3 Tips for Effective Inventory Management
Inventory management is typically not something that gets people excited. It requires setting up a good process and tediously following routines in place to keep inventory levels accurate. Weak inventory management often leads to:
- missed delivery terms and unhappy customers
- increased warehousing cost and tied up cash due to excess inventory
- constant problems with syncing material purchasing and production orders
Solution to problems above is neither costly nor complicated. Here are solutions to three typical mistakes small manufacturers make with their inventory management.
1. Do not invest too much in inventory
Having a high level of inventory might help you avoid out-of-stock situations. However, you end up tying up your cash in excessive inventory and increasing your warehousing cost. Depending on your products you might also face expiration problems or need to offer discounts once the season is over.
So how to avoid out-of-stock without piling up too much? The solution is in predicting your inventory needs accurately. Start by analyzing your historical sales trends and put in place basic forecasts. Then try to set reasonable desired inventory levels for your materials as well as your final products that provide sufficient buffer. Using an inventory management software that allows you to fix minimum inventory levels that trigger automatic replenishment orders helps to retain desired levels.
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2. Keep track of inventory levels
Once you know the required amount of inventory, you need to make sure you know how much you have in hand at any point in time.
Mistakes may happen while receiving the shipment of materials, shipping products to customers, performing stock take and so on. Using an inventory management software that allows you to track the movement of every article in real time is a big help. Additionally, performing continuous stock takes rather than counting everything once a month or once a year is a much more efficient way of finding mistakes. Pick an item or two every day and compare the inventory account to the actual count result. Big runners should be counted more often compared to slow movers.
3. Set priorities
Pareto principle (also known as 80/20 rule) states that 80% of your sales comes from 20% of your products. Most likely it's true. Probably also 20% of products are to blame for 80% of your cash tied up in inventory. It could also be that you focus 80% of your time solving inventory problems that only generate 20% of sales.
Analyze your sales data and inventory levels. Focus on activities that result in the biggest effect. Getting your inventory levels in line for big runners should be the priority. Dealing with slow-moving stock should also start with articles that tie up most of the cash.