12 Inventory Control Strategies to Reduce Losses
Dec 20 2022

Mismanaged inventories can lead to serious financial issues for a corporation. Utilizing inventory management strategies can lessen supply chain issues. Additionally, a management solution can guarantee a brighter future for the retail industry.

Raj runs a retail business in Mumbai, and he began selling online last year. Up until he started doing year-end reconciliation, he was pretty pleased with the sales figures. He realized that, although selling 200% more goods than the year before, he had actually lost money in that period.

Can you deduce the cause?

The lack of an inventory control system was the cause. One of a company’s key assets, inventory is an investment that is held until the product is sold or used in manufacturing. Inventory tracking, storage, and insurance are additional expenses.

Determine the accountable party

Finding a committed individual who can assume the position of inventory management should come first. This will guarantee that someone is familiar with your inventory and is able to respond to questions concerning the management system quickly. If no one is in charge and many employees are handling various responsibilities, you can end up with a massive mess.

Specialists in inventory control keep track of all the goods that are in stock and in transit. They also manage returns, carry out changes, check received goods, and develop procedures for inventory reporting.

Set levels for reordering

Setting “reorder levels” for each of the goods makes inventory management considerably simpler. Re-order levels are the minimal number of things that must always be on hand, to put it simply. It’s time to place an order for more when your inventory stock falls below the predetermined levels.

The procedure of obtaining the products will be standardized by establishing re-order levels. But some investigation is needed. Based on factors like how quickly the item sells, how long it takes to restock, etc., this choice will be made.

During the early stages of the business, you might not be able to set it, but soon you will understand it.

The best thing is that while you aren’t there, your staff can directly decide what to order.

Conditions can change often because some businesses, like e-Commerce, are dynamic. Reorder levels and safety stock should be frequently checked throughout the year to ensure they are still applicable.

Depending on the historical sales data, it will be a good idea to alter your re-order levels upward or downward.

Sort your operating inventory by category

It is clear that we always prioritize the products that sell well. But in order to effectively manage inventory, we also need to pay closer attention to other inventory components.

Experts advise employing an ABC analysis to effectively manage your inventory for this. In essence, this separates the products that need a lot of care from those that don’t.

Going through the full stock list and adding each item to one of three categories is an easy method to accomplish this.

A – expensive items with infrequent sales Items in this category need ongoing care because they have a big financial impact on storage costs but have unpredictable sales.

B – low-value items with a high frequency of sales Items in this category require relatively less attention as they have a smaller financial impact and they’re constantly moving.

C – moderate value items with a moderate frequency of sales Items in this category fall somewhere in-between and still require some attention and financial assessment.

Put your valuable products first

Setting the product line’s priorities is a free-fall method used in inventory management strategies. Use the 80/20 rule and concentrate on the things that are most important. Typically, 20% of your things will produce 80% of the demand.

Spend the majority of your time predicting, assessing the stock situation, keeping safety stock, and placing new orders for those top items. The next 30% of goods with the highest sales will typically account for 10% of total sales. Although they make up half of your inventory, your slowest-moving items only contribute 10% to your overall sales.

The asymmetry will persist despite variations in the aforementioned proportion. You must recognise this pattern and focus your efforts on the goods that generate the most revenue.

FIFO

FIFO, or “First-in, first-out,” is an acronym. It is a crucial idea in inventory management. Simply put, it indicates that your oldest stock—the one that was initially entered into the system—is sold first (first-out), not your newest stock

For perishable goods, this is especially crucial to avoid having dead stock that cannot be sold

The next concern is if we can also use the FIFO principle for non-perishable goods.

The same stock is more prone to wear out if it is always seated at the back. In addition, elements like packaging, features, and price frequently evolve throughout time. Stocking a product that is no longer in demand is pointless.

So, how can you put a FIFO management system into practice in your company? You’ll need to put up a well-organized warehouse for this. Then you’ll need to make sure that the older items always remain at the front and the new ones are introduced from the back.

You may achieve this with the aid of warehousing and fulfillment businesses.

Calculate your carrying cost

The costs of holding or “carrying” inventory over time are known as carrying costs. In other words, additional costs like storage, insurance, extra equipment, and staff must be paid by the corporation in addition to the purchase price.

The carrying costs will be 18 to 25% more than the value of the inventory when all additional expenses including raw material storage, damage, depreciation, processing, financing, and taxes are taken into account.

Some companies have a tendency to overspend on inventory levels out of fear of being understocked, which can deplete working capital and reduce earnings.

Moving outdated inventory can be very difficult. You might wind up discounting it or selling it.

How therefore can we address the carrying cost problem? Start by making some accurate predictions about the quantity and timing of the supply you’ll require.

What you’ve sold in the past is the finest compass. It’s likely that you’ll require 50 products this month if you’ve averaged selling 50 items per month during the last 12 months.

Seasonality, such as month-end increases or holiday sales, must also be taken into account.

Think about drop shipping

Drop shipping is the simple term for the process of sending products directly from the producer to the store or buyer. From the standpoint of inventory management, it actually is the best situation.

The manufacturer or wholesaler handles it for you rather than you having to transport inventory and ship goods by yourself through the sales channel, internally, or via third-party logistics.

In essence, you eliminate inventory from the procedure totally!

Your gains come from the amount that separates the wholesale price from the retail price. You can enhance your sales from a variety of things you buy from your drop-shippers if you can figure out the processes well.

Action Plan for Managing Excess Inventory

Inaccurate sales forecasts, poor planning, or the use of a business model that ignores the complexity of the products and their life cycles can all lead to excess and obsolete stock.

Businesses with effective inventory control systems establish two task groups with connected action plans. The initial task force pinpoints the underlying causes and decides how to lessen the production of fresh surplus and obsolete material.

The second focuses on better strategies for liquidating the extra stock. It gives the sales staff a list of the most popular excess or obsolete products to promote in order to make sure they are offering discounts on the designated excess products. Therefore, a key component of these inventory management systems is an action plan.

Continual Inventory Audit

What is monitored is handled! A developing business must maintain regular inventory tracking. You will receive reports about inventory levels in warehouses or stores if you are utilizing any reliable inventory management software.

However, it’s crucial to confirm that those figures correspond to the actual facts. There are primarily 3 easy methods for tracking inventories.

Counting all of your inventory at once is known as the physical inventory system. Because it relates to accounting and tax reporting, many organizations prefer to do this around year-end. While definitely laborious, this process is crucial.

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