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Adopting a More Efficient Inventory Management Process

Derrick Weiss

With a shocking amount of cash tied up in inventory, U.S. companies, especially those in e-commerce, should be thinking about what their inventory management system is doing for them.

Inventory, along with receivable and payable accounts, currently account for $1.1 trillion in cash. This is the same as 7 percent of the U.S. GDP. Moreover, U.S. retailers are currently holding about $1.43 in inventory for each $1 of sales their sales revenue.

These statistics underscore the fact that it's hugely important to have an effective inventory management system for your enterprise.

Automate inventory functions and track stock across multiple locations seamlessly with SkuNexus.

Customer Experience: the Goal of Every Inventory Management Process

Of course, it's important to hire customer-centric sales and support representatives.

You also need a clean, sleek website that showcases your products and makes the shopping and order processes painless for your customers.

However, this all goes out the window if you can't meet the basic needs of your customers because the products they want are on backorder or out of stock.

Here are some inventory management inefficiencies that may have negative consequences:

  • Inaccurate or missing SKU delivery dates on purchase orders
  • Inability to assign items to orders due to low size and color quantities.
  • Distribution channel inventory inaccuracy results in back orders
  • In multichannel warehouses, rules that create multiple shipments
  • Planning and ordering processes that need to be streamlined

When Does Inventory Get Updated?

When you have a system, it's much easier to track and account for inventory that's sold and shipped. People make mistakes, whether it's intentional or unintentional, so the more you can automate the process, the more correct and efficient the warehouse process becomes.

Inventory management relies on an e-commerce store's purchasing plan, which is the set of guidelines for orders and reorders of products that have been sold.

So, the question is, when do you update the inventory counts for products? When the order is placed, you update inventory no matter how the order arrives.

Inventory is first updated in the warehouse system and then in the system of record, or authoritative data source, which is the system that's recognized as the one source of truth.

  • When orders are being fulfilled through the picking and packing process, inventory is checked to make sure the items have been properly removed from the inventory count. This provides an additional checkpoint.
  • When products leave the warehouse to be shipped to the customer, it's important to verify that all systems are updated with the new inventory counts and any relevant notes on the order.

Making KPIs Part of Your Operations Lingo

Key Performance Indicators (KPIs) help you manage your processes and set goals to improve the customer experience.

This can't happen in a vacuum, and the important metrics need to trickle down from the corner office or boardroom onto the warehouse floor.

Goal KPIs keep everyone mindful of the really important metrics for your industry or market.

Make sure you tie one or more metrics to inventory management and hold staff accountable for reaching or exceeding the goal. Here's one example:

On Time Orders is a KPI that tracks the percentage of the time your customers get their orders on time. It's a great precursor to customer satisfaction and loyalty and, when measured effectively, can help you prevent large-scale customer defections. The formula is: # of Orders Delivered On Time ÷ Total # of Orders

This KPI reveals whether your customers are receiving their orders within the time promised.

The higher the ratio, the better you’re doing at this important task. A low on time order percentage typically results in customer service issues.

Team Alignment

The whole team needs to be locked into the KPIs because having goals and being rewarded for meeting them helps people focus on the entire process so that fewer things slip between the cracks.

First, though, the team needs to get an overview of how the entire process works, not just the portion they're responsible for.

This helps create checks and balances up and downstream. The more each team member understands how the system works, the more motivated they'll be to safeguard each step of the process.

When you align the whole team toward common goals, it then becomes possible to tie compensation (in the form of bonuses, raises or promotions) to these process-oriented goals.

While this can be done on a personal level, it may be more effective to reward equal success to the company, so there is a shared camaraderie among the staff.

Warehouse Equipment

Implementing a robust inventory management process involves getting the best tools to track your products. This means that you’ll need to implement a scanner for barcodes or tags and make sure all inventory has a barcode, SKU or another tracking method.

It’s worth the investment to get mobile scanners and computers that allow up to the minute updates on inventory movement and order completion.

You may also need other warehouse equipment, depending on the size of your operation and the complexity of your tracking system.

An Inventory Management System

Your inventory management system should be the system of record discussed earlier. It has every update that comes in throughout the order fulfillment and shipping process and provides important reminders of when to reorder products that have low counts or are in danger of out of stock or back order statuses.

For the single source of truth, there should be a single gatekeeper.

This is someone who manages the system and who is most likely a high-level manager or director in the organization.

It's important to have a stakeholder everyone respects, who asks the right questions to keep everyone on their toes and make sure that team members use the system accurately.

Document Your Inventory Management Process

It's worth the money to hire an analyst or re-task an employee to create a flowchart of your entire inventory management process. This is vital for a few reasons:

  • Visual representations and flowcharts help team members grasp the entire process at a glance.
  • This is an invaluable document if you are planning to implement or upgrade an inventory management system.

There are many examples of this online, so don't wait to get something down on paper.

Make sure to include a weekly, monthly, quarterly, or annual processes that aren't part of the daily workflow but are essential to the success of your inventory management process.

All processes need to be documented, no matter the frequency.

Process flows are a great way to begin documenting the process, but your documentation needs to go beyond the obvious and incorporate policies and procedure that deal with exceptions like backorders.

Physical Inventory

The entire inventory should be tracked, tagged and monitored on a regular basis to discover problems like shrinkage or inaccuracies in certain areas. This allows you to forecast future demands more accurately and coach team members who aren't using the inventory management step properly.

When you implement a comprehensive system and back it with good training, your operation practically runs itself. For example, when the stock is running low for a product, inventory is automatically reordered, hopefully with minimal human intervention.

A good inventory management process keeps the whole company aligned on delivering a good customer experience. Refine yours with the right system and you’ll be in good shape.

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