5 Best Practices to Ace Your Small Business Inventory Management

Why is Inventory Management Key to the Success of a Small Business?

Inventory management is key to the success of any organization. Unless you have a clear knowledge of what you have on your shelves and in what quantity, what and how much is being lost, spoilt, or wasted, and what and how much needs to be reordered, all your efforts to create the best products will be wasted.

A restaurant or bar that does not replenish its stock well in advance and fails to serve its customers what they want because its stocks have run out, is sure to lose business.

Imagine a customer visiting your bar on a Friday night after a hard week's work, hoping for a good drink. But you don't have the supplies to make their drink, and they turn away disappointed. This customer is very likely to go to the bar next door. Your bar loses credibility and business.

Poor inventory planning may also lead to superfluous supplies piling up. Your money will stay tied up in products that you don't use -- products which may ultimately get wasted if they pass their sell-by date.

The stakes, in this regard, for small businesses are higher because they operate on small budgets in the first place. Poor inventory planning will bleed them of precious capital. Plus, if they want to grow their business soon, they'll want to create a strong impression on customers. Poor inventory management may prevent this.

With efficient inventory management, on the other hand, both dead stock and stock outs can be avoided. Businesses will make better sense of inventory usage patterns and estimate the appropriate inventory levels they should maintain. It ensures that you deliver the right products to the right buyers and place the right purchase orders with the right vendors.

Good stock-taking also entails knowing precisely where each item is maintained in the storeroom or warehouse for efficient utilization of products. A good inventory management system helps small businesses reduce time, effort, and costs by storing best-selling stocks in places that are most readily accessible.

Inventory management also helps to determine which items are popular with customers and which are not. It also reveals which raw materials are more expensive than others. This data allow businesses to organize their procurement accordingly. They can minimize their expenses and increase revenue by prioritizing best-selling items for investment and advertising.

Meticulous inventory tracking also serves to prevent product losses due to fraud, theft, and pest infestations. These issues frequently undermine initiatives to increase sales and harm organizations from within. Small businesses can't afford to be held back by such issues.

Mistakes Small Businesses Make in Their Inventory Management

1. Small businesses that operate without a strategic vision are not likely to succeed. These organizations work on a small scale and have a small customer base. Their requirements, and hence their inventory management strategies are different from those of larger organizations. For clarity about the types of products and quantities they need, and in order to rein in their costs, owners of small businesses must consider if they want to continue operating through a single channel or adopt multi-and omnichannel distribution methods. Do they want to continue as brick-and-mortar establishments or do they want to move online? Which markets and customer demographics do they want to target over the next five years? Do they want to invest more in the business, and if so, which products should they promote? These are some of the questions they must consider.

2.Small businesses often do not employ experts for inventory and supply chain management, to save costs. However, this is a big mistake that can lead to costs ballooning instead. Generalists managing stocks may not be able to take timely decisions to drive the perfect balance between being adequately stocked and preventing wastage.

3. Since the requirements of small businesses are limited and they are usually not awash with funds, the first instinct of a small business may be to use manual and spreadsheet-based methods for managing inventory. However, such methods are prone to inadvertent human error, like miscounting of stocks and sending purchase orders to the wrong vendors. Moreover, handling a clutch of spreadsheets and computing their formulae can be tiring, and can cause users to make mistakes. Even the smallest error can have profoundly adverse operational and financial consequences. These processes are also highly labor-intensive and time-consuming, and tasks like accumulating sales data, creating sales projections, calculating optimal stock quantities, and updating stock levels can't always be completed efficiently when employees are already busy serving customers.

4. A business that advertises a product even when it is out of stock runs the risk of disappointing customers. The growth of small businesses depends largely on customer satisfaction and displaying incorrect inventories on sales channels may cause customers to desert a business in favor of businesses that actually deliver. This has terrible financial implications. Conversely, showing a product to be out of stock when it is in fact available will snuff out sales opportunities. These mistakes may arise from irregular stock-taking, miscounting, and using inefficient methods.

Control alcohol inventory costs with an easy to use bar management software.

Try a free download now.

Download Now

Drawbacks of Manual Inventory Management

Manual stock-taking entails communicating with suppliers over the phone or by email, counting stocks that have arrived and those that are already on the shelves by hand, and recording the results on sheets of paper. Updates to inventory levels are made using the same basic procedure when products are sold.

However, now that technology can fully automate the stock-taking process, manual inventory management is considered to be highly inefficient.

Human error may unintentionally creep into stock-taking when using manual methods. Spreadsheets also involve a considerable degree of manual effort and are prone to mistakes too.

Thus inventory is either overestimated or underestimated, and business owners could lose track of what items are purchased, sold, or wasted or lost when they have to manage multiple emails, phone calls, and reams of paper carrying countless numbers. Indeed manual inventory management is not just hard work, it's not exactly smart work.

Additionally, most business owners rely on their employees for stock counts. The more hands that work on inventory, the higher the likelihood of inaccuracies. It also pins employees down to tasks that could have been handled faster and more efficiently by automated software, instead of freeing them to interact with customers.

Inventory management is eventually a time-consuming, back-end task that no firm can avoid, and delegating it to staff is not a wise move when sophisticated inventory software is available.

Advantages of Inventory Management Software

Inventory management software solutions are essentially computer programs that completely automate inventorying. Businesses can rapidly and accurately measure their present stock levels and decide which products and what quantities of those products need to be purchased.

Modern software solutions are typically connected with barcode and QR code scanners. Barcode scanning is usually done at the point of sale (POS) or in the back end where products are stored. Scanners can be handheld, working on Bluetooth or Wifi technology to transmit data wirelessly. Barcode scanning gives you data not only of the number of items on hand, but more detailed information like product price, weight, expiry dates, manufacturing dates, and so on.

