Feb 18

4 Inventory Optimization Tips for Small Businesses

How can you optimize inventory to streamline your processes and save money?

You’ve heard of this story before.

A mid-sized business reorder stocks just before supplies run out. The manufacturer’s a long-time supplier, so everyone’s at ease and ready for the goods to come in. But then, something goes wrong. A huge storm grounds the freight airplane that’s transporting the supplies, and the order is delayed. The business asks the customers to wait a few weeks until the right product is in stock. By the end of the day, most customers have already bought from another vendor who’s just a click away. After all, the competitor won’t make the customers wait.

What is Inventory Optimization?

Inventory optimization is part of the supply chain process that tells you where your inventory is at and how much of it you have in order for your business to run smoothly. Optimizing your inventory is vital in managing company assets and ensures the longevity of any business, big or small.

Unfortunately, many small and mid-sized enterprises (SMEs) fall short when it comes to managing their inventory. Some of them will have too small or too excessive of an inventory. Unable to meet the needs of the customers, having too little of an inventory will drive customers away, often to another competitor, and sometimes, even for good. On the other hand, going completely off the beaten path and overstocking goods “just in case” will have your business bleeding money faster without a guarantee of a return.

Big-commerce companies such as Amazon already have the edge over SMEs with their costly and advanced schemes in place that fully optimize each process in their supply chain, delivering products to their customers in a matter of days, sometimes even hours.

Why is Inventory Optimization Important?

If you’re an owner of a small business, you don’t have the resources for advanced systems in place, so you can’t make the mistake of mismanagement when it comes to the goods you’re selling. When your inventory follows a clear and systematic framework, the rest of your supply chain will smoothly follow. Here are four inventory optimization tips for small businesses that can help reduce risks of avoidable mistakes like overstocks, out-of-stocks, failed shipments, and so on.

1. Get Rid of Obsolete Inventory

employees talking about inventory at laptop

Obsolete inventory, sometimes referred to as “dead” or “excess” inventory, is stock you can no longer sell or profit from, and it can significantly harm your business’s overall financial health. These goods usually begin as slow-moving inventory, then turn into excess inventory before finally becoming obsolete or “zombie” inventory.

Your business has already invested money and time in these products and can no longer regain those costs — and the longer you carry inventory that sits dead on the shelves, the more money your business will end up losing. The money you’ve spent on carrying zombie inventory could be spent implementing inventory hosting strategies to utilize space in your warehouses effectively. Strategies like purchasing more efficient handling equipment, having tighter storage methods, and more efficient layouts can deliver better results to your business than storing unprofitable inventory.

2. Invest in Inventory Management Software

If you own a small business, managing your inventory might come in the form of manually listing inventory levels in notebooks or Excel. But as your business flourishes, you’ll be spending more time than usual logging in stock and managing inventory or risk your inventory going out of control. One of the easiest ways for businesses to improve inventory optimization is by taking advantage of modern technology and using software that will not only track real-time product availability but also generate orders for goods that sell well.

two coworkers sitting at laptop

When used correctly, inventory management software can be beneficial in preventing loss of money from unsold items, reporting real-time inventory levels and business trends, and curating suggestions for the distribution of your inventory. Before deciding on a software solution to use, make sure you fully understand what analytics your company needs, and then choose a software that’s easy to use.

3. Monitor and Track Supplier Performance 

Every time you deal with suppliers, your business faces a substantial number of risks and potentially disastrous events in the form of safety issues, product and material defects, environmental problems, and delivery failures. Most businesses recognize the existence of these risks but don’t take any actions to reduce them effectively. While it is true that all disasters can’t be prevented, your business can still minimize the risks of mishaps by monitoring supplier performance.

If you have a supplier that doesn’t deliver goods on time or doesn’t deliver enough, it’s time to take steps to prevent possibly devastating disruptions in your supply chain. Talk to your supplier about these issues and locate the source of the problem. In doing so, your company must be ready to deal with a potential switch of suppliers, unsettled inventory levels, and the chances of running out of stock with some goods during the process.

man and woman sitting on couch talking

4. Create an Accurate Demand Forecasting Model

Every product in your inventory has a lifecycle. A product might be first introduced in the market with little to no demand, snowball until it has a steady and stable demand, and become irregular and obsolete again in a matter of months. Demand forecasting models help predict the profitability of a business. It can also help your business make better decisions when it comes to budgeting, planning, and risk management.

When developing a forecasting demand model, it is also essential to consider the seasonality of a product. Some goods that sell well only in the summer can’t be forecasted according to the demands in the previous quarter. Following an ABC inventory structure can also be helpful in short-term and long-term demand forecasting. Assign category A to the most valuable goods in your company with the highest profitability, category B for goods that are somewhere between the most and least valuable, and category C for the goods with the lowest consumption value.

One type of software that’ll help you streamline your processes and always stay on top of inventory is a POS system. Since it tracks everything that comes into and goes out of your business, it’ll help you closely monitor and manage your product. Want to learn more? Contact True POS today.

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