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Top 8 inventory management best practices

Oct 06, 2022 - Lars Anderson
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It’s easy to underestimate the importance of inventory management. Inventory management is just one part of order management, but you must do it properly for your business to run smoothly.

Here’s a quick check to see how strong your inventory management is — what is your current inventory turnover rate? Inventory turnover rate is an accounting measurement that tells you how often you use (and replace) items in your inventory over a set period.

A high inventory turnover rate shows that your business consistently uses the inventory in stock. Conversely, a poor inventory turnover rate can cause unsold stock and indicate gaps in your inventory management.

Whatever your result, your business should always try to manage inventory levels as efficiently as possible. Better inventory management will ensure you never have too much or too little in stock.

The main benefits of managing inventory levels include:

  • Reducing risk. Your inventory is one of the most valuable assets for your business. It’s also vulnerable to damage and theft. The proper inventory levels mitigate these risks.  
  • Improving customer satisfaction. Customers, especially modern customers, don’t want to wait for their items. Shipping delays due to stockouts hurt your customers and brand reputation. Improved inventory management can prevent these stockouts and boost customer satisfaction.  
  • Increasing cash flow. When you hold excess inventory, you’re unnecessarily tying up your resources. Changing your inventory management so you only bring in stock that you’ll use or sell will keep cash moving through your business.

Managing your inventory levels using robust inventory management solutions will improve your business both operationally and financially. Unfortunately, it’s not without its challenges.

Common inventory challenges that businesses face

There’s a wide variety of inventory challenges your business might face, but below are four of the most common ones.

Incorrect data

Knowing what inventory you have and how much of each item is in stock at any given time is essential. It may have been possible to count inventory only once a year in the past, but that’s not the case anymore.

Effective inventory management relies on accuracy, so incorrect data can be costly.

Suppose your inventory records indicated that you have plenty of one of your business’s popular products in stock. You would list this product as available, and orders would keep rolling in. But wait — those inventory records were wrong. You actually have dangerously low stock of the product.

At that point, your customer service would need to reach out to customers to let them know the product they ordered is now out of stock. Customers would complain. Your brand reputation would take a hit. These are just some of the pitfalls of having incorrect inventory data.

Any inaccuracies in your data can lead you to make decisions based on bad information. Plus, having to correct inaccurate information about stock levels wastes precious time and resources.

Tracking discrepancies

Some businesses use different spreadsheets and software as part of a manual inventory tracking process. Not only is this inefficient and time-consuming, but physical counts are also prone to producing tracking discrepancies.

Some causes of inventory discrepancies are:

  • Theft
  • Losing items in the distribution facility
  • Faulty returns processing
  • Damage
  • Supply chain glitches

You never want to have two (or more) contradictory records of what you have in your inventory. You’ll have to investigate which record is accurate if you encounter these tracking discrepancies.

Fluctuating customer demand

Customer demand changes constantly, and businesses are left scrambling to make new forecasts.

If you overestimate customer demand, you may end up with obsolete inventory that you can’t sell taking up storage space. However, if you underestimate demand, your business will experience costly stockouts.

Part of inventory management is finding a way to execute demand forecasting as accurately as possible. You should adjust your inventory levels accordingly when your forecasts predict increases or decreases in consumer demand.

The more accurate your demand forecasts are, the better your business will be equipped to meet that demand without losing money.

Poor organization

A poorly organized warehouse means your employees will struggle to locate and identify your inventory stock. This poor organization often leads to delayed shipping times and lower customer satisfaction in the long run.

Rather than letting poor organization hurt your business, consider reorganizing with a new inventory management strategy.

Inventory management best practices you should follow

The following inventory management best practices will help you avoid some of the more common inventory problems.

1. Use an inventory management software system

Gone are the days of having to do all your inventory management manually. Today, you can use inventory management software to track and manage your inventory with ease.

Inventory management software is a tool for automating your inventory management system. The software tracks your inventory and automatically updates your inventory records when you make a sale. You can also set the software to create purchase orders once your inventory hits a certain level.

Keep in mind that not all inventory management software systems are created equal. The inventory management software you choose should be effective and reliable to improve your business operations.

2. Organize your warehouse layout

Given that poor organization is a common inventory challenge, it’s no surprise that organizing your warehouse layout is one of the best practices for inventory management.

Organize your warehouse layout by considering your business’s typical orders and fulfillment process. Then, apply these guidelines:

  • Keep products that are frequently purchased together close to each other.
  • Make sure your best-selling products are the most accessible.
  • Clearly label the aisles in your warehouse.
  • Store seasonal products in mobile shelving units.
  • Set up the warehouse flow in the order of operations (e.g., from inventory receiving to storage to packaging to shipping).

