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Mohammed Ali

Efficient Inventory Management Can Save You Money

by Mohammed Ali
Calculating Operational Costs

If you think excess inventory is a problem that only affects other retailers, think again. As of 2015, retailers are racking up inventory costs of $1.43 for every dollar they make in sales! Simply put, excess inventory can break your business by:

  • Eating into your working capital, tying up money you could otherwise use to scale or invest in new products and technology.
  • Taking up space, which isn’t free by any measure
  • Wasting shelf life of your products, which can lead to you throwing out more stuff than you sell

Why does the average retailer stock up more than they need?

The answer is simple and twofold. One, in today’s era of instant gratification, stocks-out can mean that the retailer has forever lost a chance to serve a certain customer. Two, a retailer selling on multiple channels still falls back on spreadsheets and manual inventory updates, which in turn results in errors of calculation and judgment.

The Math Of Managing Inventory Better

Calculating Operational Costs

Indeed, managing your inventory across sales channels - marketplaces, web stores and retail outlets - can be daunting to say the very least. Still, knowing how to balance your demand against your inventory can help you save immense amounts of working capital. Here’s how:

  • Get an accurate calculation of how much stock you absolutely require, nothing more and nothing less. This ensures that you only pay for what you need.

    For example, you sell 10 phone cases every day, and your vendor needs a week (7 days) to send you more stock from the time you raise a purchase order. In this case, you should have at least a stock of 7*10= 70 phone cases in stock all the time. This is the bare minimum inventory you need to make sales. Once you reach 70 phone cases, you should raise a new purchase order. This value is called the reorder level.

    If you don't know this calculation for stock levels, you will never know just how many units to order from your vendor each time.

  • Some vendors may not always comply with time restrictions. If your vendor promises a week, but delivers in ten days, you need to have additional units for all the extra time your vendor is taking. This is your safety stock. Having safety stock on hand helps you avoid stocks-out because of your vendor, and also accounts for surges in demand that you may not have foreseen.

    Continuing with the above example, say you know that your maximum sales have been 20 units on any given day. Likewise, your vendor is known to occasionally take up to ten days to deliver your products. Your safety stock is the difference between the maximum and average parameters. In this case, it is (20*10)- (10*7) =130 units.

  • Just as you are concerned about stock levels from your end, your vendors and suppliers have concerns of their own. Most suppliers usually compensate for the discounts they offer by playing the number game - the more they sell, the more financial sense it makes to them.

    Known as the minimum order quantity, this can be represented either as the minimum number of products the supplier will sell in one batch, or as the minimum bill amount you should make for him to sell to you. Why is this important to you? You may know just how much you need thanks to your inventory calculations, but while calculating reorder level and safety stock, it is important to take into account the absolute minimum number of products each of your vendors will sell.

Just with these values and concepts, you can see savings appear in your working capital. If you didn’t know that these are the numbers you need to work with, you would either order too little (and thus end up paying more for expedited delivery when a sales surge happens), or order too much and tie up money in the form of warehousing and storage fees.

The Financial Benefits Of Efficient Inventory Management

Assume, just for a second, that the above process is automated. Instead of a spreadsheet, you work with a system that has the ability to track inventory in real-time. This intuitive system realizes when you reach the reorder level, and raises a purchase order for more stock immediately. Even better, it does this for all products across all of your sales channels.

Calculating Operational Costs

Here’s what a good multichannel retail management system can do for you:

  • It can be accessed from anywhere, on any system with an internet connection. It allows you to set permissions for which of your employees can see what aspects of the business.

    This lets you free up labor that is otherwise involved in stock counting, and allows you to reduce manpower cost.

  • It tracks inventory in real-time, 24 hours a day, even when you’re sleeping. Less stock-outs mean more efficient use and rotation of inventory. You never have to spend a penny extra on stocking up more than you need.

  • It records the product’s processing status, and gives you a picture of your products as they are sold, shipped, delivered or returned.

    More efficient returns handling can save you a world of pain, as you can decide which of your products can be added back to the inventory, and when.

  • It is connected to the Point of Sale (POS) system in your stores, and consolidates inventory across all physical and digital channels.

    Treating inventory as one single unit allows you to calculate your requirement in the same way, which means no more confusion about which warehouse or retail center to ship products to.

  • With intuitive integrations, you can manage your shipping, accounting and selling within a single platform.

    Some of these integrations allow you to get discounts on shipping and packaging you wouldn’t have gotten otherwise. Also, since everything is visible to you on a single platform, you save time and resources on periodic audits.

  • It automates your purchase orders so that you never have to worry about placing orders on time with your vendor again.

    Again, by avoiding last minute purchase orders, you save money you would otherwise spend on express shipping from your vendor.

  • Most significantly, such a system keeps one eye always trained on your inventory levels, and virtually eliminates the scope for human error, stock pilferage and otherwise unaccountable losses in stock, all of which can cause you to write off these losses after each financial year.

Managing Inventory Just-In-Time

Calculating Operational Costs

One of the major hidden costs in inventory management is the rent or lease you pay for the warehouse. Even if you don’t lease out an entire warehouse, typical storage rates for warehouses run between $6-$15 per 6 square feet per month. Needless to say, the larger your products are, the more you pay for warehousing.

Let’s say you keep your products in a retail store. You’re probably using 30% of the shop floor for storage of inventory, which does not include your display sections as they become the shop floor where customers walk around. Then, let’s say you pay an average of $30 per square foot per month, and you have a store that is 1,500 square feet. 30% of this, which is $13,500, is exclusively accounted for in warehousing! You can see another example of this calculation here.

One way to reduce your warehousing cost is to reduce warehouse space. You can do this by holding just as much stock as you need at every point in time, no more, no less. This concept is called Just In Time Inventory Management.

This helps you save immense amounts of money by eliminating the concept of stocking-up almost entirely! Indeed, a smooth process flow within the supply chain is essential to implement this successfully.

You can read more about Just In Time inventory management for retailers here.

So there you have it! With just a bit of math, a good inventory management system and sourcing best practices, you can actually make inventory handling a lean process, and free up your working capital that you can then out to better use.

Since a machine does more of the work, you can reduce your operational costs even further by having a small team that leverages technology to run your retail business efficiently.

Using multichannel inventory management software like Primaseller helps you manage your inventory across locations and channels very efficiently. And having a great shipping solution like EasyPost ensures that you won’t sink your newfound savings into shipping costs.

Author Bio

Mohammed Ali is the Founder and CEO of Primaseller — a MultiChannel Inventory Management software provider that also helps sellers build brand credibility by ensuring that accurate stock information is reflected across sales channels and orders are fulfilled on time. When not running a startup, Ali is often caught lapping up the latest book in fantasy fiction.