Overstocking and understocking inventory can create major challenges, especially financially. Businesses should strive to perfect inventory management and forecasting to ensure they stock just the right amount of inventory during all seasons. Hitting the right amount of inventory can even out carrying costs of inventory and make it more manageable. Read on as we explore 7 tips for understanding how much inventory you should carry.
7 Tips for understanding how much inventory you should carry
It’s important for any type of business to understand how much inventory they should carry at any given time. If you have too much inventory on hand, then you may be tying up too much capital in inventory and paying for more warehouse storage than you should. If you do not have enough inventory on hand, then you may be losing out on sales, back ordering items, and developing a bad reputation by giving customers a poor experience.
The ideal situation is to find the perfect stock number for each product that your business offers that considers lead times, customer demand, and all the other factors needed to make accurate inventory demand forecasts. By having accurate inventory demand forecasts, your business can save an incredible amount of time and resources and even automate some processes like purchasing.
All of this is more easily said than done. And, as a small business owner, you may not have the resources to hire your own supply management team to make these types of inventory-related decisions for you and the benefit of your company. Until you can hire your own in-house supply chain manager, here are seven solid tips to consider to help you understand how much inventory you should carry as a small business owner.
1. Create an inventory management system
If you’re a small business owner that needs to maintain a desired level of inventory at all times, the first thing you should do is to create an inventory management system and invest in various hardware and software as part of that system.
An effective inventory management system will help you track sales and identify patterns in demand that can help you make purchasing decisions. Inventory needs to be tracked consistently and stock levels need to be adjusted every time a product ships out, is received, or is returned by a customer.
Once you start to factor in individual lead times and safety stock figures for each of your vendors and their products, then you can start to automate purchasing and other processes within the inventory management system and your overall supply chain. Automation is an incredibly effective way of saving time and resources.
2. Adjust accordingly for your industry
Your industry and the types of products you sell have a lot to do with how much inventory you should have on hand as well as when you should have more or less of a particular product. The first question you need to ask yourself is does your product expire or has a shelf life. If it does, then your inventory management system needs to take that into account by looking at inventory levels on a daily basis and making purchases based on lead times as well as shelf life times.
If your product does not have a shelf life, inventory management may be a little less complex, however, you still need to adjust accordingly for your industry.
For example, if you sell winter coats, you may have some seasonality to consider. Seasonality not only applies to winter coats being in high demand during the colder months, but you may also need to consider having extra stock for back-to-school sales, Christmas and the holiday shopping season, spring jackets for the rainy season, and other special promotions you may want to offer. Aside from seasonal demand and special promotions, you will also need to make sure you have plenty of stock for the most common sizes for men, women, and children. Some sizes are going to be much more in demand than others.
3. Determine inventory and storage cost
One of the most important factors when it comes to inventory levels is the cost. Cost needs to be more than just unit cost. Expenses associated with inventory storage should be considered as well. If you have a large amount of inventory simply sitting in warehouses for long periods of time, it can add up. This is why having an effective inventory management system and accurate inventory demand forecasts are so important for your business.
Aside from the cost per unit and storage expenses, you also need to consider costs associated with inventory disposal if your products have an expiration date. Obviously, the goal is to limit waste as much as possible by selling products before expiration, however, some waste may be inevitable. That being said, the costs associated with this should be factored into your bottom line and purchasing decisions as well.
4. Know and calculate your inventory turnover ratio
Your inventory ratio is essentially how many times you sold and replaced specific products within a set period of time. Certain industries have different inventory turnover ratios based on the nature of the products they sell, however, a desirable turnover ratio for any business may fall between 4 and 12 over the course of a year.
5. Know your supplier lead time
Another important factor to consider when making inventory management and purchasing decisions is supplier lead time. Supplier lead time refers to the time it takes for a product to be received from when the purchase order is created to when it is available to ship out to customers. This is important to know for each supplier and for every product that your business offers.
6. Maintain safety stock
Safety stock is an amount of inventory that acts as a buffer to account for fluctuations in demand and uncertainties like excess demand, supplier delays, inaccurate inventory demand forecasts, delayed purchasing, and financial constraints. By knowing what your safety stock levels are for each product that you sell, you can help to achieve zero order cancellations from simply having not enough inventory to meet demand.
Canceling orders or having to backorder items for customers is a bad business practice that will have customers looking elsewhere for their purchases. Chances are if a customer makes an order on your site and you cancel it due to the item being out of stock, they will find another source and never return to your business again.
7. Identify and correct inventory management issues
It’s one thing to have an inventory management system in place, however, you also need to be proactive when it comes to addressing issues that come up. For example, if you notice you are always running out of a particular item you may want to investigate to see what the core issue is. Maybe there is a supplier who is behind on production? Or maybe some of the product is arriving damaged and in unsellable condition? These are the types of things you should be proactively investigating to solve issues in your inventory management system
Also, if you find that you have too much inventory of some particular items because of an inaccurate inventory demand forecast, you may need to experiment with different ways to liquidate the inventory. You may need to offer special discounts on certain products or donate some product to charity as a tax write-off to flush out items that are taking up precious storage space and tying up working capital.
How Kickfurther can help
Oftentimes we try to take shortcuts as a way to overcome challenges. For example, maybe you’ve decided to only stock the amount of inventory you can afford. While this is smart, it may be costing you sales which translates to profits. Finances often get in the way of inventory management, but they don’t have to. Created by an entrepreneur just like you, Kickfurther is committed to providing affordable inventory funding solutions for small business owners.
Kickfurther is the world’s first online inventory funding platform that enables small businesses to access funds that they are unable to acquire through traditional sources. For companies that sell physical products or non-perishable consumables and have revenue between $150k to $15mm over the last 12 months, Kickfurther can help. We connect brands to a community of backers who help fund inventory on consignment and give brands flexibility to pay that back as they receive cash from sales.
Kickfurther can help startups and small businesses fund millions of dollars of inventory at costs up to 30% lower cost than the competition. With more than $100 million in inventory funded to date, Kickfurther can help you get funded within a day or even minutes to hours.
Interested in getting funded at Kickfurther? Here are 3 easy steps to get started:
#1. Create a free business account
#2. Complete the online application
#3. Review a potential deal with one of our account reps & get funded in minutes