Experts Reveal 15 Inventory Management Best Practices for Retailers
Though it’s not the sexiest retail topic, inventory management is crucial for retail businesses. It can make or break your bottom line. Yet 43% of small businesses either don’t track inventory at all or use an antiquated manual method.
Without effective inventory management techniques in place, you make your business more susceptible to costly stockouts and related issues. Consumers experience out-of-stocks 1 in 3 shopping trips, according to one IHL Group report. The problem cost businesses $984 billion worldwide in just one year.
Polling was carried out with retail industry experts to find out their best practices when it comes to inventory management for retailers. Check out what they had to say:
Understand the relationship between sales and inventory
“Don’t just focus on top sellers when you’re figuring out your inventory buy and replenishment strategy. It’s important to consider the relationship between sales percent penetration AND inventory percent penetration so that you don’t miss opportunities to do more business.
For example, if you pull your sales results and see that cocktail dresses are 20% of your sales, and jumpsuits have only generated 4%, the instant reaction is to buy more cocktail dresses (not jumpsuits).
However, if you simultaneously look at your inventory results, you may see that while cocktail dresses generated 20% of sales, they represented 40% of your inventory, while jumpsuits generated 4% of sales but on 1% of your inventory.
Your initial instinct to buy more cocktail dresses and hold back on jumpsuits gets turned on its head. By considering the relationship of sales to inventory, you can see that you’re actually over-inventoried in cocktail dresses, and may be missing opportunities to sell more jumpsuits because you don’t have enough of them on the floor.
There are other factors that need to be considered when making assumptions about this relationship between sales and inventory, such as seasonality, whether an item is front-loaded to begin a season, etc. But looking at the numbers and then digging in further to help you make your decisions can optimize your merchandise’s selling potential, and help you avoid situations where you have more inventory than you need to do business.”
– Ani Collum, retail strategist, principal at Trade Collective, a commerce consultancy -
Manage residual inventory to control costs and preserve profit
“Customers don’t want to pay full price for merchandise that’s “leftover” at the end of a season and retailers don’t want to incur the additional costs of managing slow-selling stock. One important way to control hidden costs and preserve incremental profit between seasons is to manage residual inventory.
Residual inventory is what remains at the end of one selling season and is carried into the next season. A few examples include wool apparel and accessories that are on sale in the spring season or outdoor furniture sets that are marked down in the fall season.
There are three simple steps to effectively manage and minimize residual inventory:
Create season codes with style numbers when you enter items into your inventory management system. This can make analyzing sales and inventory by season a significantly easier task.
Identify your parameters for exception management and determine action steps for managing those exceptions. Run your sales and inventory reports consistently and frequently to help you identify the exceptions earlier in the season.
Partner inventory management best practices with retail merchandising strategies.”
– Chris Guillot, founder of Merchant Method and instructional designer of The Merchant Map -
Leverage On Automation
“Automate the [inventory management] process as much as you can. The most important thing a retailer can do when it comes to inventory management is to use a software or POS system that does the heavy lifting for you.
You’ll always have to do some physical counts to make sure your actual numbers match what’s in the system. But a POS will also show you which product categories are most profitable, what types of products are popular on which days of the week, and other valuable insights that can help you purchase more strategically.”
– Meaghan Brophy, senior retail analyst, FitSmallBusiness.com -
Focus on your customers first
“When it comes to inventory management, it’s undeniable that focusing on your best customers is key to future success. Your best customers shop the most often, spend the most, and already like your products. If you keep them happy, they’ll keep coming back. It’s all in the 80:20 rule that says that 20% of your customers are responsible for 80% of your profits.
Products that sell with your best customers are most likely to attract more customers who are like them. They’re a representation of market trends; understanding what your best customers want to buy from your business already sets you ahead of the pack.
Consistency in quality and product types will strengthen your brand. The more you deliver with products that appeal to your best customers, that are high-quality and also recognizable through branding, the more those products will sell themselves.”
– Sophie Macdonald, content marketing manager, Marsello -
Create a tech stack ecosystem
“Use technology: There is plenty of business software out there that has inventory-tracking functions. If used properly and completely, they can calculate your monthly inventory costs. Using these systems will track your product usage, and it will help with ordering accuracy.”
– Tony Deutsch, CPA, MT, CGMA, a shareholder with Concannon Miller, a CPA and business consulting firm -
“Previously, we had to go to the front of the store to get a physical count of inventory by site, record it by hand, and then look at a paper catalog to order via the phone from the supplier. By adding this technology, we’re able to save so much time and money.”
“For example, now we know there is some inventory that takes 12 months to move and we shouldn’t ever re-order it because it doesn’t move quickly enough. Technology helps us provide products that people actually want. We’ve gotten rid of around 8-10% of our inventory that wasn’t selling, and that has allowed us to bring on another 100 items that are selling better.”
– Dave Wilson, owner, Mom and Popcorn -
Make the most of surplus stock
“Damaged and defective products should be accounted for separately from other inventory. An excess of damaged or defective products may reflect a systemic problem in the supply chain, quality control issues, or problems with the distribution, shipping, and/or storage of products.
Defective products may also be returned to the vendor/distributor for a refund. Therefore, it’s essential to account for damaged and defective products separately from the rest.
Sellable material shouldn’t be placed in dumpsters; it should be donated or destroyed. If you can’t sell it, can’t return it, and need to write it off, you may have to dispose of the product. Often, the best option is to donate it. This will help the community and those in need, as well as boost your image and brand perception in the community.
