Inventory management goes to the heart of retail, which depends on making the right goods available to customers at the right time and price.
Efficient inventory management also helps retailers reduce excessive transportation and carrying costs.
Key Takeaways
- Inventory management helps retailers ensure they have enough stock to meet demand while reducing the financial and environmental costs of storing and transporting excess inventory.
- Inventory management software helps retailers ensure that they have the right goods in stock and that they can use their inventories across all sales channels.
- Retailers use manual inventory checks and other audit methods to ensure accurate inventory records.
- Retailers can choose their inventory accounting method, but regulators expect them to stick to it to ensure consistent year-to-year reporting.
What Is Inventory Management?
Inventory management is the process of tracking and controlling the quantity, cost, and location of inventory. It helps businesses identify how much stock to order at what time. It’s a crucial part of the supply chain process, ensuring that the right amount of product is available at the right place and time.
Inventory management focuses on the flow of goods from ordering through storing, distributing, selling, and restocking. For large retailers, inventory management involves managing and accounting for total company wide stocks of goods and item levels for each of their warehouses, distribution centers, and outlets.
Retailers must strike a balance between holding enough inventory to meet customer demand and minimizing the amount of stock they hold, as unsold items represent carrying costs such as rent and transportation and the cost of acquiring those stocks.
Retail Inventory Management Explained
Retail inventory management is forecasting necessary inventory levels for sale or storage for each type of good, across sales channels. It includes using software to help determine the demand and value of goods held in inventory for accounting and auditing purposes. It also entails a variety of best practices used to ensure that goods are being stored and shipped effectively to retail outlets. The overall goal of inventory management is to ensure that retailers have enough goods to satisfy demand and minimize the expense of holding unsold goods.
Why Is Inventory Management Important?
Effective inventory management is crucial to retailers because:
- Stock management: it ensures that they have enough products on hand to capture every possible sale.
- Costs: It keeps costs down because retailers stock only what’s needed.
- Customer understanding: it helps retailers improve their understanding of customers and buying patterns.
- Prevent overstocking: It helps prevent retailers from overstocking products that expire or become obsolete, such as perishable foods or medicines, and products prone to obsolescence.
- Customer satisfaction: Having accurate inventory data across sales channels helps retailers get products to consumers faster, improving customer satisfaction and reducing stress on staffers.
- Reduce inventory shrinkage: inventory that a retailer should have but doesn’t because of internal theft, incorrect recording of inventory on intake, miscounted inventory, goods damaged or spoiled on arrival, misplaced inventory, or other reasons.
- Stock monitoring: without strong inventory management, retailers can’t return damaged goods to suppliers because they won’t know how or in what condition those goods were delivered.
10 Steps in Retail Inventory Management
The following is a breakdown of the steps retailers take to manage their inventories:
- Monitor, audit, and manage inventory proactively: Every retailer needs to count their inventory periodically to ensure its records are accurate. These exercises, most often completed with a retail inventory management system like Bizkit, should factor losses from theft, as well as damage, defects, and returns. Count frequency depends on the complexity, scale, and type of the retailer’s inventory management system, but the recommendation for retailers is weekly, sometimes daily.
- Create a main category hierarchy: This hierarchy ensures that the most valuable or profitable categories of goods are tracked closely, minimizing the risk of losing business to stockouts. This is known as ABC analysis.
- Identify and move deadstock: Deadstock, also known as obsolete inventory, includes damaged items, incorrect deliveries, and leftover seasonal products that aren’t expected to sell. Record items in this category and remove them from inventory to minimize carrying costs. Designate a place to hold deadstock and manage it regularly at a frequency that makes sense for the business. Promptly ship merchandise that can be returned to vendors for credit (pullbacks). The remainder can be sold to discount outlets, bundled, or given as free gifts with a purchase, donated, or recycled.
- Know where your stock is: For retailers, knowing where the inventory is located is straightforward: Goods are probably on display or in the stockroom. But retail companies with multiple sites and those selling through a mix of physical, digital, and catalogue channels might have inventory in transit or scattered across warehouses, distribution centers, stockrooms, and store shelves. Misplaced or overlooked products can represent missed sales and lost revenue.
