Inventory management techniques: What is inventory management?

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Originally Posted On: https://quickbooks.intuit.com/r/inventory/inventory-management-techniques/

While inventory is a vital aspect of e-commerce businesses, the reality is that many wholesalers—large and small— may overlook how critical inventory control is to profitability and scalability. Inventory management is valuable and effective in achieving business growth– that’s why we’ve created this guide. We’ll take a deeper look at what to do (and not to do) when it comes to managing inventory. Use the links to navigate the guide and find the most helpful tips for your business.

• What is inventory management?
  • What is the purpose of inventory control?
• The cost of poor inventory management
  • Cautionary tales of inventory management failure
• Inventory management techniques
  • Inventory management technique #1: Setting up a reliable inventory management system 
  • Inventory management technique #2: Demand forecasting
  • Inventory management technique #3: Automation

Inventory management is the process of sourcing, tracking, reordering, selling, and all other tasks related to physical inventory. Your business’s inventory management practices determine your inventory control and how that impacts business operations.

The purpose of inventory management is to ensure that you know what you have in stock, what you’re running low on, what’s moving, and other key details. This often relies on the practice of key techniques like first-in, first-out (FIFO); last-in, first-out (LIFO); and just-in-time inventory management (JIT).

So, why is inventory management important to a business? Prioritizing streamlined, up-to-date inventory management is an important aspect of business operations that helps you keep products in stock and make decisions about the products you carry.

Poor inventory management processes have a quantifiably negative impact on your bottom line. From having money tied up in inventory that’s sitting around raising your warehousing expenses to forcing businesses to implement mass markdowns to move overstock, losses may add up. According to a recent report by Coresight Research and Celect, U.S. retailers lost $300 billion in revenues due to markdowns in 2018. This is equivalent to 12% of total sales.

Furthermore, it costs five times as much to acquire a new customer than to retain an existing one, so could potentially have additional customer acquisition costs. This may be avoided through providing a good customer experience—and using smart inventory control methods.

Many large and once-profitable companies have fallen prey to the negative repercussions of a poor approach to managing inventory.

Retail toy giant Toys “R” Us suffered from chronic inventory management problems for years that left the company without stock during peak sales periods. One major example of its failure to manage inventory is its Black Friday sale in 2015. According to a report by The Wall Street Journal, the retailer’s website was in stock 62% of the time on the 100 top-selling toys, well below the 95% recommended stock level. This left many customers no choice but to head to Amazon or other retailers to find their products—and the company’s North American operations filed for bankruptcy in September 2017.

In 2015, Target was forced to abandon its planned 133 store openings in Canada after multiple inventory management and logistics failures—one of which was that barcodes on popular Barbie toy cars didn’t match the numbers in Target’s system—caused a massive pileup at their distribution centers and empty shelves in stores. Inadequately planned inventory and supply-chain management strategies ended up costing the company $941 million in losses.

To avoid these types of mishaps, implementing strong inventory management techniques is essential.

Succeeding at inventory management comes down to three key steps:

• Vetting and setting up a reliable inventory management system that helps you keep accurate inventory counts. This can save you time and money, while optimizing inventory turnover.
• Generating and monitoring demand forecasts (so you can tweak your approach based on demand). With better forecasting, you can prevent the risk of ordering excess inventory, dead stock, and cash-flow problems, while lowering your carrying costs. This is especially important if you deal in perishable items.
• Automating inventory management and supply-chain processes (to save time and reduce the likelihood of human error). This technology can automatically update new inventory, inventory costs, and stock quantities across platforms. It can also generate purchase orders for you based on the reorder points you set—just make sure your designated reorder point is different from your safety stock quantity. Doing so will help you optimize lead time and account for backorders and other issues.

These three pillars will give you the right foundation for sustainable growth, accurate order fulfillment, and good customer experience. Let’s dive a little deeper into how you can implement these techniques for better inventory management.

The most impactful step you can take is to invest in an inventory management system. And not just any system, but one that is designed with multi-channel businesses in mind. You need an inventory management system that makes it easy to:

• Keep track of stock levels
• Reorder when you’re running low
• Update inventory levels across channels
• Add new products to your inventory
• Analyze which products are selling and which aren’t

QuickBooks Commerce is one such inventory management system.

QuickBooks Commerce lets you take control of your multi-channel business and helps you optimize your operations all in one single platform. It’s equipped with powerful features that allow you to:

• Manage and track orders
• Track inventory across multiple channels and locations
• Add product listings with pricing and descriptions that automatically upload to your different channels
• Receive valuable insights from detailed sales reports
• Automates your accounting because it connects with QuickBooks Online

With a robust inventory management system like QuickBooks Commerce, you are well positioned to avoid problems like stockouts and overstocking. And, you don’t even need to worry about learning how to complete ABC analysis or cycle counting because QuickBooks Commerce simplifies everything for you.

One reason that business owners often find themselves under or overstocked is because they don’t have a good read on the demand for their products. While you can make assumptions about seasonality, you need a much more concrete approach for deciding how you stock inventory.

Demand forecasting is when you use data—typically historical data based on sales—to analyze consumer demand for certain products. Demand forecasting can give you insights into how seasonality impacts sales, whether there are trends for certain products or sales volume, as well as other valuable information.

If your business is just starting out and you don’t have historical sales data to go off of, you can look at your industry as a whole. With this demand forecasting technique, it may also be a good idea to look at competitors with very similar business models and offerings. While it’s not ideal, it can provide you with a good starting point for managing your inventory in the months to come.

Another factor that plays a role in why businesses fall behind on inventory management is that it can be time consuming. From manually tracking inventory levels on your different sales channels to actually placing orders for restocks, business owners may simply not have the time.

If this is one of the biggest struggles you face regarding inventory management, you may want to consider what automation can do for you. With high-functioning automation, you can enjoy benefits such as:

• Automated reordering
• Automated inventory tracking across sales channels
• Automated, real-time updates for the amount of inventory available to multiple channels

With QuickBooks Commerce, you can take advantage of these perks that allow you to manage inventory more efficiently, saving you time and money.

With QuickBooks Commerce, you can manage everything from orders and inventory to bookkeeping with one powerful platform. By leveraging the tools and capabilities of this inventory management software, you can take important steps to improve business operations and customer satisfaction.