Take Control of Your Stock: 10 Inventory Management Best Practices
Inventory mismanagement costs global businesses a staggering $1.77 trillion USD, according to IHL research.¹
The issues caused by stockouts and overstocks don’t just hurt your bottom line. They disrupt operations, damage customer trust and hinder your growth.
The key to avoiding these pitfalls is proactive, strategic inventory management. By implementing proven strategies in your business, you can reduce stockouts, minimize waste and make sure your business operations are efficient.
In this article, we’ll cover 10 actionable best practices you can follow to help you take control of your inventory and set your business up for long-term success.
1. Categorize Your Inventory Using the ABC Method
What Is It?
The ABC method divides inventory into three categories:
A: High-value, low-quantity items. Think luxury goods, custom-made products or fancy electronics. These are the type of items that bring in the majority of your revenue.
B: Moderate-value items with moderate demand. These are your mid-range products, popular seasonal items and some raw materials.
C: Low-value, high-quantity items. For example, everyday consumer goods, cheap components or packaging materials. These take up a lot of space, but don’t bring in a lot of cash.
Why It Helps
This method helps you focus on the right things, so you can have the right amount of stock, save money, and improve your overall business performance.
By knowing which items make you the most money and need the most attention, you can:
Keep the right amount of stock: Make sure you have enough of the high-value items (Category A) to meet demand without overstocking and wasting money.
Cut down on storage costs: Save on storage, insurance, and other costs by getting rid of excess inventory, especially the low-value items (Category C).
Get orders out fast: Prioritize restocking high-demand items to avoid running out and keep customers happy.
Get better deals with suppliers: Negotiate better prices for high-value items (Category A) based on how much you buy and how important they are to your business.
Tips for Applying It
Check your numbers: Look at your sales, costs, and carrying costs for each item. Use this info to sort items into A, B, and C categories.
Set some rules: Decide what fits in each category based on your business and industry standards. For example, you could say items that make up 80% of your revenue are Category A, items that make up 15% are Category B, and items that make up 5% are Category C.
Keep things up-to-date: Stay on top of changes in demand, pricing, and supplier lead times. Adjust your ABC categories as needed.
Use tech tools: Inventory management software like Goflow can automate the ABC analysis, track inventory levels, and create reports.
2. Apply the 80/20 Rule (Pareto Principle)
What Is It?
The Pareto Principle states that 20% of your inventory will usually generate 80% of your sales. By identifying and focusing on this critical 20%, you can maximize your profitability.
This approach aligns well with the ABC method above, and categorizing your inventory in this way will help you focus on the 20% of inventory that generates 80% of your sales.
Why It Helps
The Pareto Principle helps you to prioritize where you spend your time and money. You’ll focus on the items that are really bringing home the bacon, and eliminate some of the duds that are not pulling their weight. This means you can streamline your inventory, improve cash flow and make more money.
Tips for Applying It
Use tech to your advantage: Inventory management software and analytics tools can help you track sales, spot trends, and automatically reorder your best-selling products. Look at sales numbers, profit margins and how quickly items sell to find your winners.
Sort your inventory: Use the ABC analysis method (see above) to categorize your inventory based on value and sales volume.
Give your top performers extra attention: Once you've found your top 20%, make sure you always have them in stock. Invest in marketing and promotions for these items, and maybe even offer discounts or bundle deals to boost sales.
Keep things fresh: The 80/20 rule isn't set in stone. Your top products might change over time due to market trends, seasons, or what customers want. Regularly check your sales data and tweak your inventory strategy as needed.
Look at the big picture: While the 80/20 rule is a good guideline, don't just rely on sales numbers. Think about profit margins, customer demand, and how long a product usually lasts when making inventory decisions.
3. Implement Real-Time Inventory Tracking
What Is It?
Real-time inventory tracking uses software to give you up-to-the-minute info about your stock levels. This includes everything - from what you have ready to sell to what’s coming in to what’s going out. This allows you to check your data regularly, change your strategies when you need to and stay ahead of the competition.
Why It Helps
Real-time inventory tracking is a game-changer, because you always know what you have. This prevents you from running out of stock and losing sales, but also from having too much stock and wasting money.
Plus, the other benefits include:
Orders Done Right: Accurate inventory data makes getting orders out the door faster and smoother. You can tell customers if you have what they want, give them good shipping estimates, and not keep them waiting.
