Inventory management is something that any small business that deals with stock needs to be aware of. If you aren’t able to control inventory you run the risk of customers buying products that end up being out of stock, causing frustration for them and embarrassment for you.

But if you can manage inventory successfully, it can help you to run a seamless business that delivers customer delight as well as making it easier for you to keep track of your products. That’s why we’ve created this guide with everything you need to know about the management of inventory, including:

  • What is inventory management?
  • Why is inventory management important?
  • How to improve inventory management?

So here’s our small business guide to inventory management.

What is Inventory Management?

Before we get into how to do it, let’s discuss what is inventory management? It is a crucial process that businesses must implement to keep track of their stock of goods or products. This process involves overseeing and controlling inventory levels, managing the flow of goods in and out of a business, and ordering and receiving new stock.

First of all, what’s the difference between ‘inventory’ and ‘stock’? In retail businesses, inventory is often referred to as stock. Managers commonly use the term "stock on hand" to refer to products such as apparel and housewares. However, across industries, inventory more broadly refers to stored sales goods, as well as raw materials and parts used in production.

Difference between stock management and inventory management

Although some people suggest that the term "stock" is more commonly used in the UK to refer to inventory, the terms inventory and stock are often used interchangeably. While there may be a subtle difference between the two, the meaning is essentially the same.

The importance of inventory management

The importance of inventory management cannot be overstated, especially for businesses that sell physical products. Accurate inventory management helps businesses to avoid stockouts and overstocking, reduce waste and costs, and ensure that products are always available for customers.

Accurate tracking of inventory
Effective inventory management requires the implementation of accurate tracking systems, efficient ordering and receiving processes, and good communication and collaboration between different teams within a business. It involves several key components, including tracking inventory levels, setting inventory targets, ordering and receiving inventory, managing inventory flow, and forecasting demand.

Tracking inventory levels involves keeping track of the amount of inventory a business has at any given time, monitoring changes in inventory levels, and adjusting inventory levels as necessary. Setting inventory targets is crucial to ensure that inventory levels are aligned with demand, lead times, and supplier reliability.

Managing inventory flow
Ordering and receiving inventory involves placing orders for new stock, tracking the delivery of stock, and ensuring that the stock received matches the order. Managing inventory flow involves managing the movement of stock in and out of a business and ensuring that inventory is stored and handled properly.
Forecasting demand is also a critical component of inventory management. Businesses need to anticipate future demand for their products to plan their inventory levels and ordering processes effectively.

Effective inventory management can bring many benefits to a business. It can help to reduce waste and costs, improve customer satisfaction by ensuring that products are always available, and increase the overall efficiency of a business's operations.

Main methods of inventory management

There are three commonly used methods for accounting for inventory: first-in-first-out (FIFO) costing, last-in-first-out (LIFO) costing, and weighted-average costing. Typically, an inventory account is composed of four distinct categories:

  • Raw materials - these are the materials a company purchases for use in its production process. They require significant work to transform into a finished product ready for sale.Work in process (WIP), also known as goods-in-process - this category represents the raw materials that are currently being transformed into finished products.
  • Finished goods - these are the completed products that are readily available for sale to customers.
  • Merchandise - this category represents finished goods that a company buys from a supplier for future resale.
    Companies use different inventory management methods depending on the type of business or product being analysed. The most common inventory management methods include just-in-time (JIT) manufacturing, materials requirement planning (MRP), economic order quantity (EOQ), and days sales of inventory (DSI).
  • Just-in-Time Management (JIT) - JIT is a manufacturing model that originated in Japan in the 1960s and 1970s. This method enables companies to save money and reduce waste by keeping only the inventory they need to produce and sell products. While JIT can be risky, the approach reduces storage and insurance costs, as well as the cost of liquidating or discarding excess inventory.
  • Materials Requirement Planning (MRP) - MRP is sales-forecast dependent, meaning that accurate sales records are required for manufacturers to plan inventory needs and communicate them with materials suppliers. For instance, a ski manufacturer may ensure that materials like plastic, fibreglass, wood, and aluminium are in stock based on forecasted orders. Inability to accurately forecast sales and plan inventory acquisitions results in an inability to fulfil orders.
  • Economic Order Quantity (EOQ) - The EOQ model helps companies calculate the number of units to add to their inventory with each batch order to reduce total inventory costs while assuming constant consumer demand. The costs of inventory in the model include holding and setup costs. The EOQ model ensures that the right amount of inventory is ordered per batch so that a company doesn't have to make orders too frequently or have an excess of inventory sitting on hand.
  • Days Sales of Inventory (DSI) - DSI is a financial ratio that indicates the average time in days that a company takes to turn its inventory, including goods in progress, into sales. This ratio represents the liquidity of the inventory and how many days a company's current stock of inventory will last. Generally, a lower DSI is preferred, indicating a shorter duration to clear off the inventory, although the average DSI varies from one industry to another.

In summary, inventory management is an essential process for any business that deals with physical products. By implementing effective inventory management practices, businesses can reduce waste and costs, improve customer satisfaction, and increase operational efficiency.

Inventory management system

That’s inventory management in a nutshell, but what is an inventory management system? It’s a software tool or platform that helps businesses manage and track their inventory levels, orders, and sales. It typically includes features such as inventory tracking, order management, and reporting capabilities.

