5 Key Ways to Stop Losing Money on Inventory
Strong inventory management is crucial to the success of any company. Quite simply, inventory costs money. You need to purchase and store various items. You’re tying up cash when you don’t sell off your inventory, but you’re also making the wrong impression on customers if you fall behind on orders. If you carry items with expiration dates, such as many different types of food, you’ll also lose money if you don’t sell them on time.
Many businesses that are looking for funding, or even that are well established, fail to understand how they can avoid losing money on inventory. These tips will help you avoid this. You’ll maximize your return on investment if you rely on the following inventory management techniques.
Establish Par Levels
A par level is the minimum amount of a certain item you can have in stock before it’s time to reorder. Of course, the ideal par level for one item may not be right for another. Popular items which customers buy every day may have higher par levels than those which customers buy less frequently.
That means you’ll have to research trends to determine the best level for everything you sell. While this takes time, it will pay off in the long run.
Maintain Relationships with Suppliers
It’s very important to always make the right impression on your suppliers. There may be instances when you suddenly need to place large, unexpected orders. A supplier will be more willing to help you if you already have a strong relationship with them. That means paying your invoices on time and regularly communicating your needs and expectations.
Adopt the FIFO Mentality
The “first-in, first-out” (a.k.a. FIFO) approach to inventory management involves selling the oldest items first and the newest items last. Obviously, this should apply to perishable items, but you’ll get the best results if you apply it to all your stock.
For instance, while a particular item may not “go bad” if you don’t sell it on time, its packaging could get worn-out and damaged as it sits. This means customers will be even less likely to purchase it. You can prevent this by making it a point to display and sell items based on when they were ordered.
When researching trends from your company’s history, look for instances when you failed to manage inventory properly. This can happen in several ways. For example, you may have oversold a product because you didn’t anticipate such massive customer demand. Perhaps you didn’t have enough cash available to reorder an item. Maybe someone made a miscalculation and you don’t have as much inventory as expected.
Different businesses struggle with different inventory management failures. Knowing which you’re most vulnerable to is key to making contingency plans if similar problems develop in the future.
Inventory management takes time. The problem is, while you want to be thorough, you also want to be efficient. The ABC model will help.
This popular inventory management approach involves separating the items you carry into three distinct categories. They include:
- A: Valuable products with low sales frequency.
- B: Moderate value products with moderate sales frequency.
- C: Low value products with low sales frequency.
You need to pay the most attention to category A items. They can have the strongest financial impact, but it’s also difficult to intuitively predict their sales patterns. On the other hand, category C items require less attention. They don’t have a major financial impact because their cost is low and their sales patterns are predictable. Category B items require a moderate degree of attention.
Work on adjusting your inventory management processes to incorporate these techniques. Again, your inventory is a major investment. Following this advice will help you get the most from it.
Rae Steinbach is a graduate of Tufts University with a combined International Relations and Chinese degree. After spending time living and working abroad in China, she returned to NYC to pursue her career and continue curating quality content. Rae is passionate about travel, food, business development, entrepreneurship and writing, of course.