An optimized warehouse layout makes your staff and processes more efficient, improving your bottom line. Being strategic with your warehouse layout also helps maximize your order fulfillment.  

Don’t let the fear of overhauling your warehouse layout stop you from reaping the benefits of better warehouse management and organization.

3. Set periodic automatic replenishment (PAR) levels

Periodic automatic replenishment (PAR) levels are limits you can set on the maximum and minimum inventory levels for your materials and products.

When a particular item's inventory starts approaching the lower limit, that’s when you should reorder it. The maximum set inventory level keeps you from ordering too much of an item which can lead to inventory loss.

Every business is different, so look over your inventory analytics to find trends in your past usage. This data should guide the PAR levels you set. Together, the two PAR levels boost your inventory management techniques.

4. Consider batch tracking

Batch tracking, sometimes also known as lot tracking, is a process that lets you trace and monitor groups of items through your supply chain.

“Batches” in batch tracking are goods with similar characteristics, such as their supply chain sources, manufacturing dates and locations and the parts/materials used to make them. Knowing all this information about products from each batch can be highly valuable down the line.

Suppose a customer buys one of your products and reaches out to say it’s defective. If you use batch tracking, you can easily pull up which materials the manufacturer used to produce the product and when and where they produced it. You could then check all the other products from the same batch for issues and remove any that are also defective.

5. Forecast customer demand

Customer demand is often volatile, but it’s especially unpredictable lately. Changes in customer demand also have significant ramifications for your inventory management. That’s why forecasting customer demand needs to be a top priority.

Unfortunately, accurately forecasting customer demand isn’t easy. The more products and promotions you offer, the more difficult it becomes. You'll struggle to make accurate predictions if you rely only on spreadsheets and manual calculations.

Automation is the key to modern demand forecasting. Many intelligent inventory management systems include artificial intelligence-supported forecasting, so consider using one in your business to take your forecasts to the next level.

6. Do regular stock audits

It may be tempting to put off your stock audits repeatedly, but you should resist that urge. Frequent stock auditing reduces the risk of human error in your inventory data and gives you recent, reliable stock data.

Daily cycle counting is one stock auditing process you should consider implementing. If that’s too frequent, settle into a different (but still regular) stock audit schedule.

Beyond a basic physical count, you can also apply other inventory audit procedures. such as:

  • Cut-off analysis. Pause all operations like shipping and receiving inventory to conduct a physical count. Stoping operations helps prevent mistakes.
  • Freight cost analysis. Determine the shipping costs for transporting your goods and materials. Track how long after the date of shipment the goods arrive at their destination. This analysis will account for units in transit and include lost or damaged items.
  • Analytical audits. In an analytical audit, you compare your current inventory turnover ratio, inventory costs and/or gross margins with previous periods.

Any of these stock audits will improve your records, leading to better budgeting and potential for higher profits.

7. Work with reliable suppliers

Finding reliable suppliers can be challenging. If you want to improve your company’s inventory management, it’s vital to work with trustworthy, consistent business partners.

Consider the process of finding reliable suppliers a preventative measure. The cheapest local supplier may seem like a good option initially, but think about what will happen to your business if that supplier can’t deliver as promised. It could bring your whole production process to a halt. You’d go through your remaining inventory and be stuck with a serious inventory problem.

Over time, working with reliable suppliers will reduce costs, increase product quality and simplify inventory management.

Given how critical working with reliable suppliers is, you may want to devote time and resources to supplier relationship management (SRM). SRM helps strengthen your supplier relationships to create a smoother, more streamlined supply chain for your business.

8. Have a backup plan

Even if you implement all the other inventory management best practices, you will eventually experience an inventory problem. That’s just the way things go. Your business needs to have a backup plan for dealing with that problem when it happens.

Some of the factors to keep in mind while creating your backup plan include:

  • Secondary suppliers. If one of your critical suppliers can’t deliver, who will you turn to for goods or services in your supply chain? Keep a list of secondary suppliers you can turn to in case of a problem with one of your primary suppliers.
  • Customer notifications. In the worst-case scenario, you’ll have to contact key customers to inform them about your inventory issue.
  • Insurance. You may want to consider business interruption insurance to protect against losses caused by supplier issues.
  • Secondary records. Without your inventory list, it will be difficult — or impossible — to implement essential inventory management solutions. Make sure you have secondary copies of the list in the form of a local copy, a local backup and an offsite backup.

Hopefully, you’ll never need to implement your backup plan. But if you do, you’ll be glad you made one.

Better inventory management for bigger business growth

Improving your inventory management creates opportunities for your business to grow and succeed at new levels.  

So, what are you waiting for? To get more help with your inventory management, book a demo with Cart.com. As the experts in Ecommerce growth, Cart.com can transform how your business manages inventory.

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