Inventory Management: The Big Guide for Small Businesses
Inventory management defined is the process of keeping track of all the goods your company has in stock. This is hugely important as your profit margins rely on timely order fulfillment. If you do not keep an accurate record of what materials are being delivered, what is being manufactured, and what products are being shipped, then it is easy to get overwhelmed. Good management allows this to happen in a timely fashion. However, this is easier said than done. In 2017 over 30% of small businesses in the US did not track their inventory. A further 14% still use a pen and paper method! This is a surprising, but solvable statistic. Such approaches do not appreciate the importance of inventory management and the value it can bring to a small manufacturing business.
Lacking good materials requirements planning (MRP) is a real headache for small businesses owners. Not understanding inventory or inventory management solutions leads to lower profitability and efficiency. Not getting products shipped will mean your customers might look elsewhere. Time spent catching up with inventory is less time spent on making your customers happy. That’s why we have created the essential guide to small business inventory management in 2018.
What is Inventory Management?
First things first. Thinking of inventory as a single discrete entity is counter-productive. Inventory can refer to items of several different types. Getting every part of your inventory to run smoothly requires careful planning and consideration of inventory management methods.
When you talk about inventory, you need be specific. Are you talking about raw materials or completed goods? How much is in process, and how much is waiting to be shipped? This affects how much inventory is available or tied up in the manufacturing process. Being on top of this allows you to make informed decisions about how much you really need to order and store.
Below are the main types of inventory in small manufacturing businesses.
Raw Materials – all materials and substances used to create your finished product. A bill of materials lists all raw materials, and other items that you need to manufacture that product. You machine raw materials into parts which are combined to form components. When a raw material runs low, you send a purchase order (PO) to your supplier;
Assembly Items – if your product requires a lot of parts, it might make sense to pre-assemble some or all of them. For example, you wouldn’t just put together a bike from scratch. You would get the frame, wheels, seat, and accessories ready beforehand. An assembled part such as a wheel would be known as a sub-assembly, and should be counted separately as such in your inventory. You would create a manufacturing order (MO) to create parts to keep your production line going;
Work-in-Process – when you receive a sales order (SO), you would create a separate MO for the final product. It may require multiple sub-assemblies to complete. It is important for you to know how many items are work-in-process. This is so you have an idea how long it will take until it can be shipped, and how many more you can make until you need to create another PO;
Finished Goods – products already waiting for shipping. When the finished good reaches a customer it fulfills the SO; and
MRO – Maintenance, Repair, and Operating items not part of your product recipe but are a part of the manufacturing process or operations. Includes all supplies to keep machines running, staff uniforms, and office supplies.
A useful inventory management definition is the overseeing and control of each type of inventory. This is so all your orders are processed in an orderly and timely fashion. Good management means your business can keep up with orders, satisfy more customers, and become more profitable.
Say you’re a small manufacturer making your own unique skateboards to sell online. To produce a skateboard, you need to order raw materials and parts from a supplier. These are delivered and stored. You take these materials, machine them, assemble them, and give them your unique look. Finally, you store the finished product until it is shipped to your customer.
The objective of inventory management is to make sure this process works efficiently. Breaking the manufacturing flow and wasting money on storing excess safety stock reduces efficiency. Inadequate management of inventory costs US businesses millions of dollars each year.
The successful stripping away of as much inefficiency as possible is called lean inventory management. Managing waste and standardizing processes are two major elements of lean inventory management. These are almost impossible to do manually. In order to cut as much fat as possible from your production flow, MRP systems help you make these decisions.
Effective inventory management can mean saving heaps of time while maximizing profitability. Get orders done on time and increase customer satisfaction. The reputation of professionalism and positive word-of-mouth will spread. Understanding the inventory management process well is a win-win for you and your customer.
Types of Inventory Management Explained
There are two main inventory management methods: periodic inventory and perpetual inventory.
Businesses doing periodic inventory only update inventory at specific times. The interval is usually a year for many large businesses but could also be more frequent. Periodic inventory management is associated with businesses that make large volumes of sales. The high stock turnover means it is simply not practical for them to take stock daily or weekly. They take advantage of the huge savings in labor costs this affords.
There are downsides to this approach. Such businesses do not know exactly how much inventory they have for most of the year. Large amounts of inventory could even go missing without the owner knowing. Basing yearly financial records on periodic inventory means that inaccuracies can be costly. Infrequent inventory updates mean thousands of dollars are wasted on storage each year, which highlights the importance of inventory management.
Perpetual inventory is constantly updating inventory records with every incoming and outgoing item. More information is recorded which gives a business more control over its inventory. Using a centralized computer system means that everything is kept together and up-to-date. This means the whole business is on the same page, and fewer mistakes are made.
