How to Manage and Scale Inventory Management for Small Businesses

Every small business needs to have an inventory management system in place. These systems ensure that you can track your inventory, know when to place orders, answer questions about stock, and more.

Read on to discover how to manage and scale your inventory management system as a small business.

What Is Inventory Management?

Before getting into the advice for inventory management for small businesses, it’s important that you understand what inventory management is. Inventory management describes the processes related to inventory, including storing, using, ordering, and selling your products. Depending on your business, it can include raw materials and finished products.

Various types of inventory management software help make this process much easier for small businesses.

Why Inventory Management Matters

Simply put, your inventory is one of the most valuable assets for your small business. If you don’t have enough inventory when you need it, you will miss out on valuable sales or even hurt your reputation if you are unable to fulfill customers’ orders.

On the other hand, if you have too much inventory, you may run out of storage space or simply spend too much money ordering items you don’t need. Large inventories also increase the risk of theft or damage.

Having proper inventory management software for your small business, along with other management methods, prevents these issues.

Good inventory management can also offer the following benefits:

• Saves money – You can minimize the excess stock in various locations, reducing wastage.
• Prevents theft and damage – With fewer excess products, you limit the potential risk of theft or damage.
• Improves cash flow – You focus your spending on products that sell, letting you boost your cash flow.
• Improves efficiency – Knowing the status of your inventory lets you do operate your business more efficiently. This includes ordering shipments, dealing with market changes, and overall, using resources effectively.
• Improves customer satisfaction – Customers will be happy with the service they receive when they can quickly receive products. This kind of service leads to customer loyalty and positive reviews.

Common Inventory Management Obstacles

Part of understanding inventory management software and solutions is seeing how they can help you overcome the most common obstacles. Inventory management involves a long list of common issues, many of which can be resolved if you set up the proper processes or use the appropriate inventory management software for your business.

The following are some of the more common obstacles in inventory management:

• Using manual or outdated processes
• Inefficient processes
• Insufficient order management
• Inaccurate details about stock
• Incorrectly placed or labeled items 
• Not having a centralized inventory hub
• Changes to customer demands
• Expanding the product range
• Making the most of warehouse space
• Overstocking
• Tracking obsolete inventory
• Managing defects and waste
• The complexity of the supply chain
• Poor communication

10 Tips for Managing and Scaling Inventory

As mentioned, the right processes and inventory management software can help you overcome most of those obstacles. To further improve your inventory processes and allow your small business to scale, keep the following inventory management techniques in mind.

Tip 1 – First In, First Out

One of the most basic and important inventory management techniques is the principle of FIFO (first in, first out). The first items that you receive should be the first ones that go out. So, you sell or use the inventory that has been there the longest.

This is especially important for food-related or other perishable products. But it is also useful for other products that are seasonal. No matter the product, FIFO helps you ensure that you don’t end up with lots of out-of-date packaging.

Tip 2 – Using Par Levels

Par levels are another crucial part of any successful inventory management system or software. These refer to set levels of supply for a certain product that your inventory reaches, indicating you to order more. Ideally, efficient inventory management software will automatically order more on your behalf or enable you to set it up to do so.

Tip 3 – Regular Audits

Like any other part of your small business, having regular audits of your inventory is crucial to ensuring everything functions properly. Audits can help you confirm that your inventory is flowing properly and that you know where you stand in terms of various products, materials, and processes. Ideally, you should audit your inventory at least annually, but note that many small businesses need more frequent audits.

Tip 4 – Cycle Counting Between Audits

Cycle counting is an alternative to full audits and is a good process to use between major audits. With this process, you count the inventory for a single item or category of items at a time. You do so on a rotating cycle, so every product gets covered. This gives you the benefits of an audit without having to do the entire process at once.

Tip 5 – Just-in-time Inventory

Depending on your type of small business and your business model, you may want to consider JIT inventory. This inventory strategy involves having just enough of your inventory to fit your customers’ demands. Items go on display or get used as soon as you see them.

This method can be efficient, especially for certain e-commerce companies. However, it puts you at risk of supply chain issues.

Tip 6 – ABC Analysis

ABC analysis involves identifying the type of stock that is the most popular and profitable and what is least popular. A is the top 25% of your inventory when ranked for profitability. C is the bottom 25%. B is everything in between.

Tip 7 – Track Inventory KPIs

KPIs are used to benchmark or track metrics in various parts of your business, including your inventory. Tracking inventory KPIs can give you valuable insights.

For example, some sales KPIs include the stock-to-sales ratio and the inventory turnover ratio. You could use those to set benchmarks for sales. Also, receiving KPIs can help you track your efficiency in receiving and handling returned items.

Tip 8 – Forecast

With inventory forecasting, you look at past figures to predict the future. Specifically, you look at past sales of an item to predict how much you will sell in a given timeframe. This enables you to order the appropriate amount. It’s not completely accurate, but this practice can be incredibly helpful.

Tip 9 – Bundling Overstock or Slow-moving Inventory

This inventory management technique straddles the line between sales and inventory management. It involves bundling together items when they are slow-moving or overstocked. You reduce your profit but clear up warehouse space and reduce the risk of damaged or stolen materials.

Tip 10 – Scan Barcodes

Scanning barcodes at key steps in the supply chain and inventory management process makes it much easier to track your inventory and get accurate reporting. Most inventory management software will be compatible with a barcode scanner.

Inventory management systems and processes enable you to track inventory accurately, helping with cash flow, efficiency, and customer satisfaction. Most major challenges can be overcome with the right inventory management system for small businesses, but you will also want to follow other best practices. From supply chain management to purchase orders to tracking customer demand, an effective inventory management process will be far-reaching.

Combine your new knowledge about managing inventory with other guidance from Podium to help you efficiently run your small business and help it grow. Interested in more free resources like this? Sign up for our weekly newsletter, The Local Digest, here.