Achieving the optimal inventory level is crucial for efficient business operations. But it can be tricky.
Many people believe that excess inventory is less costly than running out of a product. However, keeping too much of a slow-moving item can increase your company’s overhead costs and erode your profitability.
On the other hand, too little inventory means failing to meet and maximize the demand for your products. This will impact your top-line negatively. You also risk customer wrath, or even worse — the loss of your customer’s lifetime business with your company. This eats up your salespeople’s time, energy, and morale. Now they must deal with agitated clients and unmet sales targets.
Remember that your customer service is closely tied to your organization’s capability of fulfilling your customer’s requirements efficiently and correctly.
How do you create an inventory system that can result in a win-win-win situation for your customers, your warehousing department, and your salespeople? One of the most important keys to good inventory management is data.
In this article, we’ll go through the six ways you can use data to always have the optimal level of inventory.
6 Ways to Prevent Running Out of Inventory
1. Use historical sales data to predict purchasing trends.
Sales reports can summarize each SKU’s offtake on a daily, weekly, or monthly basis. You can then use this information to make decent projections of the quantity you need. Employees also know when you need certain items.
Take note of seasonality, as well as expected highs and lows. Do you experience spikes during month-end? Is there a certain day of the week when your customers usually replenish their stocks? How much additional sales does the holiday rush contribute to your product line? After the season, when should you start trimming down your order quantities?
Historical sales data will also reveal which items are your bestsellers. These are the items that make the bulk of your sales. Make sure you keep a close eye on these items. Review and order them more frequently, if needed.
2. Use software to keep track of real-time inventory levels.
Keeping track of the current inventory that you have on hand will help you decide whether or not it is time to place a new order. It’s important to have a point person to review your inventory levels for each item regularly. That way, you can take prompt action especially during unexpected surges in demand.
If you have a big portfolio of items, manually counting each item every day would be an incredibly time-consuming task. Likewise, it’s prone to human error.
To minimize these potential problems, it’s a good idea to have inventory management software to help you keep track. All-in-one POS software systems have a range of features that can make the process easier for small business owners.
Of course, you still need to check your inventory record versus your actual quantities. Do this periodically to avoid and address discrepancies between the two.
3. Keep lead time in mind when calculating when and how much to reorder.
Different suppliers have varying order-to-delivery lead times. Lead time is the number of days/weeks/months from when an order is placed to when the item reaches your warehouse.
If a particular vendor has a long lead time, make sure that you take this into consideration when replenishing your inventory. Keep in mind that it’s important to negotiate for a shorter lead time. Do this in order to minimize the amount of inventory you need to keep in your warehouse.
If you are a manufacturer, there is also the production lead time to add to the equation. This is simply the number of days it takes to produce your item in your factory (or third-party manufacturer).
4. Set a minimum inventory level to know when it’s time to reorder.
You need to reorder your items when they reach the minimum inventory level so that you do not run out of inventory.
When determining your minimum inventory level, it should not be some magic number that you just pulled out of a hat. Rather, it should be based on your projected sales quantity for a certain number of days. It definitely should not be less than your supplier and production lead time combined.
An illustration might help. If you sell 300 pieces of your product every 30 days, that means your average daily sales is 10 pieces per day. Assuming your supplier lead time is 15 days, then your minimum stock level should be at least 150 pieces (10 pieces x 15 days).
If you are a manufacturer and it takes 5 days to produce your finished product, then you have to add 50 pieces (10 pieces x 5 days), for a total of 200 pieces minimum stock level.
5. Include market trends and projected brand performance into your equation.
Take note of your industry’s outlook and factor in expected growth and decline in your ordering and inventory management.
Are you going to launch a marketing campaign and you’re bullish about your brand’s increased sales? Make sure that your inventory level is enough to meet the spike in demand.
6. Know your warehouse’s capacity and partner with a third-party logistics (3PL) company, if needed.
As your business grows, you will need to order more stocks of your products or raw materials. However if your warehouse capacity is limited, the lack of space might be a challenge for you.
If investing in additional warehouse or personnel is not yet feasible for your company, a fantastic practical option is working with a third party logistics (3PL) company. These companies offer order fulfillment services that can help you save time, energy, and money.
Inventory Management Formula
This is a proven ordering formula. It can work for any kind of business, with some minor tweaks based on your SKU types and industry.
- Total Days = The number of days you want to keep in inventory + supplier and production lead time + buffer days for a possible increase in offtake or unexpected delays.
- Order Quantity = (Average sales per day x total days) – inventory on hand.
Keep in mind that the above formula does not take into account the following:
- Customer order to delivery lead time.
- Shelf life of SKU’s or raw materials.
- Minimum order quantity (MOQ).
- Bulk discounts from suppliers.
- Box, pallet, and finished products sizes and weight.
When you run out of inventory, you disappoint your customers and give your competitors the chance to snatch them from you.
Keep in mind that some upset clients will never come back to do business with your company ever again. As a result, make it your goal to have a healthy inventory level at all times.