Scanned data is received by inventory management or POS software and accurate records of stocks are produced. There is no chance of miscounting stocks. The software alerts you when stocks deplete, and it can even place new orders automatically. Human intervention is cut to a minimum, and inventory management is no longer boring and tiresome.

The data processed by inventory management software is presented as business intelligence reports that help make data-driven decisions for the operation. For instance, you don't simply place purchase orders only after being alerted to stock depletion; you can also call for new supplies when stocks approach their use-by dates -- information that software can bring to your notice.

Business intelligence reports also help organizations identify issues like pilferage, resource wastage, and over-portioning. Graphs, tables, and charts and other forms of data visualization make these reports easy to interpret.

The best inventory software solutions are cloud based. This allows data to be accessed from any place, at any time, and on any mobile device. Stock updates can be viewed in real time and by several users at the same time. Mobile apps are good examples of cloud based software and put every inventory management detail at the user's fingertips swiftly and easily.

5 Best Practices in Inventory Management

What are the best ways for small businesses to manage their inventory? Such businesses are always walking a tightrope, anxious to grow their operation, but limited by funds. The smallest mistake can nip their ambitions in the bud, yet, lacking deep pockets they can't afford to buy every sophisticated tool out there to forestall these mistakes. What they can do instead is adopt certain best practices. The subsequent sections discuss some of these in detail.

No. 1- First In First Out

The first-in-first-out (FIFO) method calls for supplies bought first to be sold first. This practice is especially useful for food and beverage businesses dealing in perishable products. It ensures that every item is duly utilized and doesn't spoil by sitting on the shelves.

For small businesses, the FIFO method assumes even greater importance because these organizations operate with limited resources. They wouldn't want to waste these resources buying and holding items only to let them rot on the shelves.

By preventing resource wastage, FIFO enables cost reduction. A good small business inventory software supported by a well-functioning point of sale (POS) system offers a clear picture of when supplies were bought so that you can decide when to use them.

No. 2- Demand Forecasting

Small businesses have the dual objective of ensuring that all their products get utilized and that they purchase or produce only what will sell. Both objectives are geared towards minimizing costs, which are the goals of any large or small business.

What such businesses can do to fulfill these goals is to implement an effective demand/sales forecasting system. There are top-notch demand forecasting software solutions in the market like Zip Forecasting, and for just a few dollars per month, you can accurately predict what your sales/demand will look like in the immediate future.

Demand forecasting essentially looks at past sales figures, market trends, the state of the economy, seasonality, upcoming events/festivals, and so on, and helps you arrive at near-accurate sales projections for the future.

These projections not only help in optimizing purchases, setting suitable reordering targets, and establishing inventory control , but they also help you schedule your staff accordingly. For example, a business expecting low customer traffic can save money by calling in fewer employees, and Reduce Labor costs this way.

Likewise, when demand is expected to be high, businesses can opt for higher staff strength, so that every customer gets quality service and sales are secured. A good demand forecast, therefore, has big cost benefits.

No. 3- Identify Low-Turning Stock

A small business should have a working strategy to identify and dispose of low-turning stock in order to keep its costs down.

Calculating the inventory turnover ratio for each product will help identify low-turning stock. Inventory turnover ratio, in this regard, refers to the number of times stocks are sold and replenished over a specified length of time.

A product may have a low turnover ratio due to a fall in demand, overstocking, or buying without properly estimating its demand. A low turnover stock would also mean that the company incurs unnecessary inventory holding costs, which a small business would want to avoid.

Low-turning stock, once identified, can be disposed of before it turns obsolete. This can be done through discounts, special promotions, by tagging it with fast-moving products, selling to a third party, or shifting the stock to another location where customer traffic is higher and there is demand for that product.

No. 4- Just-in-time Inventory Management Method

Another inventory best practice that small businesses can adopt is the just-in-time (JIT) method for inventory management.

The JIT method involves businesses closely collaborating with vendors to ensure that raw materials are delivered just in time for production but not earlier than required.

This ensures that the stocks on hand are just enough to meet customer demands. The good part about this method is that businesses selling perishable goods don't have to worry about stocks rotting on shelves because there is every chance that what is bought will be sold in time.

This practice needs a high degree of operational precision and calls for strong support from a demand forecasting system and a high degree of coordination with suppliers. A sudden demand surge you don't see coming may cause a stock-out and the resultant loss of image and earning opportunity. Also, a sudden fall in demand can lead to resource wastage and defeat the organization's attempts to keep costs low.

JIT is a very useful system when it works well. However, unforeseen supply disruptions can occur, and so, even when adopting this strategy, it's best to keep some buffer stock handy.

No. 5- Quality Control

Without upholding a culture of quality control at each stage of the inventory and supply chain management process -- from placing orders to receiving supplies, picking products, and packaging them -- no business can succeed.

Therefore check your stocks regularly, not just to count them but to also ensure that no product is rotting or has been damaged by pests.

Ensure that all the safety protocols of food handling and food preparation are strictly followed. When receiving supplies, check that you are not being delivered products that are stale, spoiled, or past their use-by date.

Poor quality of supplies not only means a waste of money on unusable goods, but it also carries the risk of endangering the lives of your customers if spoilt goods reach their table. This may not only lead to a loss of goodwill and risk future sales opportunities, but it may also result in big financial consequences in the form of lawsuits and fines.

Check also if the products you receive or sell contain undeclared allergens that may harm the consumer. While picking and packing products similarly ensure that the best products are chosen and food safety norms are followed.

The culture of quality control should emanate from owners and operators and be adopted by all levels of staff.