- Invest in ecommerce: Ecommerce gives retailers additional outlets for overstocks, including selling goods at a discount on a differently branded site.
- Don’t forget sales data: An effective retail inventory management system like Bizkit integrates sales and inventory data from every available system, including point-of-sale (POS) systems, ecommerce systems, and systems that record customer interactions with sales and service agents. This picture shows you which goods are selling fastest (a metric called sales velocity) and which are lagging. Use this data to decide when and how much to reorder and when to offer promotions or discounts.
- Invest in brand-building: Building various strong brands lets retailers align customer expectations, goods, and prices more effectively. This way, a retailer can sell slow-moving goods at a lower price on a secondary website or physical location without hurting the image of stores targeting higher-end consumers at higher prices.
- Focus on worker and customer safety: Inventory should be displayed or stored safely so that customers, employees of other vendors, and the retailer’s own employees aren’t at risk from falling goods or goods stored in an otherwise hazardous manner.
- Manage inventory from a POS system: Point-of-sale systems combine the ability to accept payment with the ability to check goods out of inventory. When a transaction is processed through a POS system, it automatically updates inventory data across locations in real-time. Some POS systems also interface directly with other financial systems, including accounts receivable, sales, and returns/exchanges.
- Set smart reorder points: Retailers can use sales data to calculate the automated reorder point—the inventory threshold that triggers reorders. This simple, rules-based approach saves time and reduces the possibility of costly inventory management mistakes.
7 Best Practices and Tips for Retail Inventory Management
Inventory management can be boiled down to several logical steps: Make sure you have enough inventory to meet demand. Make sure you can ship or deliver those items to your customers in a timely and cost-effectively. Make sure you know where your goods are coming from, that you have a method for reordering them before you run out, and that you have found a reliable way of forecasting demand, so you know when and how often to replenish your inventory. Below is a summary of the more granular best practices.
1. Use ABC analysis
ABC analysis helps make sure you have enough of the inventory that’s most valuable to your business. Using ABC analysis, divide your inventory into three (or more) broad categories, ranked in order of sales volume or profitability, and prioritize your inventory accordingly. The Pareto Principle is a good rule of thumb:
- Hold 20% of inventory in goods that generate 80% of sales or profits—in the A category.
- The B category is for items in the middle.
- The C category is for the least profitable or popular items
Retailers use this analysis to help determine future ordering and marketing, displays, and merchandising decisions.
2. Forecast demand:
Demand forecasting predicts a stock item’s demand over a defined upcoming period. Forecast demand by reviewing historical sales and other data and applying knowledge of upcoming seasonality, market trends, and special events, such as holidays and promotions.
Retailers can forecast demand by holding a finger in the wind, using data analytics software, or through retail management software like BizKitPOS, which can outperform even the most sensitive index fingers.
3. Set KPIs:
There’s an adage that what doesn’t get measured doesn’t get managed. Also, too many metrics spoil the broth.
It’s important to set a fixed, and manageable, number of key performance indicators (KPIs) that are crucial to your business, such as:
- inventory turns,
- sell-through rate,
- gross margin return on investment,
- inventory shrinkage
Also, make sure people working toward those metrics produce the results you desire.
4. Optimize inventory turnover rate:
A slow inventory turn can indicate decreased market demand, indicating it’s time to do one or more of the following:
- reduce reorder quantities and safety stock,
- change pricing,
- offer incentives to reduce stock levels,
- change the mix of goods offered for sale.
Most items move through an increasing demand cycle, followed by a leveling off and maturity before an eventual decline. Focus on items entering their decline stage and reduce stock levels before they become obsolete.
On the flip side, a high turn means you’re not purchasing enough inventory to meet demand or it’s potentially time to raise prices to stabilize the ratio and boost unit profit margins.
5. Determine your reorder point:
The stock reorder point is the level that triggers replenishment in an inventory management system.