Hardware such as wireless barcode scanners make inventory updates quick and accurate. This means perpetual inventory is doable for businesses with low staff counts. Hardware that interfaces with database software makes storing inventory data secure and understandable. This system has become commonplace and is part of inventory management best practices for small manufacturers today.
Small business used to favor periodic inventory due to the savings on labor costs. It simply did not make sense for businesses to constantly monitor inventory. Periodic inventory was accurate enough, with high amounts of buffer stock filling any gaps. Nowadays, the importance of inventory management for maintaining healthy margins and timely order fulfillment is clear. Perpetual inventory is preferred by virtually all businesses today.
Technology allows large businesses to use perpetual inventory systems to keep track of huge inventory changes. The standard inventory management process is to use readily-available wireless barcode scanners alongside a computer database to track each item. This maximizes speed and minimizes inaccuracies. Being able to perfectly keep track of a business’ inventory in real time gives a concrete advantage over periodic systems. The benefits of inventory management when done continually allow owners to oversee their operations much more clearly.
Perpetual inventory management is regarded as the best system of tracking inventory. But this is only true if managed well. If not, then inaccurate and unreliable inventory tracking will continue to plague businesses. This means that investing in an expensive system is not a catch-all solution to inventory management problems. Small business inventory management cannot simply copy and paste what the big players are doing. They need to carefully consider the options available to them.
Quick Inventory Management Tips for Small Businesses
Find an inventory management solution that works for you. All businesses are unique, and as an owner, only you know what is best for your organization. What works for large manufacturers does not work for small ones. Here are some tips that apply to all good systems.
Use best practices — for example, SKUs are unique ID numbers for each product variation. They let your system process orders more accurately and integrate better with e-commerce channels.
Know your process — include machining, packaging, and shipping times for each product. Make sure your deadline takes this into account.
Anticipate changes — notice and learn trends in customer activity. This is done so you can keep up with changes in demand without straining your operations. Cloud inventory management allows you to track changes using analytics features.
Limit buffer inventory — don't waste money on warehouse costs. Save more by setting up reorder points where your system tells you when an item gets below a certain amount. This should keep inventory coming in when needed, and not piling up.
Be a good customer — make sure you’re the ideal company for your supplier to work with. Pay invoices early, develop a good relationship, and they’ll become a dependable partner. If you’re ever in a pinch you'll be at the top of their list.
Get to know the cloud — use cloud-based inventory management so your inventory can be managed from multiple locations, keeping you up-to-date at all times.
Listen to your customers — find out about customer satisfaction. How many receive their orders on time, or early? Research ways to improve management to create a better experience for your customers.
Inventory Systems in Retail, Manufacturing, and Distribution
Virtually all modern makers sell through multiple sales channels. These could include an online store, catalog sales, trade shows, craft fairs, and a physical store. If your business sells face-to-face then you probably use a point of sale (POS) system. This could involve a cash register, but portable card readers allow you to make secure sales anywhere and keep your inventory up-to-date with each sale. Even many food and drinks vendors are turning to an inventory management system to keep track of their stock in real-time.
Huge businesses like Amazon, with a warehouse of over a million square feet, have utilized nifty tech in recent years. Robots and drones are cool, but still barely used. Most of Amazon's warehouses still employ humans who use standard inventory management tools. These are readily available and affordable, so small business can also see the benefits of inventory management.
Small makers, craftspeople, and manufacturers are getting an ever-increasing presence on online shopping platforms. E-commerce sites like Shopify are popular with companies making their own goods. Such platforms allow independent makers to reach global markets.
Like it or not, e-commerce is becoming more and more ubiquitous, and available for small manufacturing and craft businesses. Thanks to such sites, any business can now freely access these huge global markets. In 2017, e-commerce accounted for 9% of all sales transactions in the US and is growing by over 1% each year. Worldwide e-commerce sales are to reach $4.88 trillion by the end of 2021. Online inventory management allows e-commerce integration. Going online has allowed thousands of manufacturers to scale their business.
Inventory Management Software for Small Businesses
We already know that off-the-shelf spreadsheet software does not fit the bill. Entering all stock and order changes by hand leads to mistakes sooner or later. Maybe some data goes missing, or you lose track of something under a mountain of records. An inventory management system for small business does not have to mean Excel. There is software designed with the small makers, artisans, and craftsmen in mind.
Most inventory software is for large businesses. They are known as large enterprise solutions and usually cost thousands of dollars per year to maintain. These costly products are also typically overstuffed with features. Developers put every feature they can think of for any large business. They are one-size-fits-all solutions that are not suitable for small business needs.
Various free alternatives for small businesses have cropped up in the past few years. These can be over complicated, too limited, or not compatible with current software. Sometimes it is copy and pasted from a large enterprise solution with some things taken away. They generally do not have the customer support you would expect from quality software. There is no guarantee that the system will still be here in years to come. Be very careful with freeware.
