For startups, managing the inventory is easy. But when more sales come in as your business grows, that’s when it will be difficult. You could miss some sales, overstocked, and many more errors and problems might arise. On that point, you’ll wonder what you may have missed. What you may have done to avoid it. So let’s prepare for it. On this blog post, I’ll share the most common Inventory Process that well-established businesses use. And this is not just for preparing startups, anyone can use this if you’re having trouble managing your inventory.
What is The Inventory Process?
Let’s start with the basics. Inventory Process is a method of recording, analyzing, and managing the stocks in your physical inventory items. There are a lot of ways to do this, but with a reliable and effective one, you’ll enjoy these benefits:
- Assure and increase sales.
- Creates loyal customers.
- Reduce costs for storage.
- Less waste or spoiled stocks.
- Manage multi-channel sales.
- Inventory forecasting.
- Effective order management.
- Report data and analysis becomes centralized and comprehensive.
- Effective inventory control.
- Improved process and staff efficiency.
Awesome right? To achieve that, we have to focus on two essential parts of the Inventory Process methods which are: Forecasting and Organizing.
Inventory Process Method: Forecasting
First of all, this is not about doing a wild guess and hoping it will work. Forecasting is about analyzing your sales and marketing data to effectively manage your inventory. In other words, stock level optimization. And to do so, there are three methods that you should keep in mind.
- Preparing a Safety Stock
A safety stock for each of your items is your back up plan for any issues that a low inventory level may encounter. For instance, a sudden rise on the demands of a certain product. You don’t wanna miss out on those sales, and you don’t want your customers to look somewhere else. Another scenario is a stock issue from the supplier or manufacturer.
But how will you measure the level of your safety stock? By estimating and analyzing all your quarterly or yearly sales data. So you better have as much. And to manage those data, simply use this formula:
Safety Stock = ( Sales Volume of Top 3 Days / 3 ) – Average Daily Sales Volume
Note: Do not use your Safety Stocks for normal daily sales. Keep it in level and only use it as a backup.
- Choosing the Correct Reorder Points
In determining when you will need to reorder for new stocks, you have to have a basis. Overstocking may occur if you order too early. On the other hand, you might end up eating your safety stock level if you’re too late. Again, only use safety stock for issues like problems on the supplier or manufacturer that may cause delay to your products. In other words, only for unexpected or uncontrollable events.
So, to determine the reorder point, you need to analyze the time frame between ordering, delivery, and having the product prepared for sales. Let’s call it the Lead Time. You also need the data of your average daily sales over the past month, quarter, year, or so on. Lastly, the number of safety stock. Here’s the formula:
Reorder Point = (Lead Time in Days X Average Daily Sales Volume) + Safety Stock
- Figuring out Order Quantity
Economic Order Quantity or EOQ helps calculate how much you need to order. Because it’s important to keep your inventory to the optimal level. It also helps to keep the carrying cost to minimum level.
This calculation will still depend on your business data. First, you need the number of units sold over a given time period, like a year. That is the Demand. Next is the total cost associated with the per purchase order. That includes staff, transportation, etc. Lastly, the carrying cost per unit. You can get those data by analyzing all costs incurred on holding inventory in hand such as warehouse rent, insurance, spoilage costs, etc. The formula will be:
EOQ = Square Root of [((2 X Demand) X Order Cost) / Carrying Cost Per Unit]
Inventory Process Method: Organizing
Determining how you’ll organize your inventory in the warehouse is also important in managing it. Here we have three methods or tips that you can use.
- ABC Analysis
This method helps determine which one to prioritize over the others. All you have to do is divide all on-hand inventory into groups A, B, and C. You can also have a D to E or so. But that depends on your business industry. The groupings should go like this:
A items are: high value with low sales frequency.
B items are: moderate value with moderate sales frequency.
C items are: low value with high sales frequency
You could also make up a label for each level of sales frequency. But this will determine which group should be closer to the Packing and Shipping Area.
- FIFO or First-In-First-Out
This is the most common and simplest method yet effective. What has been stored first should be the first one to be packed and shipped. This is to avoid older items to be stuck in the warehouse and prevent damage, decay, or passing expiration date.
- Simple Location Labeling
When naming or labeling the warehouse area, row name, shelf number, etc., sticking with simple letters and numbers will keep everything organized. Therefore, the products will be easy to find by your team, and it won’t be hard for new recruits to learn it. For example, one of the warehouses is labeled as Area 1. Inside there are Rows that you can name A1, A2, A3, and so. Then on every row, there are shelves. You can label them Shelf 1, Shelf 2, and so on.
Pro Tip: To make this task easier, go automatic. An Inventory Management System or Program is available nowadays. Invest in the high-grade one to minimize errors and discrepancies. Go for the one can do things such as: automatically assigning counting tasks to team members with barcode scanners, smartphone-enabled, instant stock updates, etc.