Are you thinking of launching an online business or opening a physical shop? Or have you already taken the plunge? The adventure is just beginning, and the road to entrepreneurship can sometimes be strewn with obstacles. Fortunately, some of these obstacles can be anticipated. Logistics is one of the key elements to master right from the start. An efficient, financially healthy company is organised from A to Z, and optimised inventory management is a vital part of this organisation.
Managing your inventory is therefore a major challenge for your company. Implement best practices as soon as possible to manage your merchandise as well as possible and:
- optimise your business operations;
- save money and improve cash flow;
- improve customer satisfaction..
But what does inventory management mean?
The first step in developing or improving your processes is to understand what inventory management is and why it is important.
Inventory means the quantity of goods and merchandise you have on hand for your customers. Inventory management involves monitoring the quantities of goods stocked by your company, organising these goods (item records, weight, dimensions, reference, location, price) and restocking.
When we talk about inventory, we are not just talking about finished goods ready for sale; we also mean all the goods involved in your company's operating cycle. The main types of inventory include the following:
- merchandise inventory: goods sold for profit without prior processing;
- raw materials inventory: products purchased and to be processed by the company:
- inventory of semi-finished products: products being manufactured.
- inventory of finished goods: products ready for sale after the raw materials have been processed;
- packaging inventory: supplies for packing your orders or selling direct.
These different elements will then be stored in a warehouse, or perhaps at suppliers' or distributors' premises.
Risks associated with poor inventory management
As you will have gathered by now, effective inventory management is essential to keep your business running smoothly, and there are risks involved in not paying enough attention to the organisation of your merchandise.
A poorly managed and organised warehouse can lead to:
- overstocking, which leads to loss, waste and breakage. In addition to the higher logistics costs associated with too many products, you will also lose money on products that are out of date, out of fashion or out of season, and therefore unsaleable;
- cash flow problems. Chances are you have invested money in acquiring your stock and/or signed supplier contracts to resell it as quickly as possible and make a profit. But this will cost more money than you can earn, for as long as your merchandise is gathering dust in your storage space. Furthermore, supplier invoices can become overdue and your stock can remain largely unsold;
- under-stocking leading to poor order execution and delivery delays. The products requested by your customers are not in stock and your orders are incomplete or behind schedule. Customer satisfaction is waning;
- workplace accidents. Poorly organised storage space can create risks for you and your staff.
Inventory management best practices
The ideal situation involves converting your inventory into cash as quickly as possible while ensuring a balance between supply and sales. Methods and best practices exist to make this possible. Let's take a look at how to organise and improve your inventory management.
1. Assess the situation
Review your inventory situation. If problems arise, look for the causes. Do you have restocking problems? Are your orders prepared and delivered on time? Do you regularly run out of certain products? Are you having trouble selling your stock? Do you have surplus or ageing stock? Out-of-date stock?
To prevent these problems from recurring, you can set up monitoring indicators, such as:
- out-of-stock rate: this rate measures the ratio of unsatisfied orders to total orders. The aim is to keep this rate as low as possible and demonstrate your company's ability to meet orders, which will be calculated using the service rate explained below;
- service rate: this rate is equivalent to the ratio of the number of satisfied orders to total orders. It is the opposite of the out-of-stock rate;
- inventory turnover rate: this is the ratio between actual consumption and your inventory. It indicates whether the stock is frequently replenished and should be as high as possible.
2. Choose the right storage technique
Choosing a supply and replenishment method adapted to your needs and sector is essential for the effective organisation of your merchandise management. Below are some possible methods.
- The replenishment method, also known as the calendar method. This type of inventory management involves replenishment at a fixed date and quantity and is usually governed by a delivery contract with a supplier.
- The reorder point management method: to simplify your inventory management, consider establishing a minimum safety stock level for each product (also known as the reorder point). The reorder point shows you the level at which it is time to restock. Use the following formula to calculate your reorder point:
Reorder Point = Safety Stock + (Supplier Supply Time x Expected Consumption) - The re-completion method: this involves ordering on a fixed date, but in variable quantities, so that stock levels can be adapted to sales volumes.
- The order-based replenishment method: this enables orders to be placed for variable quantities, and on variable dates, and replenishment to take place on an as-needed basis. This method is therefore based on the company's short-term needs to determine the quantities to be ordered.
- The just-in-time method: this method, also known by the acronym JIT, involves waiting for the customer's order. It consists of producing or ordering only what is needed at the time of the customer's order. This allows you to keep stock levels as low as possible and avoid overstocking problems.
- The "First In, First Out" (or FIFO) method: this is crucial, especially if you work with perishable products; it involves selling the oldest stock first.
- The Last In, First Out" (LIFO) method: this is the reverse of the previous method. The principle is that the most recently acquired merchandise is sold first. This method is generally used in industries working with homogeneous, non-perishable products that do not depreciate over time, such as construction.
3. Make accurate projections
Effective inventory management requires an accurate view of demand, which is not an easy task. There are many variables to take into account, and unforeseen events can arise.
Points to consider when planning your future sales:
- market trends;
- your growth rate for the current year;
- data corresponding to past sales and previous years' results;
- guaranteed sales from contracts and subscriptions;
- seasonality;
- upcoming promotions;
- advertising expenditure.
4. Optimise your storage space
To save time, it is essential to organise your storage space. This organisation must facilitate product identification, stock replenishment and order preparation. Sales staff or order pickers must be able to find the items they need quickly.
This avoids accidents caused by falling objects, repetitive movements or poor posture.
As well as keeping your storage area well organised, you also need to use clear names and labels for your products to facilitate stock movements.
5. Maintain good relations with your suppliers
The effective management of your products requires adaptability. Whether you need to return a defective product, quickly recommend certain products that have sold out or deal with manufacturing problems, you must be able to act quickly. That is why it is important to maintain a good relationship with your suppliers. They will be more responsive and accommodating in the event of a problem.
6. Always keep customer satisfaction in mind
We have talked a lot about logistics strategy in this article, but don't lose sight of the fact that your main objective is to guarantee product sales and customer retention. Customer satisfaction and the customer experience must be at the heart of all your decisions, even logistical ones. Too little stock, long delivery times, faulty products sent out, etc. will lose you sales and customers.
7. Equip yourself with the right tools
Many independents and small businesses start up online or local businesses using the traditional paper-and-pencil method. But this method, which can work very well on a small scale, will soon become difficult to manage, depending on your growth objectives. Investing in warehousing or inventory software will become inevitable in your race for growth.
Conclusion
Take or regain control of your inventory! Select the right techniques and tools and start implementing them today.
By combining the different techniques above to define an organisation that suits you, you can help reduce your costs, gain efficiency, maintain your company's profitability, but also prepare for the unexpected. Don't forget that efficient merchandise management is a major factor in the success of your business. Good inventory management gives a company a better chance of profitability and survival.