Resource Center/Article • 10/01/2021

Inventory Management Best Practices that Work

Which types of inventory management models apply to your business, and how can you optimize to reduce costs in your supply chain?

The strength of your organization rests on the weakest link in your supply chain. For too many retailers, that Achilles’ heel is persistent inventory management errors. Maybe it’s a lack of inventory management software (IMS), or it could be poor execution on orders and returns. In both cases — and many more — the result is the same:

Damaged customer experience.

Redundancy and confusion from human error.

Product shrinkage.

Siloed tracking and information-sharing.

Add it all up and you’ve got waning margins at a time when your competitors are already eating into your market share. Below are several inventory management best practices that can help alleviate this commercial stress and course-correct your company’s backend processes.

Customize your omnichannel inventory model

Ever-expanding delivery channels mean once-solid inventory systems require regular updates and optimizations. This is evident in the growth of Buy Online, Pickup In Store (BOPIS), shoppable social media platforms and other disruptive trends triggered by e-commerce and COVID-19. Your inventory management system must be capable of fulfilling orders from an array of sources both on and offline — while consistently and accurately restocking.

Inventory management techniques

To accomplish this shipping and supply cycle, you might decide on one of the following inventory control methods:

First In First Out (FIFO): Products stocked first are sold first.

Just In Time (JIT): Products/materials are created only when they’re specifically needed, rather than stocking just-in-case inventory that may never be sold.

ABC analysis: Organizing a warehouse from best- to worst-selling products (A is high priority, B is mid priority, C is low priority). Stock A inventory needs consistent quality assurance, storage space and reordering, whereas Stock B and Stock C might not require as much hands-on management.

Storefront-first: While e-commerce and contactless shopping make BOPIS convenient for shoppers and less costly for shippers, inventory that sits in brick-and-mortar stores should be prioritized first for sales and shipment, where applicable. (If you don’t prioritize store-based inventory first, you at least need an efficient inventory system that can track and move products between stores or between online channels.)

These common inventory methods promote lean warehousing and efficient controls at all stages of the product life cycle. There are dozens of other methodologies to choose from as well. To help decide which system might work best, consider two metrics:

Reorder Point (ROP): The ideal window of time and price point at which to replenish inventory to avoid running out of supplies or overstocking.

Economic Order Quantity (EOQ): The amount of product that should be ordered while reducing storage and holding costs.

Define your KPIs

There’s no shortage of key performance indicators (KPIs) by which to measure your business. The United States Postal Service promotes and explains 10 metrics here, including:

Average Days to Sell Inventory (DSI): Length of time to convert inventory into sales.

Holding costs: Unsold inventory and associated costs of “holding” them potentially indefinitely.

Perfect Order Rate: The ratio of orders that are the right product in the right package at the right amount at the right destination — and documented “rightly” in the system.

NetSuite discusses 33 various metrics, too, grouping them into four subcategories:

Employee KPIs.

Sales KPIs.

Operations KPIs.

Receiving KPIs.

As you can see, there are plenty of data points to track and monitor. But here’s where retailers run into trouble: classic analysis paralysis. Without a software solution that continuously mines, surfaces and analyzes this data, the numbers are locked away in spreadsheets, paper files and other forms of non-integrated tracking systems. So, define the KPIs that matter most to your organization, then adopt a software that can support and operationalize these findings.

Map your software to your KPIs

A lack of visibility into your inventory data results in lost opportunities and wasted resources. More specifically, that means missing out on chances to:

Secure repeat orders and lifetime customers.

Reduce shopping cart abandonment.

Upsell and cross-sell product offerings.

Benchmark performance metrics against internal historical trends, industry standards and competitor success.

The inventory management software you implement must fulfill a number of tasks, such as:

Integrating with existing applications and software (or entirely replacing legacy systems).

Explicitly featuring and supporting the KPIs you track.

Reflecting real-time inventory data for all stakeholders who need access.

Sharing and exporting information to other lines of business, vendors and external partners without losing data integrity.

Emphasize your returns policy

The rise of the reverse supply chain adds another dimension to your warehouse inflows and outflows. All of your reordering policies must account for products being returned at higher rates in recent years and months — potentially as much as 40% can be expected to be returned. Without an effective returns policy, you might be stuck with:

Defective or duplicate stock.

Poor customer experience.

Increased carrier and holding costs.

Receiving your inventory back to your facilities means your inventory management system must pull double duty — something it may not originally have been designed for. To avoid returns in the first place, ensure your product descriptions are accurate, your product photos are updated and your website specifies your exact policy. Returns management is a vital part of inventory management. Contact Green Mountain today to get the most out of your inventory management.

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