As a retailer, you know how important it is to avoid running out of inventory — and thus losing sales — or having excessive inventory on hand, which can tie up your cash flow.
Inventory management isn’t just about keeping stock levels in check; it's about optimizing your process to meet customer demand without overburdening your resources. For big companies with extensive financial resources and sophisticated technology, this goal is easily achievable. However, smaller retailers often face inventory management challenges due to their limited financial capabilities, staffing constraints and smaller margin of error.
So, let’s examine practical strategies and tips for streamlining your inventory process, balancing supply and demand, minimizing costs and avoiding waste or loss.
Utilize inventory management software
Technology might be ubiquitous in the modern world, but a surprising 67.4% of supply chain managers rely on Excel spreadsheets to manage inventory rather than using inventory management software.
The problem is that these spreadsheets rely on manual updates and are therefore prone to errors.
Inventory management software automates tracking stock levels, orders, sales and deliveries. As a small retailer, this means real-time visibility into inventory, which is crucial for making informed purchasing decisions.
Fortunately, there are several solutions on the market today that don’t require an enterprise-level investment. In fact, some inventory management features might be built into the accounting software or point-of-sale (POS) system you already use or available as an add-on module.
When selecting an inventory management system, consider cost, scalability, ease of use and integration with your existing POS systems.
Use the first-in, first-out approach
Under the first-in, first-out (FIFO) method, you sell inventory in the same chronological order as it was purchased or created. This is especially important for retailers of perishable products, like food and flowers, but it can also apply to seasonal items, such as holiday items or back-to-school supplies, and clothing, where demand is impacted by the weather and changing styles.
The FIFO method helps ensure goods don’t sit around too long and become damaged or otherwise out of date and unsellable.
When setting up your storeroom or warehouse and product displays, make sure you add new items to the back. This ensures your older products are front and center, ready to be sold first.
Maintain accurate inventory records
Whether you use sophisticated inventory management software or a spreadsheet, the data output generated from your inventory system is only as good as the inputs you provide. Or, to put it simply: “garbage in, garbage out.”
Inaccuracies in your inventory records can lead to stock-outs, overstocking and lost sales or increased holding costs. These errors cost businesses anywhere from 10% to 30% of their annual profits, on average.
Regular stock counts, manually or through automated systems, ensure your physical stock levels match your records.
You can improve the accuracy of your inventory reporting by implementing a few best practices, including:
Employee training. Train your staff on how to update your inventory management system and the importance of accurate record-keeping.
Regular audits. Conduct periodic audits to verify the accuracy of inventory records. At a minimum, you should physically count all inventory items at your fiscal year end.
Reconciliation processes. Develop a system for reconciling inventory discrepancies promptly to minimize their impact. Discrepancies may be the result of recording errors. However, they can also be a sign of theft or fraud.
Implement just-in-time inventory
Just-in-time (JIT) inventory is a strategy for increasing efficiency and reducing waste by ordering goods only as you need them rather than keeping a large supply on hand. For retailers, this means receiving items just in time to sell them to customers rather than stocking up on what you might need weeks or months ahead of time and tying your cash flow up in inventory and devoting a lot of space to storage.
To use a JIT inventory strategy, you’ll need to use inventory management software that can help you spot reorder points and alert you when inventory levels fall below a certain level, but with enough time for new stock to arrive without running out of what you have on hand.
One of the downsides of a JIT inventory strategy is supply chain disruptions, like those businesses experienced during the COVID-19 pandemic. To reduce risk from potential supply chain delays, you may want to adopt a just-in-case inventory management system, which balances JIT ordering with extra stock or longer buffer times for high demand products.
It’s also helpful to work with trustworthy and reliable suppliers — and maintain good relationships with them. That way, they can communicate with you when they anticipate delays in production or shipping.
Get financing for essential inventory
Inventory financing is a type of short-term borrowing designed specifically to help businesses purchase inventory. Using your inventory as collateral, you can get a loan that provides the capital you need to stock up on new products and pay suppliers without depleting your cash reserves.
To get started with inventory financing, first determine how much you want to borrow based on your needs and sales projections. Then research and compare different lenders, including banks and alternative financing companies, to find the best terms and rates.
Once you find a lender, be prepared to provide detailed information about your business, including personal and business tax returns, bank statements, inventory lists, financial statements and sales forecasts.