How can you improve managing inventory for better profitability

How can you improve managing inventory for better profitability

If you are running a company and you know a bit of accounting, you have heard of inventory for sure. If you are holding a lot of inventories it means you are keeping your valued money frozen and idle. Let us know more about inventory management and multiple effective ways of doing it.

What is inventory management?

Inventory management is the process of tracking and monitoring the number of stocked goods a company holds. Inventory managers must be aware of goods in terms of multiple factors like quantity, weight, volume, location, dimensions, and more.

Apart from tracking all these details, an inventory manager would make sure the company holds only the required amount of inventory; not more not less. The objective is to minimize the cost of inventory holdings by helping businesses understand the right time to let go of bad or expired products, or buy more goods.

Why is inventory management important?

Businesses must have enough stock in hand to fulfill consumer demands. Effective inventory management keeps enough stock on hand to meet customer demands. 

Effective inventory management saves you money and more. Take a look at the following:

Avoid wastage

You do not want to sell expired or spoiled products. If you are dealing with perishable products or products with low shelf life like vegetables, pickles, food items, makeup, etc. you have to sell them within the right time frame. Robust inventory management would make sure that the business has the right quantity to sell at the right time. As wastage is equal to the loss.

Avoid deadstock

Expired stock, spoiled stock, or dead stock is of no use to the business. The reason can be anything, it might be due to a change in trends, change in policies, expiry of the product, change in the price, etc. Inventory management saves businesses from holding onto the deadstock.

Reduced storage cost

Storage cost is a variable cost that means the cost varies depending upon the volume of stock, the duration for which the stock exists, and more. One of the mottos of inventory management is to reduce storage costs as much as possible and maintain the trend.

Here are a few essential inventory management techniques to be implemented for effective results and profitable business.

Set par levels

Businesses are recommended to set par levels of inventory. Par levels indicate the minimum amount of inventory that must be held all the time. If the stock goes below the par level you know that it is time to place an order for inventory. Businesses have to set this par level depending upon their goods, needs, demand for the products, and how quickly you can receive them if you place an order, etc. 

In the initial stage, businesses might have to do some research before setting the par-level. However once set, the ordering process will be systematic and the decision-making will be easier. 

However, the par level may change due to some events, hence it is important to check the par level at least once a year.

First-In-First-Out (FIFO)

“First-in, first-out” is the basic rule of an inventory management system which states that the stock you ordered first must go out or get sold first. This rule is especially applicable to perishable products and is crucial as it saves organizations from unwanted inventory wastage.  

Apart from the factor of predictability, there is one more factor that urges on the FIFO method. Sometimes companies selling products decide to change the branding material, packaging, ingredients, etc. or the company might discontinue the products; in such situations, it becomes obligatory to sell the old stock first and save it from getting absolute.

Manage relationships

Successful inventory management depends upon your capacity to adapt quickly and positive relationship building with the suppliers. Whether you want to return the products, bit new products, create a space for costing or new inventory, dealing with manufacturer's issues, and more, you should be ready to deal with all of these amicably. And having a good rapport with suppliers would make these things work faster and cost-effectively.

One can maintain a positive relationship through transparent and proactive communication. Placing orders in time and informing them in advance is a good practice to follow. Plus, a positive relationship would help go a long way. Suppliers would not mind giving you some concessions and helping out at the time of emergency. This indirectly means you do not have to worry much about inventory losses in needy times.

Contingency planning

Just like any operation of the business needs to be started and conducted with planning, inventory also faces problems. Below are a few of them:

  • Your sales go up unexpectedly and you are out of stock.

  • You are lacking in the cash and can't pay for the products you need.

  • You lack enough space to store the inventories in case the demand goes up and you have to purchase immediately.

  • You miscalculated the inventories and now you are left with lesser amounts than needed.

  • A slow-selling inventory has occupied your space.

  • The product in demand is discontinued by the manufacturers without prior notice.

  • Problems in inventory are always surrounded by 'when not 'if'.

A business must be ready for all this. And must know the impact it might make on the business.

Regular auditing

One of the best practices to manage inventories is to conduct regular audits. Whether you use technology or manual efforts or both, make sure you get the right data for the audit.

It can be done three ways:

Physical inventory: You count all the available inventory at once. It is usually done only once a year considering the efforts that go.

Spot checking: It involves counting a product of a specific category and comparing it to the supposed-availability. 

Cycle counting: 

Throughout the year auditing is done, especially of valued items or higher-priced items.

Apart from the above-mentioned techniques, you can also use the following techniques to effectively manage the inventory. 

Prioritize the inventories and categorize them into different categories:

  • High-priced products with a low sales frequency. The financial impact of these products is high.

  • Moderately priced products with an average sales frequency. 

  • Less-priced products with a high sales frequency. These items require less attention in terms of financial impact.

Accurate forecasting

Predicting demand with as much accuracy as possible. 

An organization with an effective inventory management system can help reduce costs, maintain positive cash-flow, and boost the profit of the company. Your business is ready for the unexpected with effective inventory management.

Hence, taking control of the inventories is one of the first steps to control the organization and earn profits.

Garner Bringham Nov 19, 2020 · #1

Thanks a million and please keep up the effective work. I am really happy to say that, It is a very interesting post to read