Inventory Management Techniques for Small Businesses

Inventory management can be a huge challenge for small businesses that are still trying to learn the ropes of their industry, customers, and supply chains. The good news is that small business owners don’t have to manage inventory manually on their own. 

You can use inventory management techniques to manage stock so that you consistently have the right products at the right times to meet customer demand. 

What Is Inventory Management?

The main goal of inventory management is to help companies manage their stock so that they can meet changing consumer demands. Inventory management involves tracking and monitoring everything from the ordering to the storage and the shipment of all the different products you stock at any given time. It helps ensure that you have the right products in stock when demand is high and prevents excess inventory for products with lower demand. 

Inventory management focuses on three different types of inventory: raw materials, work-in-progress, and finished goods. It may also include safety stock and MRO goods. 

• Raw materials are the items that you use to make your finished goods 
• Work-in-progress goods are the items that are currently being manufactured 
• Finished goods are items that are completed and ready to be sold to customers 
• Safety stock are items that you keep aside in case of supplier shortages or unexpected boosts in demand
• MRO goods stand for maintenance, repair, and ordering and are used to support the manufacturing process

Why Does Inventory Management Matter?

Inventory management is an important component of any products-based business. But don’t just take our word for it; here are some reasons why you should care about inventory management: 

• Inventory management can help you save money by stocking the right items at the right times. That way, you don’t end up with excess stock in items that are not selling. You also don’t end up with item shortages that can cost you sales. 
• Inventory management can help you satisfy customers by providing them with the items they want promptly instead of waiting for them to come back in stock and potentially losing a sale in the process. 
• Inventory management helps you save time by doing the heavy lifting for you and providing you with valuable insights without having to do any tricky and time-consuming calculations. Instead, you have everything you need at your fingertips and in real-time. 
• Inventory management helps you grow your business by effectively tracking and managing these different components that only become more complex as your business grows. 

Understanding the Inventory Management Process

There are five stages in the inventory management process that you need to know about to understand how the process works: 

1. Purchasing: This involves buying items or materials that you are either going to sell or turn into products through production. 
2. Production: Involves producing a finished product out of the raw components gathered in step one. 
3. Holding stock: This involves storing both your raw components before the production process and your finished products after the production process until they’re sold. 
4. Sales: Involves actually selling finished products to customers and collecting payments. 
5. Reporting: Involves gathering information about sales, profits, and other key performance indicators (KPIs) to track the business’ success. 

How To Get Started With Inventory Management

There are countless ways to go about inventory management. So how can you choose the right approach and actually get started? 

First of all, you need to consider your pain points. What are you currently struggling with when it comes to your inventory? Are you constantly running out of your top-selling items? Are you wasting time and money on the excess stock in items that aren’t selling? Are you having a hard time predicting and anticipating consumer demand for different products? These are all things that proper inventory management helps. 

From there, you need to consider how an inventory management tool can help you with these pain points. There are countless tools out there to consider depending on your industry and other needs. Here are some of the best inventory management tools that you may want to look into: 

• Zoho Inventory: Includes stock management, order management, vendor management, accounting, CRM, and shipping integrations ideal for small and mid-sized retail businesses. And while this tool allows you to track every unit of inventory you have, it does not have forecasting ability. Plans start at $39 a month for the “Basic” plan and reach up to $199 a month for the “Professional” plan. 
• QuickBooks Inventory Management: Includes order management, advanced pricing, field service management, accounting, advanced reporting, and advanced inventory capabilities ideal for medium-sized businesses. This tool can either be used on the web or on the premises. This is a more expensive inventory management tool with plans starting at $750 a month and reaching $1,550 a month. 
• Stitch Labs: Includes invoice, order, and shipping tracking from multiple different locations with multiple users. All of the data from this tool can be easily exported into a PDF or even into Google Drive. It’s ideal for growing businesses, and the price depends on the volume of your sales orders. 
• SellerCloud: Includes shipment handling, scheduled listings, and customer feedback management ideal for growing e-commerce businesses. It easily integrates with payment gateways, shopping carts, e-commerce apps, and more—including eBay and Amazon. Plans start at $1,000 per month but may be higher depending on your service requirements. 
• ChannelAdvisor: Includes paid marketing capabilities, analytics and reporting, and synching with multiple channels so that you can access a variety of different platforms, including Google, Facebook, and more. It’s ideal for businesses that are looking for more than just inventory management from their tools—as it also incorporates digital marketing. The price of this tool depends on the specific features you’re interested in. 

The Best Inventory Management Techniques for Small Businesses

Here are some of the different inventory management techniques that may be beneficial for your small business: 

• Just-in-time (JIT) inventory: Involves keeping stock levels as low as possible to eliminate extra costs
• ABC inventory: Involves classifying items based on popularity wherein “A” items are the most popular, “B” items are somewhat popular, and “C” items are unpopular
• Perpetual inventory: Involves recording stock sales and usage after every purchase and in real-time 
• Minimum order quantity: Involves ordering the least amount of inventory possible at a time to keep costs low
• Economic order quantity (EOQ): Involves ordering the right amount of inventory based on a formula designed to reduce costs
• Materials requirements planning (MRP): Involves planning, scheduling, and inventory control for the manufacturing process
• First in, first-out (FIFO): Involves moving the oldest stock first
• Last in, first-out (LIFO): Involves moving the most recently-purchased inventory first 
• Dropshipping: Involves outsourcing stock management tasks by shipping directly from a warehouse to the customer
• Bulk shipments: Involves buying, storing, and shipping inventory in bulk to cut down on costs
• Consignment: This involves only paying a supplier when your products are sold, in theory, to save money and decrease risks

Final Thoughts on Inventory Management

Based on this information, you should identify inventory management techniques and tools that work for your small business. However, inventory management is just one aspect of running a small business. So for more small business pointers and guidance, check out our blog! 

Sources:

1. ​Inventory Management Definition - Accounting | Investopedia
2. The 4 Essential Elements of Inventory | Entrepreneur
3. 13 Best Inventory Management Software of 2021 (Free Guide) | Adam Enfroy