What is inventory management and why does my business need it?

In today’s world with its intense competition accurate stock management and no-delays supply chain delivery form the muscle of any retail business.

To start: What is inventory management?

Being a great optimization tool, inventory management is a set of established practices to manage, store and sell goods, helping business to ensure that right goods are in the right place, at the right time, at the right price.

With its mathematical formulae and proven techniques inventory management is a science of perfect purchasing, controlling and selling the stock in ideal timing.

What is inventory management and how to avoid common mistakes

Why do retailers need it? Importance of inventory management

It does not matter if you have a small flower shop, or run a multimillion retail corporation - you must take care of your goods quantity, quality and availability. You must not leave your shelves or warehouses empty, or experience detrimental shortages, and at the same time you must not order too much.

Risks to deal with: Overstock

We all know, that overstock ties up your capital, turns into a costly pain for you, and running out of stock, on the opposite, kills customers loyalty. Here we come to the first and most vital rule of any retailer businessman - “Have enough high-quality goods to satisfy your demand and keep your customers loyal and happy”. It is not as easy as it sounds.

Once you order the goods, you should keep in mind that the more inventory you have, the larger sum of money you spend on storage, and the risks of being left with out-of-date goods is rather high.

Even in an ideal world, where all inventory is consumed daily, you must be ready to face unexpected stock problems. Inventory can become obsolete. For example, when a newer product is entering the market. Here is a sad story to illustrate - a cellphone dealer, specializing on cellphone batteries and accessories, was enjoying high profits, customers were eagerly buying the batteries and cables bringing a steady money flow to the vendor. He decided to triple his inventory and he made his new order three times larger. After his order arrived, a smartphone company released a new phone model, which meant the sizes won’t fit. All he had to do is to sell his goods at rock bottom prices, liquidate and write off the items.

A less dramatic, however not an easier challenge of balancing between right quantity of items at a right time is a pain in the neck of businesses dealing with perishable goods or time-sensitive products. Storing oil for example, is risky and expensive, and sitting on 2019-calendars inventory or fast-fashion items is not an option, definitely.

Inventory management functions and problems it solves

Poor inventory management and having inaccurate stock data - both current and forecasted - can cause a number of serious problems.

  1. First, the excess inventory and the already mentioned dreadful over-stock. It is costly, and it freezes cash that can not be used.
  2. Second major issue is a backorder situation, or running out of stock. If business can not fulfill customer orders because the goods are unavailable, it will inevitably lose its revenues in the short run and make its customers unhappy, in the long run. If you want your retail business to thrive, both options are unacceptable. Losing customer loyalty and damaging company reputation because of an inability to deliver right goods in a right time can immediately turn the clients towards competitors. And needless to say, that customers are becoming more and more pampered, they are used to a high standards of service in retail. Customers of 2019 they do not tolerate delays, or low-speed shipping, or goods unavailability, or backorders.
  3. Third, apart from these over-stock and backorder situations, each vendor, either an SME or a large global conglomerate, shall take care of its products proper identification. All items should be marked according to a naming system, easily filtered and monitored. A good inventory management system is an organized warehouse. Lack of accurate system of product codes (or SKUs, stock keeping units) can seriously mess operations. The more goods you have, the more difficult it is to build and maintain an easy, light and functional SKU system. All items should be marked according to a naming system, easily filtered and monitored.
  4. And finally, inaccurate inventory management, as well as stock fluctuations and instability damages company’s reputation in the eyes of suppliers and contractors.

So, here is the main benefit of the inventory management systems - they help you know when to restock the goods, which goods to supply to your warehouse, when to sell them and at what price. Each item in your warehouse is an asset, a money-earning machine. And if it sits on the shelf for ages, it earns nothing, its power is simply off. And a good inventory management can turn this ‘sleeping beauty’ into a ‘princess’.

Each item in a warehouse in an asset, a money-earning machine, If it sits on the shelves for ages, nothing happens, it is turned out of power. Good inventory management turns its power on.

In other words, inventory management system is an asset, that proves reasonability of investing into, throughout the whole flow of goods - from manufacturers to warehouses, and from these facilities to the points of sale. All inventory management magic is based on pure mathematics and formulae. We will talk about techniques they use and formulae to make this magic a bit later.

Benefits of automated inventory management systems

Modern stock management systems go far beyond these basic (though vital) functions - stock monitoring and reordering - to analyzing real-life market data, encompassing the full supply chain and product flow, forecasting customer demand, accounting and even sensing customer trends. These sophisticated technologies can even analyze trade wars and fashion trends keeping business owners’ fingers on the pulse of all developments that affect consumption levels.

How does it look to ABM Inventory system users

Machine learning software installed in these inventory systems eliminates human error and guesswork. These systems keep a record of sales, promotions, discounts and basically all transactions in each point of sale, in each location, both online and offline. Data is automatically gathered and analyzed. Business owners does not have to worry about any likelihood of human factor error, everything is automated and human interference is next to none. Above that, that reduces staff costs and allocates more funds for business development and growth.