For any business that holds inventory, two things matter.
One, having enough products in stock to meet customer demands. And, two, not holding so much stock that it results in an increase in holding costs, more cash tied up in inventory, and an increased risk of spoilage.
As a business owner, you want to limit customer frustrations by making sure what they order is available in good time. Moreover, you want to minimize costs for improved profitability and ensure that cash is flowing to keep your business afloat.
Finding a balance requires employing enhanced inventory management.
In this article, we discuss different approaches to demand forecasting, inventory control, and supplier collaboration, all aimed at ensuring optimized cash flow and increased profitability.
Demystifying inventory management systems
Inventory management systems allow businesses to automate inventory management tasks. This reduces errors and saves time while providing updated information on current stock status.
In addition, it provides a single source of truth for inventory in real time. With all the data needed in the same place, it becomes easy to make informed decisions to avoid stockouts and overstocks. Moreover, by adopting a cloud-based inventory management system, it becomes possible to access data from anywhere, improving decision-making tremendously.
Top tip: Ensure that your inventory management system integrates with your accounting system. Robust bookkeeping plays an important role in inventory management.
As a small business owner, consider using Excel to create your own accounting system. With a small business bookkeeping in Excel guide, you will be able to create a system easily. The good thing with this option is that it saves you money that you could have used on expensive software or hiring a bookkeeper. Excel also gives you useful functions that can help you create a system that works for your small business.
To illustrate, Novo has developed a complimentary bookkeeping template for both Google Sheets and Excel. This resource aids small businesses in efficiently monitoring their bookkeeping tasks, ensuring accurate financial management.
It’s all about data analytics
Imagine the power of predicting demand with pinpoint accuracy. Embracing data analytics has the potential to revolutionize demand forecasting, where data becomes the linchpin for precision.
The global shift towards digital commerce is undeniably enduring. E-commerce is not only maintaining its momentum but also expanding further into regions with established online shopping trends.
Take South Korea, for example, where online sales already account for 37% of retail. Projections indicate this figure could surge to 45% in the next five years, driven by streamlined payment and delivery systems.
Similarly, the United States is poised for e-commerce to represent 31% of total sales by 2026, a notable increase from the current 23%. This sustained growth, even beyond the initial pandemic impact, underscores a genuine shift in consumer behavior.
So noticing the increase of sales in ecommerce, harnessing the analysis of customer demand patterns for specific items offers the advantage of preempting demand spikes.
This proactive approach ensures timely stock replenishment to avert shortages and maintain customer satisfaction. Moreover, data analytics facilitates a thorough review of customers’ historical behaviors, allowing businesses to stock products that have a proven track record of faster sales, minimizing tied-up capital.
Understanding past purchasing behaviors also presents opportunities to boost sales and reduce holding costs. For instance, by suggesting complementary products during checkout or while customers are browsing on an e-commerce platform.
Proper inventory management also entails efficient use of warehouse space.
Hybrid warehousing involves using your warehouse for multiple tasks. Besides holding your inventory, it can be used for picking and shipping products, providing a good way for retailers to collaborate with suppliers to move products quickly and reduce storage costs.
Retailers who want to keep stock in hand at a minimum can also benefit greatly from hybrid warehousing. Like in the case of dropshipping business model, the products are shipped directly to the customer from the manufacturer. This way, order fulfillment is done without the retailer taking possession of the products.
Just-in-time inventory management
As the name suggests, this inventory management approach involves making products on demand.
When an order is placed, the business moves to order inventory or signals the manufacturer to start producing the needed products.
With this technique, the retailer only holds zero to small inventory levels, which eliminates storage and holding costs. Zero stock levels also mean a healthy cash flow as no money is held in stocks. Also, it reduces the possibility of spoiled and obsolete items in stock.
In the Just-In-Time (JIT) approach, your business fulfills orders as they come in.
For instance, if you receive 50 daily orders, you only acquire materials for those 50 products and promptly produce them. This process is repeated for each period, as seen in the picture below, preventing inventory buildup and ensuring efficient production.
Inventory management indicators
Calculating various inventory management indicators also helps with precise inventory forecasting. Some of the indicators to consider are the reorder point indicator. This informs you of the minimum amount of stock that you should have before placing an order.
Unless the stock in hand reaches that level, you are not adding more stock. You can also calculate the maximum order quantity for effective inventory management.
MOQ is ideally the maximum amount that your customers can buy in a single transaction. This helps you determine the minimum stock that you should have to make sure that customer demands are satisfied. Other indicators to consider include minimum order quantity and economic order quantity.
Inventory management plays a key role in the success and growth of any business. It is vital to hold stock levels that keep the storage costs down, but also fulfill customer demands comfortably.
This translates to improved cash flow and increased profits. Some of the things that you can do is invest in inventory management software and leverage data analytics. In addition, use techniques such as dropshipping and just-in-time inventory to keep costs at a minimum.
Guest Author: Marian Walsh, an adept content writer, and fervent football enthusiast creates compelling narratives that deeply engage readers. When not immersed in crafting captivating content, Marian finds inspiration from the world of football, infusing their work with a spirited and unique perspective that resonates with audiences.
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