13 Fundamental Inventory Management Best Practices

What is inventory management?

Inventory management is the perpetual process of organising, replenishing, and controlling stock and raw materials across the supply chain. It is a core function of running a product business, and can be improved exponentially through the use of inventory management software.

What are inventory management best practices?

Inventory management best practices are a set of guidelines and operating processes that ensure maximum productivity and workplace efficiency while minimising wastage and costs.

By implementing inventory management best practices throughout each step of the supply chain, business owners can give their company the best shot at success.

Similarly, the implementation of said processes should also give customers the maximum value for their dollar (or pound!). This is because, by increasing inventory efficiencies, orders are fulfilled faster and more accurately.

Inventory management best practices allow product businesses to operate with maximum efficiency at the minimum running cost.

Which inventory system is best for you?

It’s important to choose an inventory system that is right for you. Decide which method of inventory measurement is the best fit for your business, perpetual or periodic review?

Perpetual inventory

With a continuous or perpetual inventory system, inventory levels are constantly monitored. A perpetual system will update inventory continuously each time a transaction occurs either when a purchase is made, or by making an adjustment when an item is returned due to damage or defect.

Inventory stock is replenished when the quantity of an item drops below a set level. Online inventory management software provides businesses with the capability to automate this reorder process when inventory stock reaches a pre-set minimum level.

Under the perpetual inventory system, the cost of goods sold is determined when a sale occurs.

Periodic inventory

There are no set reorder levels for a periodic review system, order quantities are based on stock levels at the end of each period. The periodic inventory system is not designed to track either the quantity or cost of inventory stock.

In the periodic inventory system, the ‘cost of goods sold’ is calculated after the physical inventory count at the end of the evaluation period. It assumes that all goods not on hand at the end count were sold. This may not be correct in the case of inventory items that were either damaged or stolen.

Implementing inventory management best practices will ensure stock is always easy to find and stock levels are not too high or too low.

13 fundamental inventory management best practices

1. Categorise assets

To lay the foundation of effective inventory management is to properly categorise your company’s assets. Defining variable versus fixed assets is a broad categorisation, but you should also categorise assets based on a system that makes sense for your company, whether that means categorising assets by use, by department, value, or some other metric.

Storing all of this information in a central asset database is the key to maintaining precise control over your inventory stock, as it allows you to quickly finding the information needed, and analysing the data collected to further optimise your inventory processes.

2. Invest in inventory software

Say goodbye to labour intensive inventory management. Every business should strive to remove human error from inventory stock management by taking advantage of downloading inventory software.

If you have not automated your inventory management processes, you are inherently asking for a major headache. Asset tracking systems such as inventory stock software help save time by streamlining inventory management processes, simplify documentation, and maintain accuracy beyond what’s achievable through manual inventory control processes.

3. Set safety stock levels

Inventory stock management is made easier by downloading inventory software.

You can set safety stock levels for each of your products. These are inherently the minimum amount of inventory stock that you need on hand at all times, to never miss out on a sale.

When your inventory stock falls or gets close to these safety levels you will be alerted to order more. It is important that this is revised, especially with seasonal products. You will need to adjust their safety stock levels so you do not have too much inventory stock on hand especially in markets that are prone to market fluctuations.

4. Perform routine audits

Reconciliation in inventory management is extremely important.

Although it is efficient to download inventory software, it is vital to make sure that the automated reporting match inventory levels. This can be done by physically counting your entire inventory at once. Many businesses do this yearly, however, if you find discrepancies, it is best to couple this with spot checking.

Inventory management is the lifeline of any business. It is critical to understand best practices and techniques to overcome the shortfalls of mediocre inventory management.

This can be done by taking into consideration these four best practices and especially by downloading inventory software for better management. Streamlining processes now saves negative implications later. Not only will these best practices save you time, they may directly impact your company’s bottom line.

5. Determine your business’ needs

Although many aspects of good inventory management will look similar between businesses, each business will be faced with different challenges, so ‘best practice’ inventory management can only ever be an approximate guide.

The most important aspect of best practice in inventory management is to determine your business’ inventory needs – what is it that your business needs from its inventory management function? Does your inventory management software need to support barcoding? What about support for eCommerce or mobile sales platforms?

