Essentials of Effective Inventory Management

Effective inventory management tracks goods from purchase to sale, enables brands to make timely decisions on what to buy (and how much), and strategically adjusts stock levels based on trends, seasons, and all manner of economic data.

It is far from simple to achieve, however, and there is no ironclad playbook for success. Every merchant has different products, supply chains, and financial considerations, and all must be continually monitored, evaluated, and calibrated. This takes discipline, data, and the right technology.

At SkuNexus, inventory management software is a core component of the systems we develop for our clients, and we know the challenges this business area can present for even the most seasoned companies. Here, we would like to present a guide to the essentials of effective inventory management.

What is Inventory Management?

A merchant’s inventory management is the system it uses for sourcing, organizing, and storing products to optimize inventory levels while keeping carrying costs to a minimum. 

There are a couple basic terms (stock and control) used within any discussion of inventory management that should be explained for the sake of clarity.

Stock is always inventory but not all inventory is stock. What does this mean? Stock is generally thought to be any finished goods available for sale whereas inventory can also describe materials used to create those items. This is a distinction seen more in manufacturing than retail/wholesale eCommerce where “stock” and “inventory” are often used interchangeably.

The difference between inventory management and inventory control is much more significant and it’s important to understand. The control of inventory lies under the broader management umbrella and comprises the processes and methods used to handle, monitor, and account for items on hand. It is a critical component of inventory management and largely surrounds operations within a warehouse/fulfillment center.

Benefits of Optimized Inventory Management

The advantage a coherent and well-managed inventory system provides cannot be overstated. It will have a profound impact across any eCommerce merchant’s entire enterprise.

Higher Accuracy
Knowing exactly what you have is crucial data both for your customers on eCommerce platforms as well as for demand forecasting and determining reorder points. Knowing where that inventory is stored is necessary for correct order routing and fulfillment.

Better Demand Planning
Manual inventory management lacks the ability to perform multiple functions simultaneously. An inventory management software system, however, can process a vast array of information including current orders, seasonal trends, and supply chain data. Armed with this wealth of knowledge, it can predict future demand and make timely purchasing recommendations.

Prevention of Backorders/Stockouts/Excess Stock
This lies at the heart of optimized inventory management. While supply chain issues can sometimes be unavoidable, the deep insight provided by accurate inventory data helps merchants greatly reduce the time items are out of stock or being held in excess.

Reduced Carrying Costs & Increased Cash Flow
Inventory carrying costs include storage, transportation, and materials handling as well as all labor used to perform those operations. They also include insurance, depreciation, opportunity costs, and of course, taxes. Simply put, stock is a cost until it is sold, and the greater the excess on hand, the greater the carrying costs. 

Improved Fulfillment
Organized inventory yields an organized warehouse which helps employees better fulfill orders. Greater accuracy and reduced errors go hand-in-hand and pick/pack/ship operations can function at a greater speed with no dropoff in performance. In addition, strategic distribution of inventory (if multiple fulfillment locations exist) can aid in the reduction of delivery times.

Inventory Management Best Practices

The breadth of inventory management touches nearly every part of a brand’s business. In very general terms, here are a handful of best practices employed by large corporations and small businesses alike.

Barcode Scanning: It is often said that you can have too much of a good thing, but we don’t think that applies to barcode scanning for inventory control. It reduces human error, amplifies accuracy, immediately transmits data, and provides hyper-specific location information for products as they make their way through the warehouse. From receiving to putaway to order fulfillment, barcode scanning gives you a powerful tool to pinpoint exactly where a given item is at any moment.

Perform Cycle Counts: Cycle counting is a method of counting certain products on a regular basis to help companies confirm inventory levels reflected in their inventory management software (IMS). Whereas annual (semi-annual, quarterly) physical inventory counts involve shutting down the warehouse, the limited scope of cycle counts allows businesses to save money by performing them during normal working hours.

Whatever methods a company feels comfortable using is entirely up to them. Regardless of the strategy, the ultimate goal of cycle counting is to identify and rectify discrepancies between data and products without everything in the warehouse needing to be physically counted.

Monitor Key Inventory KPIs: A multitude of KPIs exist for inventory management, both directly and indirectly related. Sales-focused KPIs like stock-to-sales ratio, turnover, and backorder rates can provide significant insights about excess inventory (or not enough), customer demand, seasonal trends, and pricing, and help merchants adjust accordingly.

Operational KPIs, on the other hand, can yield actionable data by measuring things like inventory, putaway, and picking accuracy rates. These numbers may shine light on receiving and fulfillment errors as well as possible theft or damage occurring within a brand’s facilities. 

Maintain Safety Stock: As attractive as having the leanest-possible inventory can be from a carrying cost and cash flow standpoint, safety stock is a crucial stopgap solution to protect against unexpected demand surges, inaccurate forecasting, dramatic price fluctuations, and increased supplier lead times for finished products. 

Implement an Inventory & Warehouse Management System (IMS/WMS): The need for powerful technology to command the eCommerce backend has never been greater, and that software needs to also communicate with front-end point of sale and enterprise resource planning (ERP) systems, as well.

The implementation of an IMS/WMS will enable you to view, control, and have a level of command over your inventory that previously may have seemed impossible. All of the benefits listed above, from increased accuracy to reduced errors and costs to improved fulfillment and demand planning can become part of both your company’s present and its future.

Our work at SkuNexus focuses on helping eCommerce businesses optimize the full range of their operations. The management software systems we design are built for maximum flexibility and complete customization. By constructing them in this way, merchants are empowered to tailor the system in any way that best suits their needs.

If you would like to get a closer look at what our software can do for your business, please schedule a demo.

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