Receiving Made Easy: Real-time tracking makes taking in new stock way better. You can instantly see what's arrived, check if the numbers match, and update your records right away.
Smart Decisions: Real-time inventory data shows you what's hot, what's not, and what customers want. This helps you decide what to buy, how to price things, and when to run promotions.
Tips for Applying It
Get Inventory Management Software: Use a good inventory management system like that tracks everything in real time, such as Goflow. Connect it to your online store, cash register, and other stuff so everything matches up.
Low-Stock Alerts: Set up your system to tell you when you're running low on something. This lets you order more before you run out.
Track the Right KPIs: Keep an eye on important numbers, like how fast your inventory sells, how long stuff sits around, and how often you run out. This shows you how well you're managing things.
4. Understand Your Economic Order Quantity
What Is It?
Economic Order Quantity is a formula used in inventory management. It calculates the best order quantity a company should buy to minimize inventory costs, which include holding costs and ordering costs. This formula finds the balance between keeping enough inventory to meet demand without having too much stock on hand.
The EOQ formula is EOQ = √(2DK/H).
D = The number of units purchased of a particular product annually.
K = The order cost per purchase order.
H = Annual holding cost per unit.
Another way to explain this is that the EOQ equals the square root of 2 times (the annual demand in units, multiplied by order cost per purchase order), divided by annual holding cost per unit.
Remember: for the value of D, we’re talking about the number of units you sell each year, not the value of said units. When it comes to the order cost per purchase unit, we’re talking about what it costs for your business to sell each individual unit.
The Annual Holding Cost per unit is also known as the Carrying Cost and it’s the amount your business spends per unit, per year on carrying inventory. You can figure out your annual holding cost per unit with this formula:
Capital costs + inventory service costs + inventory risk costs + inventory storage costs, divided by average inventory value.
“Capital Costs” are the actual cost of your products/materials, as well as any other costs such as interest and fees.
“Inventory Service Costs” refer to the costs related to holding any products, such as insurance premiums and IT software and hardware.
“Inventory Storage Costs” refer to the costs associated with operating your storage facility, such as shipping, utilities and leasing.
“Inventory Risk Costs” include any costs that might reduce the saleability or value of your inventory, such as obsolescence, reduced market demand, theft or shrinkage.
Why It Helps
By figuring out the EOQ, businesses can:
Reduce Inventory Costs: EOQ helps avoid excess inventory, which ties up money and incurs storage, insurance, and potential obsolescence costs.
Minimize Stockouts: EOQ ensures adequate inventory levels to meet customer demand, preventing stockouts and lost sales.
Improve Cash Flow: Efficient inventory management frees up cash that can be used for other business operations.
Optimize Ordering Processes: EOQ streamlines the ordering process by determining the most cost-effective order quantity and frequency.
Tips for Applying It
Adjust for Seasonality: If your business experiences seasonal fluctuations in demand, adjust your EOQ calculations accordingly to avoid overstocking or stockouts during peak or slow periods.
Use Inventory Management Software: Tools like Goflow can automate EOQ calculations, track inventory levels, and generate reorder alerts, saving time and reducing errors.
Don’t Forget to Account for Carrying Costs: Accurately calculate carrying costs, including storage, insurance, and potential obsolescence, to optimize your EOQ.
Evaluate Ordering Costs: Consider all costs associated with placing an order, such as shipping, handling, and administrative costs.
5. Set Reorder Points and Safety Stock Levels
What Is It?
When your stock gets low, how do you know when to order more? You determine your reorder point. Setting an accurate reorder point will make sure you never have products out of stock while you wait for new inventory.
To calculate your reorder point, you can use this formula:
Reorder Point = (Lead Time x Demand Rate) + Safety Stock
Lead Time is the amount of time it typically takes for product shipments to arrive, and demand rate refers to the average daily unit sales.
You should also have a backup plan in the form of safety stock. This is the extra stock you keep on hand just in case you have a sudden rush of orders, or your supplier is running late.
Why It Helps
The main purpose of selecting a reorder point will let you know when to order more, so you don’t end up empty-handed and disappoint your customers. And of course, safety stock acts like a cushion. If you get more orders than usual or your supplier messes up, you’ll still have enough to keep your customers happy.
With the right reorder points and level of safety stock, you’ll avoid having too much stock taking up space and costing you money, but you’ll also never run out and miss out on sales.
Tips for Applying It
Factor In Demand Changes: If demand goes up and down a lot, you might need to adjust your reorder point and safety stock.
