What Is Inventory Management: Techniques And Best Practices

Effective inventory management is a crucial skill for small business owners of course, but also for medium and large sized enterprises.

In summary, inventory management refers to the overseeing of the flow of goods from suppliers (manufacturers in many instances) to warehouses or shopfronts and ultimately to customers. When inventory management is done correctly, your business will enjoy optimal stock levels that meet customer demand and ensure satisfaction. From a business point of view, the more effective your inventory management, the better your cash flow, the lower your ongoing costs and the less stress suffered.

So what sort of techniques are employed by businesses looking for strong inventory management habits and what are best practices that cut across industry?

Techniques for Effective Inventory Management

1. Just-in-Time (JIT) Inventory

The Just-in-Time technique for inventory management aims at minimising inventory carrying costs. This is done by keeping inventory levels at a minimum. Goods are ordered and/or produced according to current customer demand.

By doing so, there are less costs associated with storage and lower risk of obsolete inventory. Moreover, the business will have more reliable and predictable cash flow without having to worry about capital locked up in inventory.

2. ABC Analysis

Another technique for inventory management is to conduct what is referred to as ABC analysis. This intuitive technique involves categorising each type of inventory your business holds into three groups based on value and/or importance. Category A are the highest value and most important items, B are the second highest and most valuable, and C are the lowest.

The purpose of this technique is to create a clear picture of what items are considered critical–and therefore need to have stock levels maintained–and which items are less critical–and therefore can be de-prioritised to free up working capital if needed. It also gives you a clearer picture of consumer demand.

3. Safety Stock

This smart technique involves maintaining a buffer of extra inventory as a ‘safety stock’. The reality of a fluctuating and unpredictable market is that shocks can cause supply chain disruptions. 

Even sudden increases or unexpected changes in demand can increase the risk of stockouts. The safety stock technique helps to prevent this from disrupting your business.

4. Economic Order Quantity

The EOQ method involves calculating the optimal order quantity of stock based on the ordering, transporting, and storage costs. The aim of this technique is to minimise total inventory holding costs.

By finding the optimal quantity–based on per unit cost, for example–businesses can strike the right balance between ensuring stock levels are maintained and carrying costs are reduced.

5. Batch Tracking

Batch tracking is a technique involving unique identifiers being assigned to groups of products that are manufactured or ordered together. This provides a business with invaluable data that can be used to trace inventory orders, manage expiry dates, and ensure effective recall management.

It is particularly important in industries such as food, beverages and pharmaceuticals, where stock comes with expiration periods.

6. Customised Financial Solutions

Businesses looking to gain control over the inventory management can find that access to the necessary working capital to do so is prohibitive. That’s where customised financial solutions come in.

Invoice Finance

Invoice Finance allows a business to use outstanding invoices owed to them as collateral for an advance on the value of those invoices. This immediate injection of working capital improves cash flow and allows for further investment and management of inventory levels.

Business Loans

Business Loans are the more traditional finance option that provide lump-sum funds to businesses for various commercial purposes. Inventory management, such as investing in initial orders or having the working capital to purchase in bulk and thus reduce cost per unit, is just one way in which business loans can be effectively deployed in a business.

Trade Finance

Inventory management can be even more complicated when it comes to importing and exporting. Trade Finance, encompassing various financial products and services tailored to facilitate international trade transactions, allows businesses to establish strong trading relationships and manage inventory effectively. 

Best Practices for Inventory Management

Tip 1 – Use demand forecasting

Knowledge is not just power, it’s control.

Demand forecasting is about understanding and predicting how the demand for your inventory will fluctuate over seasons and time. The more historical data (i.e., past sales) you have, the greater your insights into customer behaviour, and the stronger your grasp on market trends, the better position you’ll be to forecast demand and arrange inventory levels accordingly.

Tip 2 – Invest in strong supplier relationship management

Suppliers are an essential partner for inventory carrying businesses. Cultivating strong relationships with these partners ensures not just collaboration but can even lead to more timely deliveries, better communication and more favourable terms. 

Don’t underestimate the effect volume discounts and/or extended payment terms can have on your business’s ability to effectively manage inventory.

Tip 3 – Conduct regular inventory audits

The best way to manage inventory is to always manage inventory.

Regular audits ensure you, as a business owner, are across just how much stock you currently have and how much your stock levels have changed. The more accurate your inventory records, the easier it will be to identify discrepancies, notice unusual fluctuations and prevent inventory shrinkage or loss.

Tip 4 – Embrace technology

Technology is revolutionising just about every aspect of running a business. When it comes to inventory management, powerful analytical software, automation tools to streamline processes and real-time monitoring of inventory levels, orders and shipments all put more control and more transparency in your hands.

Tip 5 – Consider warehouse layout

Optimising the layout of your warehouse or inventory storage facility can help you more efficiently determine current stock levels. In addition to improving accessibility which reduces packing and delivery times, it can minimise errors and help streamline inventory audits.

Consider everything from proper shelving, professional labelling and consistent categorisation. 

Tip 6 – Ensure the right internal company culture 

There are two ways where general company culture can be highly beneficial for inventory management. 

• Cross-functional collaboration – Implementing and encouraging collaboration and communication across departments such as sales, operations, procurement and finance ensure greater alignment and transparency in inventory management.

• Continuous improvement – A culture that encourages ongoing evaluation and improvement of processes and procedures will allow for greater openness and ability for adapting to different market conditions and business needs.

Find the Right Financial Solution to Support Your Inventory Management

Effective inventory management is an essential component of operational efficiency and an important step in achieving financial health for businesses. 

Every business needs to find the right technique and implement the right practices to ensure their inventory stock levels are optimised. 

But if you are not sure what sort of financial solution is best suited to your business, your objectives and your needs, make sure to reach out to the ScotPac team today. Our award-winning finance solutions help over 8,000 businesses access the working capital they need to succeed–and we’d love to help you too!