If you have no other option, you may need to throw away the product. In that case, you should destroy it. You probably don’t want to leave the sellable products in dumpsters and create a cottage industry of ‘dumpster diving’ around your stores. This will attract unwanted attention and could have a negative snowball effect on the security of your stores and staff.”
– Fabien Tiburce, CEO, Compliant IA -
Know how to manage inventory in multiple locations
“Sync inventory between locations. Use a POS system to manage all of your inventory in a central location, instead of only being separated by store. Having the ability to view all of your inventory in one place helps identify how much stock you truly have (it can vary drastically by location) and identify opportunities to transfer stock between locations to improve sales or save on purchasing costs.
Likewise, if you operate multiple storefronts under the same name, instinct might tell you to carry the exact same product(s) in each. Your first store was so successful, why mess with that?
But most retailers find that carrying a few products which are unique to each location helps personalize each store and cater more specifically to each store’s demographic.
For example, Barnes & Noble offers a consistent experience nationwide, but each location has unique sections featuring local history and local authors.”
– Meaghan Brophy, senior retail analyst, FitSmallBusiness.com -
Track moving inventory
“No matter how strategic you are, you may have to move inventory across different locations. The key to doing so is to have a singular view of your inventory by location. This allows you to create a seamless experience for both staff and customers.
If one store is sold out, your employees can quickly find the location that has stock, submit an order for it, and either have it shipped to the location or to the customer.
In addition, you’ll also want to track any products while in transfer and ensure those products are pulled off your ‘online shelves’ to prevent overselling and fulfillment nightmares.”
– Kevin Loomis, co-founder & CIO, Ecomdash -
Review and store inventory adjustments properly
“Inventory adjustments should be reviewed by management and preserved in a secured facility. Inventory adjustments, increases, and decreases made to inventory to account for shrinkages such as loss, theft, and damage, should be reviewed and signed by management.
Adjustments are often symptomatic of larger problems. Management should be aware of these adjustments and play a leading role in mitigating risks and factors that contribute to the adjustments. Adjustments should also be logged and kept in a secured facility (not on-site) for at least five to seven years to facilitate an audit, should one be required.”
– Fabien Tiburce, CEO, Compliant IA -
Review lead times in advance of major weekends
“Especially if you don’t own your means of transportation, transfers, and shipping to stores can be unpredictable.
Make sure you know the shipping requirements and what days your shipper will and won’t be open during holidays or other busy times. You can completely miss a huge sale weekend because of an unexpected delay in transit. This could throw off your entire expectations and force early markdowns.”
– Andrew Chittron, customer success manager at Stitch Labs -
Effectively stock inventory
“Our most successful omnichannel retailers have found it best to choose one specific location to manage their e-commerce fulfillment operations. By doing so, they can manage labor, resources, restocking, and fulfillment more effectively as opposed to sending online sales orders to a location ad hoc.
Take this a step further and choose a specific location to manage e-commerce fulfillment based on the product’s popularity in a particular community.
For example, if Product A sells better in your Kuala Lumpur location, it’s better to stock more of that product at that store and send any new online sales to the Kuala Lumpur store for fulfillment. Stocking inventory with this strategy in mind prevents any unnecessary transferring of inventory to different locations to manage e-commerce fulfillment.”
– Kevin Loomis, co-founder & CIO, Ecomdash -
Conduct regular Open-to-Buy planning
“Engaging in monthly inventory management and Open-to-Buy (OTB) planning will allow you to take control of your business and empower your team to make proactive decisions that will affect both the top and bottom line.
An OTB plan segments your merchandise on-hand, your on-order, your sales goals by month by merchandise classification so you can better manage the flow of goods in and out of your store and track overages and underages in your stock levels. This allows you to better react (i.e. take more markdowns, order more merchandise, etc).
It’s one of the key planning tools that successful retailers use to manage their business as it provides them with a buying budget, clear articulation of sales goals, and a plan for the entire year. OTB planning is rigorous and requires commitment, however, there are many software tools and consultants out there that help retailers manage this process.”
– Ani Collum, retail strategist, principal at Trade Collective, a commerce consultancy -
Mind your cash flow management
“To work in tandem with OTB, implementing a process for managing cash flow, particularly as it relates to inventory purchases, is critical to the success of retailers. The ebbs and flows of cash due to the timing of inventory buys can put a lot of stress on a retail business. Being able to proactively project cash flow needs is essential.
Using a cash flow management process in a spreadsheet that outlines monthly sales goals, your fixed and variable costs required to run the business, and your planned inventory buys (looking 8–12 months out) will alert you to any potential cash flow crunches in advance of them occurring.
If you’re looking out 6 months, you might see that in August, you’re going to be low on cash because you’ll have just received your fall goods but won’t see a big sales bump until September. You can proactively adjust your expense budget to make sure you can cover for the potential strain you may have as a result of front-loading pre-season merchandise during a slower sales month. Being able to manage these scenarios upfront will put you more in control of your business and help you avoid real-time cashflow crises that many retailers experience during their fiscal sales cycle.”
– Ani Collum, retail strategist, principal at Trade Collective, a commerce consultancy -
Moving forward with inventory management in your retail business
Proper inventory management can be the difference between a lost sale and a lifelong customer. Implementing these inventory management best practices begins with setting your business up to do so accurately and effectively.
Choose the right inventory management system for your business, adopt a POS that integrates with your inventory management software and tech stack, and consider which inventory management best practices will make the biggest impact on your business.
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