Don’t Forget About Supplier Delays: If your supplier isn't always reliable, you might want more safety stock, just in case.
Consider Seasonal Fluctuations: If you sell more at certain times of the year, adjust your reorder point and safety stock accordingly.
Use the Right Software: Tools like Goflow can help you figure out the best reorder points based on your sales and inventory.
6. Use Inventory Forecasting
What Is It?
Inventory forecasting is way to predict how much of a product customers will want in the future. It looks at past sales, what’s hot right now, as well as other things that might affect how much people will buy.
Why It Helps
Good inventory forecasting helps your cash flow by making sure you don’t have too much money tied up in things you don’t need right now, and that you have enough to meet customer demand. When you have what customers want, when they want it, they’re way more satisfied and likely to come back.
Inventory forecasting isn’t a one-and-done thing, it’s something you should always be checking, analyzing and adjusting. When you use high quality inventory forecasting tools, you’ll have the right amount of stock, save money and run your business more smoothly after all.
Tips for Applying It
Check Out Your Past Sales: Look at how much you sold in the past, any seasonal trends, and other important things. This helps you see patterns for future demand.
Keep an Eye on Things and Adjust: Always check how your actual sales compare to what you predicted. Change your predictions as needed based on new info and what's happening in the market.
Use Tech Tools: Software like Goflow will help you analyze sales data, predict demand, and give you tips on how much of each stock to keep around.
Unprecedented Things Can Happen: Historical data isn’t always 100% guaranteed as a promise of what will happen next. Unexpected things can happen - such as pandemics, natural disasters and other big-impact events.
7. Automate Inventory Management Tasks
What Is It?
There are many inventory management tasks that you can automate, so they don’t have to be done manually. This includes order tracking, updating inventory levels, creating purchase orders, processing sales orders and sending alerts when stock is low.
Why It Helps
Smart automations can transform your business by saving a ton of time and effort on repetitive tasks. This means your employees can be freed up to focus on more important things.
By minimizing manual data entry and calculations, automation will also drastically reduce the amount of potential errors that could mess up your inventory records, cause stockouts or lead to overstock situations.
Plus, automation makes everything faster and gives you real-time visibility into your inventory levels and movements. This will boost your efficiency, as well as save you money, make your customers happier with faster orders and help you make better decisions based on accurate and up-to-date inventory data.
A great example of the power of automation is our client, DJ Direct. Before automation, the complicated process of placing a purchase order used to take their buyers an average of 21 days. After using Goflow, 90% of the data is supplied automatically and buyers have cut this task down to 5 days, even for complex purchase orders. That’s a time savings of 16 days from every purchase order cycle!
Tips for Applying It
Identify Repetitive Tasks: Start by looking at your inventory management processes and finding tasks that are repetitive, time-consuming, and prone to errors. These are the best tasks to automate.
Choose the Right Tools: Look for inventory management software or platforms, such as Goflow, that have automation features that fit your needs. Think about things like ease of use, scalability, integration capabilities with other systems, and cost.
Implement Automation Gradually: Start by automating a few key tasks and gradually expand as you get more comfortable with the technology and processes.
Set Up Alerts and Notifications: Configure the system to send alerts and notifications for critical events, like low stock levels, order confirmations, or shipment delays. This helps you take action quickly and avoid stockouts or customer service issues.
Monitor and Measure: Regularly track the performance of automated processes and measure key metrics, like order processing time, inventory accuracy, and customer satisfaction. This shows you where you can improve and optimize the automation setup.
8. Implement FIFO (First In, First Out)
What Is It?
FIFO (First In, First Out) is an inventory management system that is all about selling stock based on when it arrived. The oldest items that entered the inventory first get sold first, ensuring that products don’t collect dust on shelves for too long.
Why It Helps
One of the main advantages of FIFO is that it minimizes your risk of spoilage and waste, especially for perishable goods with expiration dates. It also helps you to keep your products current, making your your customers always get the freshest version available.
Plus, FIFO benefits your cash flow by preventing inventory from becoming stagnant. It makes accounting easier, as you’ll have a straightforward and consistent way to value your inventory and calculate COGS (Cost of Goods Sold). Using FIFO can help you improve your inventory management, reduce waste and boost your overall profitability.
Tips for Applying It
Organize Your Space: Arrange your warehouse or stockroom in a way that makes FIFO easy. This might mean designating specific areas for new and older stock or using clear labeling and date codes.
