Inventory Management: An Intro for Small Business Owners

If your business sells a product, you need to understand inventory management in order to store and distribute your stock to customers. Read this article about inventory management techniques and methods to streamline the process of selling your products.
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What is inventory management?

Inventory management involves controlling your supply chain so that you can provide customers with the products they want at the right times without wasting money on excess products. Storing and transporting inventory has its own associated costs, and small businesses rely on effective inventory management techniques to save money while consistently supplying customers with the products they want to buy in the quantity they need. Inventory management is a balance that involves anticipating demand and keeping track of how many units you have in stock.

Related: Maximizing Warehousing Space for Your Small Business


Why is inventory management important?

Inventory management is important to small businesses for two key reasons: reputation and finances. Having excess inventory can result in wasted products that will not sell, however not having products in stock can result in lost sales. Even if you sell a non-perishable product, excess inventory ties up funds that you could be using to grow your business. Inventory management also helps business owners understand where they make the most money. Having an accurate list of what products sell out and which ones sit on the shelf untouched can help you refine your product design.


Tips for effective inventory management

Use these tips to create an efficient and accurate inventory management system at your small business:


Determine accurate par levels

A par level is the minimum units of inventory you want to have available at all times. Par levels determine appropriate benchmarks for ordering more product, preventing you from over-ordering and alerting you to buy more when necessary.

Research past purchasing patterns to determine a good par level for each product. Calculate how much it costs to store unsold inventory to decide if you can afford to have a higher par level with less frequent orders or a lower par level with regular shipments.


Track your inventory

Use bar code scanning and shipping numbers to keep track of where your inventory is and how many units are available. Create a cycle counting schedule where employees take a count of various products and compare that number to the inventory records. This helps account for human error and catch discrepancies before they impact sales and storage costs.

Tracking inventory can also help you make sure that you are using the best practice of “first in, first out” or FIFO. FIFO means that the first products to go on the shelves of your storefront or warehouse should be the first ones shipped out. This helps you ensure that perishable products don’t spoil before they have a chance to be sold. Non-perishable products also benefit from the FIFO method because it prevents a unit from becoming outdated.


Predict change

Forecast changes in demand by analyzing sales trends for your business and economic patterns. Predicting increases or decreases in demand can help you capture all available customers without over-purchasing. Analyze how upcoming contracts and new marketing initiatives could impact the need for inventory, then prepare for those changes by adjusting par levels for your products. Forecasting helps you prepare for busy times of year, such as holidays or new product launches. 


Automate with software tools 

There is a wide range of software solutions for inventory management. While small businesses may be able to use a simple spreadsheet to track inventory, growing businesses need technology that can keep up with a large number of moving parts. Some software integrates analytics tools that give you insights about your business’s inventory patterns. Good inventory logistics software automatically adjusts inventory levels when customers make a purchase. They can also update shipping information, automatically fulfill purchase orders, process returns and integrate with item barcodes.


Back up your data

Develop a backup plan to protect your inventory information. Regardless of whether you use a basic spreadsheet or a high-tech suite of logistics software tools, losing inventory data could be highly disruptive to your business and cause you to lose money and misorder inventory. Regularly make copies of your inventory reports and back them up in multiple other digital or physical locations.


Roles to hire for inventory management

The more inventory you have, the harder it is to keep accurate records. As your company grows, hire qualified professionals to manage your logistics tools, accept deliveries and oversee all stock so that you can focus on growing sales. A competent inventory management team predicts possible inventory issues before they happen and contributes to the overall sales and production strategy of a business. Some of the roles to consider hiring for inventory logistics include:


Inventory manager

Inventory managers are responsible for tracking, storing and distributing stock. They coordinate with warehouse staff to implement best practices for tracking inventory and producing accurate reports. They order inventory according to stock levels, source suppliers and prepare units to ship. Inventory managers guide day-to-day operations and develop strategies to meet your sales goals as a business owner.  


Inventory specialist

Inventory specialists consult on various aspects of a business’s supply chain to improve overall efficiency. They identify surplus stock and high-selling items, then make recommendations on how to optimize ordering procedures. Inventory specialists also oversee returns and damaged merchandise, recording how much merchandise from each order is un-sellable. Inventory specialists have industry-specific knowledge and high proficiency with numbers, helping you create a more accurate and efficient inventory system.


Inventory clerk

Inventory clerks work under inventory managers to update inventory counts, record stock movement, check the quality of incoming inventory, compare purchase orders to receipts and other inventory logistics. Inventory clerks can help you coordinate inventory across multiple locations and manage large product volumes. They confirm that orders are accurate upon arrival, preventing issues with returns or miscounts.


Stock controller

Stock controllers specialize in tracking and recording inventory within your warehouse. While inventory managers spend time forecasting sales to decide how much inventory to purchase, stock controllers keep track of which products are in stock at any given time and work with retailers to create and stock displays. They organize the warehouse itself, determining where each item is stored and documenting layout changes. Hiring a stock controller gives you additional confidence that all of your stock is where it is supposed to be at any given time.


Frequently asked questions about inventory management


What are the methods of inventory management?

Some of the most popular methods of inventory management include:

  • ABC analysis: Identifying which products make up the bulk of your sales (“A” products), which have the next-most sales (“B” products) and which products have the fewest transactions (“C” products)
  • Dropshipping: Using a third party to store your inventory
  • Crossdocking: Moving incoming product shipments directly onto outgoing shipments to limit storage needs


What are the four types of inventory?

The four types of inventory are 1) raw materials, 2) work-in-progress products, 3) finished goods and 4) products that need maintenance, repair or replacement.


What is the best program to keep track of inventory?

The best program to track inventory depends on your company’s specific needs. QuickBooks, Veeqo, Zoho and Oracle are all great software options for beginners.


What is the role of inventory management?

Inventory management keeps businesses organized and on-track to fill orders based on demand.

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