Because inventories are often a sizable investment, they require careful management. But what is inventory control? It includes the efficient management of purchasing, receiving, warehousing, tracking, shipping and reordering — and it’s how you maximize the return on your inventory.
Why Is Inventory Control Important?
Inventory can be the largest portion of your company’s assets and can affect your company’s cash flow. Inventory management that increases turnover and lowers investment can improve your cash flow. For example, if you reduced your $500,000 inventory to $450,000, that $50,000 difference could end up in your bank account.
According to Investopedia, inventory carrying cost — that is, the expenses related to keeping and storing unsold goods, such as financing, insurance, taxes, transportation and shrinkage loss — is usually between 20% and 30% of an inventory’s value. So that $500,000 inventory could cost you $150,000 every year.
Part of good inventory management is being sure you have enough stock to meet customer demand. Few things irritate a customer more than finding out that an item is out of stock after they’ve placed an order.
Managing Inventory Control
Here are seven tips for better inventory management.
- Use ABC analysis. Classify the items in your inventory into three groups: A, B and C. Pay the strictest attention to A items, which are likely your most profitable high-ticket sellers. B items are moderately priced. C items are low-priced items with the highest turnover.
- Follow the 80/20 rule. The top 20% of your items will likely account for 80% of your profits. These will probably be your A items. Make sure they get the most attention.
- Identify low-turnover items. If you haven’t sold a particular item in 12 months, it probably doesn’t belong in your inventory.
- Set reorder points. When your stock of an item dips below a certain quantity, you’ll need to order more. Be sure to account for the lead time to replenish your stock.
- Track stock levels. Pay attention to your stock levels as you approach reorder points.
- Audit frequently. The more you audit and reconcile your inventory, the better you’ll be at managing it.
- Use cloud-based software. Invest in inventory management software to make tracking and reordering easier.
What is inventory control worth to your business? It could be a lot. Your inventory is a large investment, so treat it with the utmost care. A well-balanced inventory can ensure that you maintain a healthy cash flow without carrying extra costs.