“What can be measured can be managed”- Mitch Wronsky, CFO, Jonar (and many other smart business people like Peter Drucker)
Regardless of whether you manufacture your products or purchase them from a distributor, or both, inventory management helps you control and track the goods your business handles from purchasing all the way to sale ensuring you always have enough of the right items in the right locations at the right time.
As your business grows, staying in control of your inventory and properly managing it only becomes more difficult. Trying to manually keep track of all the pieces that are moving in and out and all about, won’t work long term. With new orders coming in, shipments going out, returns, multiple warehouses with several locations, hundreds of clients, and many employees, you can’t have your eyes on each stage without a solid process in place.
Without inventory management, you put your business at risk of profit loss, employee dissatisfaction, customer dissatisfaction, and the risk of outright failure. These risks are a result of inaccurate data and inefficient processes. The great news is that this is a problem that can be solved. Determining your inventory types, techniques, and reviewing your current processes is a great place to start.
How does inventory management work?
1. Different types of inventory
First, it’s important to identify what inventory model best suits your business depending on what types of goods you sell.
- Raw materials: are components that are used to manufacture a finished product.
- WIP: includes direct labor, material, and manufacturing overhead, and will track raw materials that are still “work in progress” to become a finished product.
- Finished products: are products that are ready to sell.
- MRO: stands for maintenance, repair and operations and refers to the tools and supplies that you are using while manufacturing goods, but are not the finished goods.
2. Inventory control techniques
Inventory control techniques help you manage your stock in a way that is optimized for your business model.
- Bulk shipments are perfect for businesses that produce large orders that can be palletized for cost efficiency.
- ABC Inventory Management is a product grading system that helps companies make decisions on which products to sell. A being the most valuable and driving the majority of the businesses profits, B and C being less profitable.
- Backordering is a common practice that allows businesses to take orders while their inventory is out of stock.
- Just in Time (JIT) is about keeping as little inventory as possible on hand. Oftentimes, small businesses use this method to avoid costly storage fees and idle inventory.
- Consignment takes place between a wholesaler (consigner) and retailer (consignee). Where the consigner gives the consignee access to products without initiating a payment. Payment for the products is made when the consignee makes a sale.
- Dropshipping and cross-docking is when your products are coming from a 3rd party and going to the end customer without you ever touching the box. Very common practice for Amazon sellers.
- Cycle counting is a way to count a subset of your inventory without counting your entire stock. This method regularly validates quantities available from a selected inventory location, counted at a specific time, and recurring on a set date.
What are some common challenges?
Inventory management is an essential aspect to running a successful business. Poorly managed inventory really means you don’t have a clear idea of what is actually going on in your warehouse or storage facility.
Let’s be clear here though, efficient management of inventory isn’t a cut and dry process, and solutions to overcoming the obstacles aren't always obvious. Different business models and levels of complexity require a vast array of well-thought out solutions. How do you know what you’re doing right and what you’re doing wrong? Is there a more efficient way to do things than the way you currently are? Let’s discuss some of the common pitfalls when it comes to managing stock levels and how things can quickly get out of hand.
Challenge #1 - Ordering the right stock at the right time
An obvious, yet challenging obstacle to overcome is ordering the right amount of stock at the right time. It may seem like a blackbox with ever-changing factors at play. Though not impossible to achieve, it is a balancing act that requires constant upkeep. Inaccurate reordering levels can result in holding too much inventory, which increases storage costs, and places unnecessary pressure on your cash flow. Also, depending on what kind of products you sell, idle inventory could mean you may need to dispose of said unsold inventory. Being understocked also prevents you from accepting orders, which means you’re losing out on sales and perhaps making customers unhappy along the way.
Needless to say, knowing how much and when to reorder stock is crucial if you want to keep costs down and maximize sales.
Challenge #2 - Controlling inventory within your warehouse
Even if you’re able to successfully identify reorder points and track inventory coming in and out, inventory control within your warehouse is often overlooked. Not knowing how much inventory you have and where it is can cause friction points when trying to get orders out the door. This leads to unsatisfied customers, and if you sell online, there’s the dreaded one star review.
When your storage facility is in disarray, warehouse workers can’t pick products efficiently, which disrupts the fulfillment process by causing delays to getting products out the door. This can also lead to picking errors where the wrong items are being added to an order and skipping proper quality checks. These issues are only compounded if you have multiple warehouses.
Challenge #3 - Getting visibility into all the moving parts
Having a system in place to keep track of the history, movements and processes your inventory goes through is essential to avoiding these devastating pitfalls. Visibility into what is actually going on with your business will alleviate manual work, reduce errors and provide valuable insights to keep improving your business.
How to improve your inventory management
We created ParagonSMB to help businesses forget about the chaos of dealing with everyday tasks, like inventory management, and focus on growing. We aimed to make complicated processes easier by offering a system that takes the work out of inventory, e-commerce solutions, multiple warehouses, reporting, order management, and more.
Having a system like ParagonSMB will help you always know where your inventory is located and how much stock you have on hand. It handles your orders, fulfillments and shipments with its connections to Amazon and Shopify e-commerce platforms. The system provides you with a built-in reporting tool that allows you to create template reports. You can also connect to your QuickBooks online accounting and import/export all of your data automatically.
Built to have you up and running in no time, ParagonSMB communicates with the platforms you are already using. Transactions and references are pushed between all of our integrations so that you don’t have to do the same work across multiple systems. It will save you time and money by removing tedious inefficiencies and by providing your customers and employees with the best experience possible.
- Bulk Shipments: when you produce large orders, they can be palletized for cost efficiency.
- ABC Inventory Management: a product grading system, A being the most valuable and driving the majority of the businesses profits, B and C being less profitable. This helps companies make decisions on which products to sell.
- Backordering: will allow you to take orders while your inventory is still out of stock.
- Just in Time (JIT): by keeping as little inventory as possible on hand, small businesses use this method to avoid costly storage fees and idle inventory.
- Consignment: when the consigner gives the consignee access to products without initiating a payment. Payment for the products are made when a sale is made by the consignee.
- Dropshipping and cross-docking: receiving items right when the customer orders them, so it’s in and out.
- Cycle Counting: when you use a subset of inventory for count, from a selected inventory location, counted at a specific time, and recurring on a set date.
- Raw Materials: are components that are used to manufacture a finished product.
- WIP: Includes direct labor, material, and manufacturing overhead, and will also start with raw materials that are still “work in progress” to become a finished product.
- Finished Products: products that are ready to sell.
- MRO: the tools and supplies that you are using while manufacturing goods, but are not the finished goods themselves.
- Invoice: a list of goods sent or services provided, with a statement of the sum due for these; a bill.
- Credit: the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.
- Vendor invoice: a document listing the amounts owed to a supplier by the recipient is known as a vendor invoice.
- Vendor credit: these are credits that you receive from your vendor as an equivalent of the amount that they owe you.
- Make payment: a payment is made when you give a sum of money in exchange for goods you have received.
- Receive payment: you receive a payment when you have a payment from the customer that has been successfully sent from their account to yours.
- Vendor: in a supply chain, a vendor, or a seller, is an enterprise that contributes goods or services.
- Product: an article or substance that is manufactured or refined for sale.
- Customer: a person or organization that buys goods or services from a store or business.