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Running a slick and seamless retail operation is one of the best ways to blow your competition out the water.
Fewer mistakes are made. Orders get out the door faster. Less money is wasted. And you create raving, loyal customers.
One of the fundamental parts of achieving this is stock optimization and gaining precision control of your inventory. But with 43% of retailers ranking this as their top challenge, it’s clearly proving to be a struggle without a quality inventory management system.
And so in this post we go through seven of the most effective inventory control methods. These help keep stock perfectly balanced, organize it optimally in the warehouse and are a crucial factor in creating a bulletproof overall operation.
Let’s start by taking a quick look at why putting techniques like this in place is so important.
Importance of inventory control
The annoying thing about new inventory control methods is the time and effort required to put them in place. And so it’s tempting to just focus on other things – like getting your marketing sorted.
But there are some pretty huge benefits that make taking a firm grip of your inventory management well worthwhile:
- Increased sales. With 70% of shoppers choosing a competitor over waiting for backordered items, better inventory management prevents missing out on sales.
- Loyal customers. 65% of buyers have cut ties with a brand over a single poor experience, but great inventory control helps add more value and create loyalty.
- Reduced storage costs. Having just the right amount of stock on hand at any one time means you’re not overpaying for unnecessary storage.
- Less waste. Inventory that doesn’t move can eventually become dead or spoilt – meaning a total waste of all kinds of different resources.
Of course – all this means more cash in the bank as it’s no longer tied up in sitting stock. Cash that can then be put into business growth and expansion.
Inventory control methods for forecasting
Demand forecasting is an essential part of inventory control. It helps keep an optimized stock level – striking a perfect balance between having too much or too little at any one time.
There are three key methods to take note of when it comes to this:
1) Setting a safety stock level
Safety stock is effectively the backup stock you keep on-hand for each of your items.
It’s about being prepared for the unexpected. And it should never be used for normal daily sales as it’s reserved purely for sudden increases in demand.
It’s always going to be an estimation, but just blind guessing and hoping is risky. It’s therefore much better to use as much past data as possible in your decision.
That’s why we suggest taking a look at your best sales days over the previous quarter or year and inputting into the following formula:
This gives a much more data-backed method for maintaining safety stock while still being able to fulfill typical daily sales.
2) Determining reorder points
A reorder point is exactly what it says on the tin – the exact point at which ordering new stock needs to happen.
This may sound simple at first. But order too early and you end up overstocked, while too late sees your safety level eaten into.
It’s therefore imperative to take into account the lead time between ordering new stock and it being delivered and ready for sale. This way, you have a buffer to still fulfill daily sales without going into safety stock.
Use the following steps to work out your perfect reorder point for each item:
- Take the average number of days (lead time) between ordering new items and having them ready for sale…
- Multiply this by your average daily sales volume over the past month/quarter/year…
- And then add your safety stock number.
Here it is written out as a simple formula:
3) Economic Order Quantity (EOQ)
Safety stock and reorder point are inventory control methods that help determine when to order new stock. But figuring out how much to order is a separate conundrum.
Economic Order Quantity helps calculate this while also keeping carrying costs to a minimum.
To start with, here are the three variables EOQ is based on:
- Demand. The number of units sold over a given time period, usually a year.
- Relevant ordering cost. Total ordering cost per purchase order. This includes all staff, transportation and any other cost associated with making each order.
- Relevant carrying cost. Assume the item is in stock for the entire time period in question and decipher the carrying cost per unit.
Once you have these figures, put them into the following formula:
At first glance, this can be a pretty daunting equation. So let’s take a look at an example of it in action.
Imagine your business sells trainers and has a demand of 18,000 units per year (1,500 a month). You’ve also worked out that staffing and transportation gives a total ordering cost of £75 per purchase order while carrying costs sit at £4 per unit.
Our formula now turns into this:
Economic Order Quantity = square root of [((2 x 18,000) x £75) ÷ £4]
Economic Order Quantity = square root of [2,700,000 ÷ £4]
Economic Order Quantity = square root of 675,000
Economic Order Quantity = 822
Based on the numbers used above, the perfect order quantity for this specific item would be 822 units per order.
Organizational inventory control methods
These initial three techniques help with stock level optimization. But how this stock is organized in the warehouse is also a crucial part of controlling inventory.
Let’s take a deeper look at some inventory control methods that help with the organization of stock:
4) First-in-first-out (FIFO)
A simple principle, yet vitally important to mention – especially if dealing with perishable items.
For most retailers, the last thing you want is to be always using the newest stock to fulfill orders. This leaves older inventory sitting in the warehouse and susceptible to damage, decay or passing best before dates.
It’s worth making a rule to store new inventory from the back of shelves and then take from the front – automatically enforcing a FIFO system:
FIFO is also a popular method for calculating inventory value when it comes to getting those end-of-year accounts done.
5) ABC Analysis
ABC Analysis is a great for determining any items that could need prioritizing over others.
It works by dividing all on-hand inventory into three groups – A, B and C:
- A Items: Are of high value with low sales frequency.
- B Items: Are of moderate value with moderate sales frequency.
- C Items: Are of low value with high sales frequency.
There’s going to be relatively low numbers of on-hand stock for A items – meaning mistakes could cause huge problems and closer attention is needed than C items.
Of course – you can also use this analysis inversely when it comes to setting up your warehouse. C items are more popular and so placing them closer to the packing desk is a great idea:
6) Optimal location labeling
A disorganized warehouse can be a nightmare to work with. Your team should be able to look at your system and easily see where any product is located.
Creating clear location names and labels is therefore an absolute must.
It’s best to avoid fancy names – simplicity is king here. For example, staying with good old fashioned numbers and letters is easy to understand and for new recruits to learn:
You can then start designating different areas to the warehouse and shelves as your operation expands:
7) Stock reviews
You can have all the best methods and inventory management techniques in place – yet errors and discrepancies will still occur.
Reviews and stock takes can cause warehouse managers to break out in a cold sweat. But they’re essential for keeping errors to a minimum.
Rather than waiting to do a huge end-of-year count, try spreading it out through the year:
- Cycle counting. This is where team members would be given ‘counting tasks’ of a small number of items to do each week. Over the year, each product has then usually been counted and verified several times.
- Spot checking. This isn’t done with any specific regularity. It can simply be done if a product is proving particularly problematic or if a team member find they have some spare time and needs something to do.
An inventory management system makes this task (and everything else) much less daunting. Quality ones will automatically assign counting tasks to team members with barcode scanners and smartphone apps able to update stock discrepancies instantly.
It’s worth noting that these seven inventory control methods aren’t the only things you need to manage stock effectively.
But they will go a monumentally long way to helping you run that high-flying operation every retailer dreams of.
What are your thoughts on these methods? Do you use them effectively? Or know of anything better? Let us know in the comments below.
Written by Mike Glover
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