Educate Your Team: Make sure everyone who handles inventory understands and follows the FIFO method.
Use Tech Tools: Inventory management software like Goflow can automate FIFO calculations and track expiration dates, making the system easier to manage.
Regular Check-Ups: Conduct periodic inventory reviews to find and deal with any slow-moving or outdated items that might need to be discounted or removed from stock.
9. Diversify Your Suppliers
What Is It?
Do you have a supplier who is unreliable, regularly late with deliveries, or frequently shorts your order? You don’t have to keep letting them cause problems for your business. In order to avoid these types of issues from coming up again, it’s a good strategy to diversify your suppliers.
Why It Helps
When it comes to your suppliers, there’s a lot of advantages to building up a diverse supplier base and not having all your eggs in one basket. It will make your supply chain more resilient and protect you from unexpected disruptions such as natural disasters, political unrest or financial instability.
If one supplier falls through, you can quickly switch to another, ensuring a steady flow of inventory and minimizing your risk of running out of stock. Also, a wider supplier base can get you better pricing and contract terms and delivery schedules, as you will be in a better position for negotiation.
Tips for Applying It
Test the waters with small orders. Before committing to a huge order, try out a smaller purchase to see if the supplier is reliable, check the product quality, and see how they communicate. This lets you catch any potential problems early on and avoid costly mistakes.
Have a backup plan. Always have a list of alternative suppliers ready, just in case your main supplier has problems. This proactive approach ensures you're never left scrambling to find inventory at the last minute.
Use tech to track supplier performance. Use tools like Goflow or other inventory management software to keep an eye on supplier performance metrics like on-time delivery, product quality, and communication. This data-driven approach helps you find the best suppliers and get rid of those who aren't reliable.
Consider geographic diversity. Sourcing from suppliers in different regions or countries can reduce the risk of disruptions caused by local events.
Regularly check on your suppliers. Every now and then, review your supplier performance and market conditions to make sure your supplier base is still diverse and meets your business needs.
10. Integrate Inventory Data Across Platforms
What Is It?
You’ll find running your business a lot easier if all of your stock information exists in one place. This way, you know how much stock you have at all your online stores, warehouses and everything else - and it’s always up-to-date.
Why It Helps
Integrating your inventory data across platforms saves you from the headache of conflicting stock counts. You’ll never have a situation where one of your locations says you’re out of an item, but another says you still have it. This avoids any lost sales and unhappy customers who are frustrated by the lack of consistency.
Let’s take Jeannie N Mini for example, a kid’s clothing boutique store with products available on multiple marketplaces including Amazon, Nordstrom, Target, Macy’s and brick-and-mortar stores. By using Goflow to integrate inventory data across platforms, owner Jeannie Yoon is now able to manage and fulfill orders effectively.
“The best part is that I can check total daily sales across all channels each night before I go to bed,” explains Jeannie. “Previously, I had to navigate through multiple Shopify sites and individual channels to tally sales, which was not practical for daily monitoring. Now, it’s all at my fingertips on my phone, making it incredibly easy.”
Now that all their data is in one place, they can see exactly how much stock they have in real-time, which avoids overselling and makes customers happier.
Tips for Applying It
Use an Inventory Management System: Think about using a system like Goflow that works with your current setup. This automatically updates your stock numbers, saving you time and stopping mistakes.
Train Your Team: Make sure everyone knows how to use your new inventory system. This keeps everyone working together and managing stock like pros.
Check Your Data Regularly: Even with a well-set-up system, it’s a good idea to look over the numbers for any discrepancies.
Take Control of Your Stock With These Inventory Management Best Practices
Mastering inventory optimization isn’t just something you can do once and then forget about - it’s an ongoing process that requires commitment and continuous improvement. Continuous tweaks, optimizations and improvements will result in significant business benefits.
By implementing these 10 best practices, you can reduce waste, avoid stockouts and overstocking, streamline your operations and improve customer satisfaction. This doesn’t have to be difficult or time consuming, especially since there are great tools out there designed to automate the process and make inventory management easier.
Ready to take control of your inventory? Explore Goflow today and start optimizing your inventory management for long-term success.
Start today by scheduling a demo!
¹ IHL Group, Retail Inventory Distortion Study - The Good, The Bad, The Ugly - 2023: https://www.ihlservices.com/product/retail-inventory-distortion-study-the-good-the-bad-the-ugly-2023/