across multiple channels, barcode and RFID, order management, inventory forecasting, fulfillment, and warehouse management and reporting & analytics.
3. Determine compatibility with existing tools
You might already have tools in place. If that’s the case, it’s beneficial to find IMS that is compatible with your existing tools and software. With a more integrated and connected back-end, you’ll have even deeper insights into your business and more checkpoints to ensure accuracy and identify discrepancies. You could also take this as a chance to reassess the other tools you currently use and see if they have all the capabilities you need to grow your business, or if you should migrate to something more robust.
4. Conduct comparative research
Once you’ve selected a small group of inventory management software options to choose from, comparative research can help you compare. Request demos and read user reviews and testimonials to get a better feel for how the tool will work once it’s implemented. Some IMS companies will also allow you to test out the tool with a free trial. One major red flag is when you see poor customer service as a recurring theme. Especially if you haven’t used IMS before, up-front support is imperative to making you feel comfortable in using the tool.
After you’ve implemented a robust IMS into your business, you’re ready to tackle advanced inventory planning. Learn how with this guide to inventory planning.