Effective Inventory Management: 5 Best Practices

Elizabeth Scolari
November 11, 2015

One of the biggest challenges many wholesale companies face as they grow is figuring out how to manage inventory as their needs change and their product portfolio grows. Fortunately, there are some proven best practices that will help to cure some of those inventory headaches. One of the biggest challenges to effective inventory management has to do with the nature of the inventory management function as part of the overall business. Manufacturing, procurement and sales activities directly impact inventory, and yet these departments may not all be actively involved in inventory management decisions. Inventory is also affected by forces outside the company – the larger economic environment, changing seasons and trends, and resulting shifts in demand. Some of these factors can be studied and predicted, and others are less easily managed. Inventory managers must cooperate more closely across departments: sales, customer service, manufacturing, IT, accounting, etc. Here are some best practices to help your business conduct more effective inventory management.

5 Best Practices for Effective Inventory Management

1. Categorize your inventory

Separating the wheat from the chaff, or in this case, separating the “stock” from the “stuff,” (distinguishing the most high value items from inventory that’s lower value) is one important step towards more effective inventory management. ABC analysis is one of the most common methods for doing this, and many leading inventory management programs like SAP, Microsoft Dynamics and even QuickBooks support it. ABC analysis recognizes that not all items in your inventory are equally important. The goal of ABC analysis is to optimize use of warehouse space and to ensure that the most important items are always available. Less important items should take less space, and more space should be used on the items that are most in demand.

2. Look at different management models

There’s more than one way to manage your inventory. There’s no law that states every item your company offers has to be maintained in your warehouse, for instance. Vendor-managed inventory, where a supplier has access to your inventory data and uses this information to ensure you always have adequate inventory, might be a viable option for certain items (such as your C items). Other options include having a dedicated inventory manager if you don’t already have one, purchasing inventory software, or hiring an outside consultant or specialist.

3. Develop a plan

After studying different options and getting a handle on what’s already in your warehouse or stockroom, the next step is to develop a more effective plan. This requires a cross-functional effort; it’s not just an operational effort that happens in the warehouse. A successful inventory plan should also involve your marketing, catalog, ecommerce, and merchandising departments. If your goal is to liquidate the C items in the warehouse, you’ll need to work with sales, marketing and other departments to ensure that there is not a reason to maintain the items (such as a future promotion).

4. Get a handle on demand

Demand forecasting is key to ensuring that even with minimal stock levels, you never run out of needed items. The amount of stock needed may fluctuate due to seasonality, the economy and business trends. To accurately forecast demand, it’s important to involve both marketing and sales.

5. Automate inventory processes

Another big challenge to more effective inventory management is maintaining accurate counts of inventory, while reducing the amount of time that is spent moving and counting items around the warehouse. This is where automation can play a critical role. Something as simple as a smartphone or handheld device can be used to scan barcoded inventory items as the move into and out of inventory. Leaving paper processes behind and investing in a true inventory management solution also helps to ensure that your business has the best visibility into the inventory you carry as well as opportunities to reduce cost and improve inventory management processes.

Challenges to More Effective Inventory Management

The ultimate goal of effective inventory management is to balance customer needs while minimizing the carrying costs of excess items. The biggest challenges to more effective inventory management often have to do with conflicting objectives of other departments that need to be involved in inventory decisions and the difficulty of accurately predicting supply and demand. Inventory managers that attempt to bring other departments into the discussions around more effective inventory management often find that each department has their own goals with regard to inventory. Sales and customer service­­––concerned with rapid order fulfillment and customer satisfaction––may want higher levels of stock at all times. Procurement­­­­––concerned with getting the best per-unit price for an item––might get a better deal on ordering 100 items at a time rather than 10. Finance––concerned with lowering carrying costs––may want minimal stock to be carried on hand. Inventory managers must balance these differing objectives when developing their inventory management strategies. With regards to supply and demand, some macroeconomic forces may always remain somewhat unpredictable. Unexpected economic downturns, for instance, are hard to predict. However, those forces that can be measured and predicted, such as supplier performance or seasonality of products, must be incorporated into the inventory management process. Closer collaboration with suppliers can help to predict when shortages might occur, while working with sales and marketing to forecast demand can help to ensure that stock levels are optimized to meet changing customer needs. What challenges does your business face with regard to inventory management? Tell us about it in the comments.