6. Convert data to business intelligence

Once you have real time inventory data, you also unlock the tools to accurately forecast inventory and sales performance. Businesses increasingly recognise the value of data because the more data they have, the more competitive they can be in an increasingly saturated market.

Selecting the inventory management best practices that are most applicable to your business will help you make the biggest increase in performance in the shortest amount of time.

7. Avoid clipboards and spreadsheets

Although clipboards and spreadsheets seem like a great way to keep inventory costs under control, particularly for smaller businesses, in reality they tend to cost businesses more than they could ever save.

Spreadsheets are error prone and have very poor accountability mechanisms, posing a recipe for mistakes and confusion. Spreadsheets also make it difficult to take advantage of new technology, such as barcodes and real time inventory control.

8. Hold as little inventory as possible

Successful inventory management involves keeping just enough inventory on hand in order to keep the business running effectively.

Many businesses cling to the safety net of large reserves of safety stock when, in fact, holding substantial inventory compromises business performance. Excess inventory involves higher than necessary warehouse costs, insurance and obsolescence and shrinkage risk.

Crucially, holding too much inventory also ties up capital, rather than freeing it up to be used more productively in the business.

9. Manage supply chain risk

A stock out is an unacceptable outcome for a competitive business.

If you are a retailer, any sale you miss out on is a competitor’s gain. If you are a manufacturer, shutting down production while you wait on inventory increases the cost you need to pass on to your customers.

While holding a small amount of safety stock is an acceptable way to mitigate inventory risk, holding larger buffers is not a realistic option.

Rather than compensating for risk by holding excess stock, best practice involves reducing the risk of stock outs by partnering with reliable suppliers and creating a backup plan within the supply chain.

10. Track the velocity of your goods

Inventory velocity is an important indicator of business health and is determined by the time it takes to sell each individual item in stock. When you know the velocity across all product lines, you can make better informed inventory stock decisions.

For example, if a particular product tends to sit in inventory for weeks before a sale, you could do a cost/benefit analysis to decide whether the margins of that sale are worth the incurred warehouse costs over time.

Knowing a product’s velocity allows business to make an informed and quick decision to liquidate a product. Without it, inventory stock can languish in storage, being in risk of becoming obsolete and this is very costly to a business.

Inventory stock velocity can also be beneficial as it allows you to make forward-looking decisions for your business. Highly sought-after products often have greater velocities, so you can use previous velocity metrics based on real-world sales information to inform future ordering decisions.

This type of data-driven purchasing can help you better ensure that high-demand products are always in stock and available for purchase, earning you more business and happy customers now and in the future.

The inventory management best practices mentioned in this guide will transform your operations and boost efficiency throughout the supply chain.

11. Decrease unauthorised foot traffic

Warehouses are busy places. With shipments being delivered, staff picking out inventory stock and forklifts driving around, there is a lot going on. All of these people are authorised to be in the warehouse; they all play critical roles in inventory stock management.

However, what about unauthorised foot traffic that’s coming through and disrupting people or getting in the way? Perhaps it’s a food delivery driver looking to drop off some lunch for employees, or someone’s partner who has come say hello with their kids. It can be risky, dangerous and disruptive to have unauthorised people in the warehouse.

Make sure your warehouse employees are wearing uniforms and the warehouse has special access requirements. This will help you keep the right people in your warehouse and decrease problems with distractions or hazards.

12. Optimise the warehouse floor plan

As the seasons change, the demand for certain types of inventory stock will change too.

It’s important to adapt your warehouse to favour fast-moving, popular goods. With a floor plan that is aligned with in-demand items, distribution can become more efficient.

By restructuring your floor plan, you will be able to respond to orders faster and get them out the door quickly. When popular items are easy to grab this can improve shipping processes and enhance customer satisfaction when it’s delivered fast.

13. Introduce priority picking

When you have valuable customers that place regular orders or large orders, you should start prioritising their orders.

So what’s the best way to do this?

Colour coding is one strategic option. Align the colours in order of priority. For instance, blue could mean high priority items and green could mean medium priority.