While retailers can establish reorder points manually, using demand planning software helps avoid stockouts and ensures that the right items are ordered at the right time.
Retailers use a reorder point formula as a trigger to replenish a given product. The reorder point is the daily usage in units multiplied by the days of lead time necessary for replacement plus the units of safety stock or the following:
Reorder point = (number of units used daily x number of days lead time) + number of units of safety stock
6. Establish safety stock:
Safety stock acts as an inventory buffer that cushions retailers against surprisingly strong demand, supplier delays, inaccurate demand forecasting, or a failure to place timely reorders.
This represents the ultimate opportunity cost for retailers.
Retailers can maintain an appropriate level of safety stock by taking the number of products they sell per day and multiplying it by the number of days’ worth of safety stock they want. An appropriate level depends on your business.
For example, a retailer selling 200 items a day that wants seven days’ worth of safety stock would multiply 200 by 7, for a safety stock of 1,400 units.
7. Optimize pick and pack processes:
Pick and pack processes involve the physical steps retail store staff take to fulfill customer orders. A simple method for smaller operations is to have staff fulfill each order one at a time. A kiosk, for example, will just give the customer what they need.
11 Benefits of Using Retail Inventory Management Software
Inventory management software helps businesses accurately track inventory and automate important functions, such as reordering and distribution. Others also help with forecasting so that retailers can project demand, avoid discounting, and improve customer service and satisfaction. Here are the benefits of using quality retail management software:
1. Improve customer service: Inventory management software improves customer service by helping ensure that retailers keep items in stock. The software accurately estimates which out-of-inventory goods will be received by the retailer or warehouse and shipped to the customer and indicates which items are in stock that customers might accept as an alternative to the item they were seeking.
2. Increase the number of selling channels: Inventory management apps help businesses branch into new retail channels by letting them leverage current inventory across those channels. This helps retailers fulfill orders (especially online) without frustrating customers with stockouts, and it helps guide decisions about discounting.
3. Accurate inventory tracking: You can’t sell what you don’t know you have. Successful retailers precisely track their inventory, what needs to be reordered, and whether they need to do something (such as offer discounts) to move stale inventory.
4. Prevent overselling: Overselling occurs when a retailer sells more items (especially online) than in stock, resulting in a stockout that frustrates customers, damages its brand, and costs its sales. Overselling is often the result of slow data synchronization between your inventory systems and stock.
5. More accurate reordering: Inventory management software won’t forget an important milestone in the retail calendar or let inventories fall below the reorder point.
6. Manage multi location warehouses: Retailers with multiple physical locations or e-commerce activities can use retail management software to shift goods between distribution centers, bringing goods closer to where they’re in high demand—or where storage is available or less expensive—so it’s possible to ship goods more quickly and cost-effectively to local stores.
7. Reduce costs: Inventory management software helps reduce excessive orders due to poor forecasting or warehouse distribution, and it reduces redundant processes that increase labor costs.
8. Forecast seasonality: Inventory management applications help retailers maintain appropriate stocks of goods across different selling seasons.
9. Improve productivity: Inventory management applications help automate rote tasks, reducing the number of steps employees need to take to complete such tasks while freeing them to focus more on making higher-level decisions.
10. Reduce aged inventory and deadstock: By determining appropriate inventory levels through ABC analyses and other analytic methods, inventory management software helps ensure retailers don’t acquire more stock than necessary.
11. Better expense tracking: Inventory management applications help retailers understand which goods are being bought, how and where they’re being stored, and how much it costs to store, transport, ship, distribute, and merchandise them.
Manage Inventory Easily with BizKit
Inventory management is one of the most important aspects of running a successful retail business. It’s a process of tracking and controlling the supply of goods available for sale, essential in ensuring customers have access to the products they want in a timely manner.
BizKit’s Retail Inventory and Planning Management provides visibility into and control of goods flowing across a retail business so that retailers can take action as needed to manage events needing their attention. Bizkit also helps retailers manage costs and working capital and meet revenue goals by determining necessary inventory levels across locations.
