Properly managing your inventory involves more than making good hires and getting blue dots next to your best sellers–although those are excellent first steps. Here are some common mistakes entrepreneurs make in managing their inventory, and how to fix them.
1. Too Much Inventory
Afraid of being caught short, it’s easy to spend too much on inventory, which can eat up working capital and erode profits. Warehousing isn’t free, of course, and inventory that sits on a shelf is subject to damage, depreciation, and even obsolescence. Old inventory can be very hard to move. Your options aren’t great, says Paul Huppertz, a logistics expert with The Progress Group, a supply chain consulting company based in Atlanta. “You may end up marking it down, selling to discounters, or shipping it to overseas liquidators.”
To fix it: Start with some decent projections of how much supply you’ll need and when you’ll need it. The best gauge is what you’ve sold in the past. If you’ve sold 100 items per month for the past 12 months, chances are that you’ll need 100 this month. Then there’s seasonality: Do you usually see a fourth quarter spike with holiday sales? Or, if you’re in the home and garden business, do you see more activity in the spring selling season? “You can also identify and quantify less obvious patterns such as month-end spikes,” says Huppertz.
2. Inaccurate Inventory Tracking
Once you know how much you need, you have to make sure you actually have it on hand. Opportunities for miscounts are everywhere: during receiving, during order fulfillment and the all-too-common pilferage. In manufacturing, says Huppertz, you’ve also got to account for yield or scrap during production.
To fix it: Using electronic data interchange (EDI) and bar code scanning can help eliminate data entry errors. Huppertz suggests implementing a system of so-called “cycle counting.” Choose a few items a day and compare the inventory record to the actual count. Best sellers should get counted more often.
3. Lack of Priorities
It can take an outsized amount of time and resources to keep track of all the details for each inventory item. Some triage is in order.
To fix it: Focus on the items that matter most. Generally, 80% of demand will be generated by 20% of your items. Spend most of your effort on those “A” items, forecasting, reviewing in-stock position and reordering more frequently. The next highest-selling 30% of items, the “B” items, will typically generate about 10% of sales. The slowest selling “C” items account for half the items you stock, but only generate 10% of your sales.