10 Inventory Management Best Practices for Improving Your Business

Make sense of your inventory management with these best practices

Are you managing your inventory as effectively as possible?

It’s OK if you’re not.

Most businesses have plenty of areas to improve, especially in their warehouses.

But if you don’t begin the process of upgrading and streamlining your business operations now, you’ll easily slip into bad habits, inefficient practices, and a high cost of inventory.

By following inventory management best practices, you’ll run and manage an efficient and effective business and warehouse year after year.

Inventory Management Best Practices

There are many industry-specific inventory management best practices you can follow, but there are also a few general practices that every business can benefit from.

Here are 10 inventory methods and practices that will help you optimize your warehouse processes.

1) Categorize Your Inventory Using ABC Analysis

ABC analysis is a technique for arranging your inventory into a hierarchy of most important to least important items.

Here’s what an ABC analysis would look like in practice:

• A-items are the best-selling, highest priority stock and require regular reordering and constant quality review
• B-items are valuable, medium-priority stock and usually require monthly reordering
• C-items are low-priority stock and are typically carried in high volumes with minimal reordering

Organizing your stock within your warehouse according to how they sell and how much value they bring your business will help you optimize storage space and streamline order fulfillment.

2) Optimize Your Pick and Pack Process

The pick and pack process is a set of procedures and tools that your employees use to fulfill customer orders quickly and efficiently.

Types of pick and pack processes:

• Discrete order picking
• Batch picking
• Wave picking
• Zone picking

Here are 5 ways to optimize the pick and pack process for effective inventory management:

1. Design your warehouse for efficiency by placing your top-selling items nearest the packing station
2. Keep your warehouse well-organized by cleaning every area and removing clutter
3. Implement and program a warehouse management system (WMS) so that the items picked are listed in the order the picker will find them.
4. Double check each order for accurate counting
5. Use barcodes or RFIDs on every piece of inventory for easy counting

3) Establish Your Inventory KPIs

Inventory KPIs measure your performance in a particular area over a specific amount of time toward a certain goal.

They help to eliminate guesswork by giving you clear milestones to hit every week, quarter, or year.

With them, you’ll have the data you need to make smart, strategic decisions for your business.

Here are 6 inventory KPIs you should focus on:

1. Inventory carrying costs
2. Inventory write-off  and  inventory write-down
3. Rate of inventory turnover
4. Cycle Time
5. Order Status and Tracking
6. Fill Rate

4) Use Batch Tracking

Batch tracking is sometimes referred to as lot tracking, and it’s a process for efficiently tracing goods along the distribution chain using batch numbers.

A “batch” refers to a particular set of goods that were produced together and which used the same materials.

Use an automatic batch tracking system in order to enter information about all the products within your batch – keeping that information at your fingertips if you need to access it quickly, as in the case of a product recall.

5) Use an Accurate Reorder Point Formula

A reorder point formula tells you approximately when you should order more stock – when you’ve reached the lowest amount of inventory you can sustain before you need more.

You can stop being a victim to market spikes and slumps by using a proven, mathematical equation to help you consistently order the right amount of stock each month.

This equation is called a reorder point formula.

Here’s a reorder point formula you can use today:

(Average Daily Unit Sales x Average Lead Time in Days) + Safety Stock = Reorder Point.

6) Carry Safety Stock Inventory

Safety stock inventory is a small, surplus amount of inventory you keep on hand to guard against variability in market demand and lead times.

Without safety stock inventory you could experience:

• Loss of revenue
• Lost customers
• And a loss in market share

What makes safety stock a critical inventory management best practice is that you’ll reap all these benefits by using it:

• Protection against unexpected spikes in demand
• Prevention of stockouts
• Compensation for inaccurate market forecasts
• A buffer for longer-than-expected lead times

7) Optimize Your Inventory Turnover Rates

The rate of inventory turnover is a measurement of the number of times your inventory is sold or used in a given time period, usually per year.

By calculating your rate of inventory turnover, you’ll have a better grasp on the market demand for your products, on the amount of obsolete stock you may be carrying, and what steps you need to take to sell or stock more inventory – depending on your turnover rate.

Here’s a simple formula for calculating your inventory turnover rate:

Cost of Goods Sold (COGS) divided by Average Inventory.

Here are 4 ways to increase your rate of inventory turnover:

1. Experiment with pricing
2. Liquidate obsolete stock
3. Forecast Customer Demand
4. Redistribute your inventory to other warehouses

8) Streamline Your Stocktake

Streamlining your stocktaking process – the steps you take to count inventory – will help you mitigate the possibility of your staff making costly mistakes.

A well-structured stocktaking process will include all the steps required to keep your staff working efficiently to uncover discrepancies and inaccuracies while keeping them engaged and focused.

Here are a couple of ways to streamline your stocktake:

• Schedule your stocktakes to reduce impact on business operations
• Clean and organize your stockroom before performing your stocktake
• Know what stock you’re counting and how you’re counting it
• Open and count absolutely everything – no guesswork allowed

9) Reduce Your Inventory

Most businesses have 20-40% of their working capital tied up in inventory – so if you’re closer to the 40% end, it’s probably time to create an inventory reduction strategy.

The goal is to find your inventory sweet spot  – where you have the lowest possible inventory levels without being understocked – in order to maximize growth and profitability for your business.

Here are 3 inventory reduction methods you can follow:

1. Lower lead times by tracking your existing lead times, sharing sales data with your suppliers, and reducing minimum order quantities (MOQs)
2. Eliminate obsolete inventory by reworking or modifying your stock, offering a discount, or dating it for a tax write-off
3. Improve inventory forecasting through real-time tracking and reporting, integrated communication, and large volume inventory management tools

10) Use a Cloud-Based Inventory Management System

One of the best business-changing decisions you can make is to stop using Excel inventory management and start using cloud-based inventory management.

Unlike locally-installed applications, Cloud-based inventory management software allows you to pay for the features you need now and seamlessly upgrade when you need to in the future.

You’ll pay a single, predictable subscription fee for a “package” that best suits your particular feature needs and team size; then, upgrading is just a few clicks away when your business growth justifies a more powerful platform.

On top of stress-free upgrades, cloud software companies work in the background to make sure things continue to run smoothly, and should you need any questions answered or breaks fixed, they’ll have a support team standing by to assist you.

A Bonus Inventory Management Best Practice

Point #10 above is not just a best practice…

It’s the one tool that brings all the other best practices together.

From streamlining your stocktake to optimizing your inventory turnover rates to batch tracking – a cloud-based inventory management software will help you improve every area of your business operations.

At least, that’s what our software will do for your business.

If you’re looking for a robust inventory management solution to upgrade and optimize your inventory processes, you just found it.