Achieving and Maintaining the Right Inventory Balance
Inventory planning is unpredictable by nature. The slightest shift in market conditions could tip the scale, and could end you up with excessive stock or too little inventory to keep up with demand. Too much inventory may force you to discount heavily to move excess stocks while too little inventory may mean missing out on sales due to out-of-stock items.
While there is no silver bullet that can fix these inventory management woes, there is one effective model you can implement to achieve the right inventory balance – and that is inventory management optimization.
What is Inventory Management?
As explained by Investopedia, inventory management refers to the process of ordering, storing and using a company’s inventory. These include the management of raw materials, components, and finished products, as well as warehousing and processing such items.
For the most part, inventory management is all about striking that balance and ensuring that you have the right stocks, at the right levels, at the right time, and at the right cost.
How to Optimize Inventory Management?
A properly optimized inventory management establishes the foundation of a strong supply chain. When you know which goods are stored in which warehouse and at what levels, you can guarantee on time-delivery, create accurate forecasts and increase customer satisfaction. Here are steps you can follow to fully optimize your inventory management.
Know which inventory metrics to monitor
Tracking inventory management metrics on a consistent and regular basis enables you to gain in-depth insights that can help you make informed decisions for your inventory. A good inventory management software should be able to track the following key metrics:
Gross Margin Return on Investment (GMROI) – This measures the amount of money you got back for every dollar you invested in your inventory.
Formula: GMROI = Gross Margin ÷ Average Inventory Cost
Inventory Turnover – This is the number of times inventory is sold within a set timeframe, which is typically on a monthly basis.
Formula: Inventory Turnover = Cost of Goods Sold ÷ Average Inventory
Stock to Sales Ratio – This measures the average stock available for sale versus the stock that has been sold.
Formula: Units available ÷ Units sold
Average Days To Sell Inventory – This shows you how long it takes your stocks to turn into sales or the length that your money is tied up in inventory.
Formula: Average Days To Sell Inventory = (Your Average Inventory/The Cost of Goods Sold) x 365
Sell through Rate – This tells you the percentage of available items sold during a specified period of time.
Formula: Units sold ÷ (Units sold + On-hand inventory)
Back Order Rate – This measures the number of orders that cannot be filled at the time a customer places them.
Formula: (# of Customer Orders Delayed due to Backorder ÷ Total # of Customer Orders Placed) x 100
Order Cycle Time – Also known as order lead time, this metric measures the time from when a buyer places an order to when they receive their purchased item.
Formula: Cycle Time = Actual Ship Date – Customer Order Date
Sales Revenue – This is the income the business receives from its sales of goods.
Formula: Sales Revenue = Units Sold x Sales Price
Demand Forecast Accuracy – This reflects the variation in actual demand and what is forecasted at the factory level.
Formula: Mean Percentage Error = ((Actual – Forecast) ÷ Actual) x 100
Factors that can affect product demand
There are several factors that can influence the demand for certain goods. These include:
- Income levels
- Consumer tastes and preferences
- New trends and seasonal changes
- External factors such as natural disasters
Although it is difficult to forecast demand perfectly, the key to accurate demand forecasting and inventory planning comes down to a systematic, data-driven approach.
Understand supplier performance
Manufacturers, suppliers, vendors and the like play a key role in the success of your Amazon store. In order to keep your operation running smoothly, you should stay on top of your supplier’s manufacturing and delivery schedules. Having a formalized supplier tool in place is your biggest ally in this case. It is also important that you build a healthy relationship with them on the get-go.
Tracking and evaluating your supplier’s performance is essential to the smooth operation and profitability of your business. Here are a few criteria you need to consider when monitoring a supplier’s performance:
- Quality: Are products made according to the customer’s request? How many items are rejected per delivery?
- Performance: Do products arrive on time, in the correct quantity and without damaged parts?
- Communication: How long does it take them to respond to your requests? What are their preferred modes of communication?
- Capacity: How large or small can the supplier handle in terms of the quantity of orders?
- Costs: Is the supplier open to lowering fees based on your bids? Do they offer flexible payment terms? Are they willing to make deals for larger orders?
Moreover, it is essential to have contingency plans in place in case something go wrong. For instance, if you source your items from China, it would be wise to have an alternative sourcing country (e.g. India) or hold some inventory in reserve to cover any unexpected delays in delivery.
Keep records of what you have on hand
Make it a habit to review what you have in your eCommerce store, in stock, and in your warehouse (or in Amazon’s fulfillment center if you are an FBA seller). To efficiently audit your inventory, you may do cycle counting – a type of sampling technique which requires you to count a small amount of your stocks on a certain day without having to do an entire manual stocktake. You may perform this inventory check daily, weekly or monthly to give you a clear understanding how accurate your inventory records match up with what you actually have in stock on the shelves.
In addition, it is crucial to document all product information for items in your inventory – such as SKUs, barcode data, brand name, suppliers, countries of origin and category for which it falls under in the Amazon marketplace. A solid inventory management tool can be a useful ally to help you streamline all your data in one place.
Invest in inventory management technology
Many businesses use spreadsheet-based forecasting model to forecast future demand and handle their inventory. However, these forecasting methods tend to be very basic and do not examine all the variables and factors involved.
Working from one smart and centralized system ensures that information from different areas of the business can be consolidated and analyzed to deliver:
- Real-time data about stock levels
- Accurate restock suggestions
Purchasing stock requires significant amount of money. It is therefore important to predict demand accurately and manage inventory properly to ensure there is no surplus or undersupply of a product. In so doing, your business is positioned better to:
- Minimize oversupply and its associated costs such as storage, distribution, wastage and transportation
- Meet customer demand
- Sell items in the inventory quickly
- Improve profitability due to increased efficiency and reduction in overall costs
Remember, creating the balance between overstocking and understocking is not a guessing game. It is based on genuine insights provided by a predictive inventory management. A comprehensive inventory software will allow you to keep a close eye on your sales, orders, stock levels, transit details and other forms of inventory logistics.
If you need assistance in building a solid inventory management, contact us today. SellerMobile is equipped with a cutting-edge inventory manager that consolidates, tracks and evaluates critical inventory data so you can keep stocks at optimum levels at all times.