How to become more efficient in Inventory Management

|Updated on: April 25, 2023


Inventory management is a crucial part of any small business – which is involved in manufacturing or trading. In fact, it is a key contributor to the profitability of a business. If a business can do a good job of managing inventory, it can actually cut costs and increase efficiency as well.

The main challenge with managing inventory effectively is – making sure that that inventory is available at the right place at the right time. For small businesses the challenge is even more – as it could either lead to the business seeing another year of business or shutting shop.

One approach is to maintain stock as per the last observed demand, but then there will always be the risk of customers getting frustrated, when they can’t find the items they are looking for on the shelf. They may then switch to competitor’s products or go to supplementary options, either ways leading to lost sales for the business. Not to mention lost customers, who may never return.

Another approach is to have enough stock at all times. While this could ensure that customers will always have access to stock, it leads to excess inventory tying up valuable cash flow for the business. Not to forget, the fact that it also costs more to store and track the inventory within the supply chain of the business.

Thus, the key to effective inventory management lies between these two approaches. While this may take some effort, it will surely reflect in various ways, mainly – business profit and customer satisfaction. An efficient inventory management process leverages the best available technology and the existing best practices, to ensure that the above-mentioned results become a reality for the business.

In this article, we will share 8 tips and tricks, using which your business too can become more efficient in Inventory Management.

8 Tips to become more efficient in Inventory Management

Categorize your inventory

Categorizing your inventory into groups can help you understand, which items are costlier and thus move the slowest, and which items are low-cost and thus move quickly. The conventional way to group inventory is the ABC method, whereas, high-ticket and slow-moving items are grouped under A, and low-ticket fast-moving items are grouped under C. Category B will then have those items which are moderately priced and move slower than C but quicker than A. Needless to say, category C items will thus need to be ordered more frequently than items in category B, which in turn will be ordered more frequently than category A. You may also want to categorize your inventory based on – customer type, profitability, carrying cost, so that for each type of inventory you can take the right decision.

Another important aspect to consider here is that inventory loses value over time. If something isn’t selling as well as you expect, it is taking up valuable resources that could be used for more popular items. Offering coupons and discounts is an effective way to clearing slow-moving stock as well. Bottom line, if an item is not moving at all, retaining that in your system will be a loss.

Be clear about costs

The conventional approach is to look at inventory at cost per unit, but it does not give you the full picture. You should also look into associated costs - what does it cost to move and store the unit, what happens when there is a restocking, how do you manage when there is a seasonal discount, how do you incorporate a wholesale discount given due to a big order etc. Then there are other costs which are scattered through the supply chain – freight, volume discounts, warehousing. When you analyse all these factors, you get a more complete idea of what an item actually costs and how much you can sell it for. This will help you improve your profit margins by taking advantage of lower costs and protecting yourself when you face rising costs.

Track complete inventory information

At all points in time, you should maintain and track a complete record of all the products which form part of your inventory. This information should include things like SKUs, barcode data, suppliers, lot numbers etc. Cost of each item is also something which you may want to track over time, since it may get affected by factors such as scarcity, seasonality etc. Also, it is not just about the inventory but also about its capacity – is the inventory movable, is there enough space to store the inventory, how long is the space available for storage, how much of human effort is required behind maintaining it etc. All this information will enable you to take the right decisions with regards to your inventory purchase and inventory flow.

Audit your inventory

It is extremely important to do a physical count of your inventory – also called as stock check, once in a while. Depending on the nature of your business, you may want to do a count yearly, monthly, weekly or even on a daily basis, especially for your category C items which move the fastest. Irrespective of the method adopted for counting, it is essential to audit your inventory once in a while to ensure that it matches the data in your books.

Evaluate supplier performance

One of the crucial things which can hit your business the most is an unreliable supplier. If you have a supplier who is habitually late with deliveries or frequently short supplies an order, then it is going to impact the inventory flow right up to your end user. Given the inherent nature of demand which keeps fluctuating, it is essential that your business has a sturdy set of suppliers, who guarantee optimum stock levels for you, so that you can cater to the demand in the best possible manner. If your existing supplier refuses to adopt the best practices, then you should evaluate other suppliers who can match your pace.

Practice the 80/20 rule

As per the 80/20 rule, also called as the Pareto’s Principle, 80% of your profits come from 20% of your stock. Thus, it goes without saying that you should make inventory management of these items a priority. This requires understanding the sales life-cycle of these items and closely monitoring them. From this, many decision points will emerge, like product procurement and product storage. To begin with, the procurement plan should be such, that you never fall short of any of these items, as they contribute the most toward your revenues and profitability. Product storage also is essential – if your most popular item is in the back of the warehouse, then your staff will waste a lot of time running back and forth to get it. So automatically, one will start planning in such a manner that the high demand products are always accessible.

Track sales, understand demand & forecast

As a business, you may be tracking sales for sure, but the activity is more than just counting how many items were sold and for how much. There is a need to analyse this data as well – which item sold faster, which items didn’t get sold at all, was there a seasonal rush, is there a day in the week where sales are more, do some items always get sold together, did an annual festival or a company’s promotion affect sales etc. Analysing all this, will help you to understand demand better and to forecast efficiently. Right from procurement to your inventory capacity to your customer’s demand, integrating inventory will help you match supply with demand always.

Invest in the right inventory management technology

Earlier, the conventional way to track inventory was to use pen and paper. Over a period of time, businesses switched to spreadsheets, and most small businesses still manage their inventory in the same manner. However, as the business grows, it becomes next to impossible to continue using manual methods or spreadsheets, since a business owner will end up spending more time managing inventory rather than focus on the overall business. Also, inherently entering data by hand, is time consuming and error prone, and tends to be a repetitive task, which can easily be automated. Most importantly, an efficient inventory management in today’s day and age demands a centralized database that is accessible to multiple resources in your business, across multiple locations and updates on a real-time basis.

It needs to be noted here that inventory management software isn’t the only technology that can help a business manage its inventory and stock efficiently. It also includes mobile scanners, POS machines, barcode machines and a host of other equipment which can automate your inventory processes.

Watch this Video to Know How to View and Analyse Inventory in TallyPrime

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