How You Can Improve Inventory Management in Your Small Business

What if I told you that there were a way to improve inventory management for your small business? What if I told you that there was a way to make your inventory management system more efficient and less time consuming? What if there is a way to increase your revenue while decreasing the amount of time that it takes to manage your inventory? Then what would you think?

Do you know that inventories can cover from 20% to 60% of your company’s total assets on the balance sheet? So, you really need to think about how to improve inventory management in your small business.

Small business owners are often plagued with the dilemma of how to best manage inventory and costs. This is where most small businesses make mistakes. These mistakes cost money, cause frustration, and can even put your business out of business. The key to efficient inventory management is in knowing how much inventory to carry at all times.

Let’s start at the beginning of your journey to improve inventory management in your company.

What are the inventories of your company?

Inventory refers to the stock of a company’s products. These include all of its goods that are currently in the supply chain – both raw materials and finished goods – as well as those that have been purchased but aren’t yet in the supply chain. 

If your company is a service-oriented company, probably you think that this is not something that matters to your company. But, if you analyze your company regarding different material flows you can easily see that even if your company is a service company you are still dealing with some types of inventories. Papers, supplies, spare parts, and other similar things will always be required by all type of companies. They are not big rates on your balance sheet, but still, you can make some improvements.

So, inventories are materials and supplies that your business carries for sale or as inputs or supplies to your production process.

What is inventory management?

On the other side, inventory management is responsible for planning and controlling the inventory in your company from raw materials to the final products or services that will be in the hands of your customers.

Inventory management is the process of controlling the flow of products through your organization. It consists of a set of activities that help organizations reduce inventory and increase the speed of delivery. Simply, it is a key to managing any business operation. A company that can properly manage its inventory will have the ability to forecast what it needs for the coming weeks and months, prepare to meet the demands of customers, and plan for when supplies will run low.

When you’re running a physical store, you have to deal with the physical aspects of your inventory. This could include things like: how much space do you need to store items, how do you manage shelf space and display products, how many employees do you need to help manage your inventory, and how often should you rotate your stock?

✋ Warning

Here are 8 reasons why your small business is not as profitable as you want and how to fix them.

Tips to Improve Inventory Management

1. Always know your inventories

Inventory control is an essential practice for all businesses. Knowing your inventory is a key part of knowing what you have available to sell. Keeping track of what you have in stock means you’ll know if you need to buy more. It also means that if there’s an emergency situation, you’ll have the correct items available to meet customers’ needs.

Generally, you will need to know two types of inventories: aggregated and item-based inventory.

Aggregated inventory is inventory according to classification. For example, you can have these types of aggregated inventories:

  • Raw materials. Items that have not entered into the production process.
  • Processing items. These items are also called work-in-process items and present items that have entered the production process, are being worked or wait to be worked on.
  • Finished products. These products are outputs from your production process that wait to be sold or distributed to your customers.
  • Distribution of products. These are finished products that are currently inside your distribution system.
  • Different suppliers. These products are products that are used by your company, but they are not part of your finished products.

When it comes to the item-based inventory you can easily disaggregate your aggregated inventory and come to the level of the item.

2. Analyze your inventory

Are you running low on supplies or ingredients? Are there things that have to be bought in bulk because of their expense? Do you need to source more ingredients to meet demand? Is your website lacking the visual impact you’d like? What does your business need to improve? Start with the inventory question. Ask yourself how long it will take to get new items into your inventory or how long it will take to restock your shelves. Once you have a rough timeline in mind, you can start to brainstorm solutions to those challenges.

It’s pretty easy to see when a product is selling, but that’s not always the case. When looking at your inventory, the first thing to do is find out how many customers you have and how much inventory you have. This can be done using basic tools like Google Sheets. After that, look at the conversion rate (the number of purchases divided by the number of potential customers) and the average order value per customer.

When you know what inventories exist in your company, or better said what inventories flow through your company you can easily analyze what’s going on.

Analyze your inventories to find answers to the following questions:

  • What are the needs of flow and kind of inventory in your small business?
  • Which aggregated and individual inventory items are most important for your company?
  • Can you see some supply and demand patterns?
  • What are the costs associated with inventory?
  • What functions do inventories do in your company?
  • How can you control each item?
  • How much to order at a given time to keep low-level inventories?
  • When is the best time to make orders?

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3. Implement continuous improvement related to inventory management

When you know the answers to the above questions, you can simply implement a continuous improvement system relayed to inventory management.

The best inventory management systems have the capability of tracking inventory in real-time, automatically recognizing shortages and orders, and predicting future demand. These systems can also be used to determine when inventory is running low, giving the organization the ability to order more stock when needed.

You need always be sure that you have a solid foundation for operations that support both supply chain efficiency and profitability. When continuous improvement programs are properly implemented, the result is improved inventory turn, more timely delivery of products, lower costs, increased customer satisfaction, and improved operational performance.

Simply, find the biggest problems and make an action plan to implement improvements.

Dragan Sutevski

Posted by Dragan Sutevski

Dragan Sutevski is a founder and CEO of Sutevski Consulting, creating business excellence through innovative thinking. Get more from Dragan on Twitter. Contact Dragan