The good news is that there is a suitable inventory management solution for every small business. They have been crafted with the needs and budget of a small business in mind.
You do not need a bloated large enterprise system or stripped-down freeware to get the job done. Inventory management software for small business can be just as reliable as big business counterparts, without the huge costs.
Challenges for Small Businesses
Making sure all staff are working from and updating the master copy of the inventory;
Accounting for lost stock due to manufacturing or employee error;
Keeping up-to-date whilst not interfering with daily operations;
Estimating manufacturing time to meet customer demand;
Finding the best inventory management software that suits your business; and
Training employees in the use of specialized software.
What Should Good Inventory Management Software Do?
Effective implementation of MRP does not have to be complicated. Simple inventory management is possible with the help of the right software. You need to make sure it is designed with the small business in mind. One good tip is to look for software which offers a free trial before entering your card details.
Before investing in new software, ask yourself the following questions.
Does it automate processes, or make more work for me? Inventory management software should mean you spend less time on inventory.
Does it scale with my business? Cloud-based inventory management lets you keep track of stock between warehouses and on the go.
Does it integrate with existing platforms, such as Shopify?
Does it have add-ons? Reliable software is always being updated. Microsoft and Apple are constantly monitoring the performance of their systems. Your business software should be the same.
Does it have support? Make sure you can write or call if there are any problems or queries you have. You don’t want to lose days due to lack of system support.
One of the main objectives of inventory management is to trim all the fat off and keep only what is necessary to get products to your customers. Good software should be easier to use than off-the-shelf packages and speed up all your management processes. Your product catalog, supplier orders, manufacturing orders, and shipping should all be in one accessible place. Good software allows you to switch between every mode of your business’ operations with a few clicks or touches.
Optimizing this like a pro is known as lean inventory management. This is what you are aiming for to keep your entire order fulfillment stress-free, even in periods of high demand.
How to Choose the Best Inventory Management Software for Small Businesses
Features of good-quality inventory management software for small business allow you to:
Store your entire product portfolio in one place with no need to enter something twice. The goal of inventory management is to not need to keep changing software to see everything going on in your business;
Attribute as many variations (size, color, embellishments, etc.) to each product. This is so exact customer orders are recognized by the system and require less input from you;
Enter product recipes and manufacturing processes so you can track your product flow more effectively. Good software integrates the management of inventory and deadlines;
See orders come in real time so you can get to work straight away;
Manage stock intelligently. Allocate materials to the first product in the list, so that gets out the door first, and minimize work-in-process, and fight over-ordering;
Track orders from suppliers so you know what stock is expected when. This allows you to streamline more and is a hallmark of lean inventory management;
Manage your team by assigning duties and daily goals. Everyone knows what they are doing; and
Be accessible to you anywhere while still being secure. This is known as cloud inventory management.
Every business is unique, so there is no single approach to finding the right inventory management tools for you. Do your research and consult an expert if need be. Taking advantage of trial periods for premium software solutions lets you see how it could work in your business. You do not have to give your card details in order to get a two-week trial period. That should give you a start on how to improve inventory management in your business to get your smart workshop up and running.
A Smart Workshop at your fingertips limits time spent poring over orders and frees you to develop your business.
Inventory Management Glossary of Key Terms
Let’s finish with a quick guide to the most important key terms for inventory management systems in 2018.
Cloud-based inventory management — keeping something in the cloud means keeping it on a secure wireless network. It is only accessible to who the business owner gives access to. All changes can be seen, recorded, and reversed it need be.
E-Commerce integration — having your inventory management process aligned with online sales channels such as Shopify. Your software receives orders directly from e-commerce channels and allows you to make and ship it as normal.
Large enterprise solution — a system or software designed with the needs of the large business in mind.
Lean inventory management — streamlining the manufacturing process to make it as efficient as possible. Lowering the waste of materials, time, and human effort is the key to this.
Manufacturing Order (MO) — signals to your shop floor that you want a particular product or products to be manufactured.
MRP (Material Requirements Planning) — A system of quantifying, planning, scheduling, and controlling inventory designed for the manufacturing process. Modern day MRPs are computer-based.
Order fulfillment — the complete process your business takes to receive, manufacture, and ship an order from a customer.
Purchase Order (PO) — the purchase of raw materials for manufacturing into products.
Sales Order (SO) — shipping the finished product to the customer.
SKU (Stock Keeping Unit) — Each individual variation of a product that your business offers. This includes all size and color variations and is set by businesses themselves. The number of each product variation in stock is tracked by inventory management software.
Smart Workshop — using inventory management software for small business people to maximize output, minimize waste, stick to deadlines, and save time.