With an inventory management system, businesses can automate many of their inventory-related tasks, such as stock tracking, ordering, and receiving. The system can also provide real-time updates on inventory levels, allowing businesses to quickly identify and address any shortages or overstocks.

Some inventory management systems also include forecasting and analysis tools that can help businesses predict demand and plan their inventory levels accordingly. This can help to prevent stockouts and overstocks, which can lead to lost sales or wasted resources.

It’s possible to use your POS or EPOS for inventory management and other business operations, which can streamline your processes. However, you need to make sure you are using the right kind of card machine for payments as an app-based card reader may not be the most effective solution as they will only integrate with an EPOS from the same company, while Dojo card machines can slot in with pre-existing systems.

Overall, an inventory management system can help businesses to streamline their inventory management processes, reduce costs, and improve efficiency. It can also provide valuable insights into inventory trends and performance, helping businesses to make data-driven decisions about their inventory management strategies.

Why is inventory management important?

Now we’ve covered an introduction to it, why is inventory management important for businesses? Proper inventory management is crucial for several reasons:

  • Avoiding stockouts and overstocking - Inventory management helps businesses maintain optimal stock levels, avoiding the risk of running out of stock and losing sales. It also prevents overstocking, which can tie up cash and storage space.
  • Reducing waste and costs - Efficient inventory management minimises waste by reducing the amount of unused or expired stock. It also lowers costs by decreasing the need for excess inventory storage and reducing the cost of carrying inventory.
  • Improving customer satisfaction - Effective inventory management ensures that products are always available when customers want them. This can enhance customer satisfaction and help build customer loyalty.
  • Increasing operational efficiency - Proper inventory management streamlines the flow of goods and minimises the time and effort required to manage inventory. This can improve the overall efficiency of a business's operations.
  • Enhancing decision-making - Inventory management systems provide valuable data on stock levels, sales trends, and supplier performance. This information can be used to make informed decisions about inventory levels, ordering processes, and supplier relationships.

In conclusion, inventory management plays a crucial role in the success of businesses by avoiding stockouts and overstocking, reducing waste and costs, improving customer satisfaction, increasing operational efficiency, and enhancing decision-making.

How to improve inventory management?

It’s clear that proper inventory management is crucial for businesses, but you may be wondering how to improve your inventory management. Inventory management poses several challenges for businesses, including overstocking, understocking, inaccurate inventory information, and inefficient processes.

These challenges can hinder a company's ability to meet customer demand and can result in lost sales and increased costs. Some of the main challenges include:

  • Accurate stock details are crucial to inventory management. Without them, companies cannot determine when to replenish stock or which items are in high demand. Poor processes, such as outdated or manual processes, can lead to errors and slow down operations.
  • Changing customer demand is another obstacle to effective inventory management. Customer preferences and trends can shift rapidly, and businesses need to be able to track these changes to adjust their inventory levels accordingly.
  • Using warehouse space efficiently is also a challenge. If products are not organised and easily accessible, staff may waste time searching for items, causing delays and inefficiencies.
  • Mastering inventory management can help businesses overcome these challenges. By implementing accurate inventory tracking systems, efficient processes, and regular monitoring of customer demand, businesses can optimise their inventory levels and improve their bottom line.

Here are some tips to deal with these challenges and have an efficient inventory management process:

Adopt an automated inventory management system

Manual inventory management can be time-consuming, error-prone, and inefficient. Adopting an automated inventory management system can help you streamline your inventory management process, reduce errors, and save time. Automated inventory management systems can track inventory levels in real-time, send automated alerts when stock levels are low, and provide valuable data on sales trends, supplier performance, and inventory turnover.

But how do you know the best inventory management software? Luckily, most EPOS systems have inventory management built in. This means you can automatically track your stock and get alerts to let you know when you’re running low on anything.

Set inventory levels based on demand

One of the most critical aspects of inventory management is setting inventory levels based on demand. If you have too much inventory, it can tie up cash and storage space, increase the risk of waste and obsolescence, and lead to higher carrying costs. On the other hand, if you have too little inventory, you may experience stockouts, which can lead to lost sales, reduced customer satisfaction, and missed opportunities. By setting inventory levels based on demand, you can ensure that you have enough inventory to meet customer needs without overstocking.

Use the FIFO method

The first-in, first-out (FIFO) method is a common inventory management technique that helps businesses reduce waste and obsolescence. Under the FIFO method, you sell the oldest inventory first, ensuring that you are not left with expired or obsolete stock. By using the FIFO method, you can reduce waste, minimise storage costs, and improve your bottom line.

Optimise your warehouse layout

Optimising your warehouse layout can help you improve your inventory management process. A well-designed warehouse layout can help you reduce the time and effort required to pick, pack, and ship orders, improve inventory accuracy, and increase productivity. By organising your warehouse based on your inventory needs, you can reduce the risk of stockouts and overstocking and improve the overall efficiency of your operations.

Monitor inventory turnover

Inventory turnover is a crucial metric that can help you evaluate the effectiveness of your inventory management process. Inventory turnover measures how quickly you sell your inventory, and a high inventory turnover ratio indicates that you are selling your inventory quickly. By monitoring your inventory turnover, you can identify slow-moving inventory, adjust your inventory levels based on demand, and improve your overall inventory management process.

These are all the ways that you can improve your inventory management system, so why not check out how Dojo’s integrated payments technology can help you run your small business, from payments to virtual queues to inventory management.