Suppose you need to store inventory. How much should you carry? At first blush, the answer is simple: Enough to meet demand, but not so much that it sits around, tying up capital.
Maintaining this optimal amount is more difficult than it sounds. If items move too fast, you will run out of stock and might find yourself in a backorder situation. If items do not move quickly enough, you’ve bought too much inventory. There’s lead time too: If you need to reorder, you want to reorder before running out of items, not when the last item leaves your shelves.
Worst of all, your ideal inventory is something of a moving target. What was a popular item last year might not be this year. Or, a new promotion might make a slower-moving item suddenly fly off the shelves.
How Do You Fine-Tune Your Inventory
Given all these complexities, how do you fine-tune your inventory so that just the right amount of stock is in your warehouse and on your shelves?
- Fight the temptation to overstock. Not only does extra inventory tie up capital, making it unavailable for other things, but there are hidden costs to having too much inventory as well. Lots of extra inventory means the additional cost of warehousing, organizing, and insuring all that extra stock.
- Measure item velocity. Which items move slowly, and which move quickly? Which can benefit from forward staging? Which need to be reordered on a regular basis, and how can you improve that process? These are all questions that require looking at your sales data over time.
- Hunt for trends. Demand for inventory can come and go with seasons, trends, or new releases of product. Look at your historical order data and try to build a model that can accurately predict these variations and trends. Using an automated system for such reports can help ensure that less time is spent on data hygiene, and more spent actually making decisions using your data.
- Automate re-order thresholds. With an integrated inventory management system, appropriate parties can receive alerts when stock is running low, thereby triggering an order. It can also keep track of your products’ availability and calculate how much product you need to reorder going forward, thereby minimizing wait time while preserving cash flow.
- Integrate systems. When shopping cart software and accounting software are seamlessly integrated with inventory software, each system can update the others in real time. This gives a much more accurate view of inventory levels, sales velocity, and overall trends. Thus, system integration might well be the first step you should consider to optimize your inventory levels. It pays to investigate which warehousing and inventory systems are capable of this.
If these steps sound complicated or costly, consider what happens if a company does not fine-tune its inventory. On the one hand, getting into an Out of Stock situation means backorders and possibly reneging on a brand promise. On the other hand, getting rid of excess inventory through trade, discount, auction, or donation means that your business will likely fail to recoup the initial investment.
Technology is certainly an important tool when doing such fine-tuning. The right technology can implement the needed integration, automation, and data-gathering. It can also make the complex-but-necessary calculations that will make you look like an operations whiz.
To see what we mean, contact us for a demonstration of how Infoplus can optimize inventory levels on the fly, using real-time data.
Until then, you should also check out our white paper, "Know Thy Inventory: The 3 rules of inventory and how to play by them." It goes into much more detail about some of the challenges in keeping optimal invenotry levels.