How to Set Inventory Management Goals That Work for Your Company

Inventory management is extremely important for any company that sell physical products. It is a cornerstone process especially for retail companies, groceries, manufacturers, and the like. Some businesses expend as much as 90% of their working capital on their inventory. As an entrepreneur who sells physical products, it’s worth asking yourself: how do you make the most out of such a big investment on inventory? Much of the answer lies in setting actual goals for your inventory management.

In simple terms, inventory management is about properly ordering, storing, and distributing the physical goods your company deals in. Well-implemented inventory management protocols will result in huge cost savings for your company. Conversely, a disjointed, unresponsive, or obsolete inventory system may slowly bleed your business dry. It’s time to set inventory management goals that can ensure your business’s profitability in the long term. To this end, here are some tips for maintaining an inventory management system that works.

Account for Different Types of Item

Your first goal should pertain to getting better at accounting for each type of item you stock. If you deal in physical goods, each of the items you stock is likely to fall under one of these categories:

• Raw materials, which you will incorporate into finished goods.
• Finished goods, which your company will sell.
• Work-in-progress inventory, or a combination of raw materials that has yet to become a finished good.
• Other stocked items that are used for operations, maintenance, or repair.

Aim to get better at moving these kinds of products, depending on what you need. Don’t forget the principle of FIFO, or first-in, first-out. The oldest products in your inventory should be sold first while the newest ones should be sold later. You should also determine how to achieve just-in-time or JIT delivery for certain goods. This will help you prevent their wastage or deterioration.

Understand Why You Overstock or Understock

Another inventory management goal you should have is to minimize overstocking or understocking. That said, maintaining that delicate balance between overstocking and understocking is easier said than done. It’s very common to end up losing money over either of these problems. Overstocking can delay production of subsequent items and eat up warehousing costs. Understocking, on the other hand, can put an inconvenient stop to sales and affect customer satisfaction.

To prevent both overstocking and understocking, you have to ask yourself the following questions:

• Are you duplicating orders without knowing it?
• Are there problems in the supply chain that you need to address?
• Has the demand for one type of product changed since last quarter?
• What’s driving the demand (or lack thereof) for a certain product?

It’s important to analyze what actually causes overstocking or understocking in particular situations. Your answers to these questions will determine your ideal stock amount. Once you’ve struck a balance, you’ll find that you won’t over-order or under-order during your next purchasing cycle.

Here’s a tip: you actually don’t have to reconcile all this data manually. You can use inventory management software to consolidate all inventory-related data and generate reports for you. That should make it much easier to analyze your current inventory situation and make more responsive purchasing decisions.

Aim to Optimize Your Costs

A third goal you should aim for is to spend the minimum working capital needed for your inventory. You should prevent warehousing costs from ballooning, allot just the right amount for stocking particular item types, and optimize your relationships with suppliers. Doing all of these will help you oversee the most stable prices in your inventory.

Remember that no two types of item in your warehouse are made equal. There may be certain items that demand more care and attention than others. Some items are also more profitable to order en masse than others. You can find this out for yourself by conducting ABC analysis, or classifying the items under these categories:

• Category A “ products of high quality that experience a low frequency of sales
• Category B “ products of moderate quality that experience a correspondingly moderate frequency of sales
• Category C “ products of lower quality that nonetheless experience a high frequency of sales

Lastly, survey your relationships with your suppliers. Only some of them may be worth keeping in the long run. It’s best to establish new supplier relationships when your old suppliers charge too much or have become unreliable with their deliveries.

Picture Your Ideal Inventory Situation Per Quarter

Your fourth goal should involve being consistent with your inventory management practices for every quarter of the year. Each quarter brings about new challenges in meeting supply and demand. For example, demand for food products like fruit cake and Christmas cookies will only be high in the fourth quarter. Come the first quarter, businesses catering to the holiday crowd will have to stock up on Lunar New Year or Valentine’s Day decorations.

That said, you should be light on your feet and ready to optimize your inventory for these events. Formulate an idea of how much stock you should have per quarter. Ensure that you have enough supply to meet the demand at least a month before big sales events happen. You can base your purchase amounts on sales you achieved this same time around last year. Or, you can even choose to hold pre-orders for certain products and stock up to meet direct customer demands.

Tick off on Your Inventory Management Goals with ANSI

A company that’s mastered the art of keeping inventory is highly likely to make an impact in their home industry. You shouldn’t be limited to archaic methods, like manual counting or reconciling separate spreadsheets, when it comes to pursuing your inventory management goals.

Get in touch with ANSI, a trusted vendor of enterprise resource planning (ERP) software SAP Business One, to implement a solution that works for you. Not only do we promise integration with software that will improve your inventory management. We’ll help you arrive at a better understanding of supply and demand, and we’ll transform your current inventory system into something more profitable and competitive.