30 January, 2024

Top 10 Inventory Management Rules for Your Business

Small- and medium-sized businesses often run on tight margins due to high overhead costs and limited economies of scale. To stay competitive, they must juggle many tasks to ensure effective inventory management.          

For e-commerce stores with a short product list, manual inventory management might work in the short term. As long as you apply best practices, a manual process is better than no inventory management.   

But if you’re an ambitious seller with multiple product locations and sales channels — or you’re trying to quickly scale your business — you’ll need to use robust software solutions to achieve your goals. 

To get the most from your tech stack, you should follow a set of inventory management rules. Let’s explore them. 

What is inventory management?

Inventory management is the process of optimizing the inventory levels of raw materials and finished goods to ensure the seamless operations of product-led businesses.

Depending on your business, inventory management can include several tasks, such as ordering, counting, transferring, and storing inventory to ensure you meet market demand and maximize profits. 

While it’s possible to use manual processes to complete these tasks, doing so takes away from the time you could spend scaling and improving production or other areas of your business. 

Instead, you should opt for workflow automation — one of the key benefits technology can bring to your operations. Automation reduces human error and takes over time-intensive tasks so you can reallocate labor hours to activities that will help your business grow. 

That’s why inventory management is best done using specialized inventory management software, such as Cin7 Core and Omni.

How inventory management benefits product sellers

While service-led companies may benefit from inventory management, it’s a crucial business process for product-focused businesses of any size. 

Here’s what inventory management techniques can do for you:   

It helps you get the most from your company assets 

Controlling inventory costs is a balancing act for manufacturers and retailers. And finding this balance may be an expensive endeavor for small business owners, especially if trial and error is your main approach.  

Through effective inventory management techniques, such as collecting sales data on all your inventory items and applying inventory forecasting, you can cut costs while increasing your inventory turnover ratio.  

You can connect your inventory wherever it lives

If you have products in multiple locations, such as warehouses and physical stores, you can easily lose track of stock levels. And without proper visibility of inventory in different locations, you could buy excess perishable or seasonal products, contributing to the $163 billion of inventory that’s wasted annually.       

While connecting stock in different locations is an important part of inventory management, it’s easy to get it wrong if you rely on manual inventory management processes that are time-consuming and prone to human error. 

Feature-rich inventory and order management software, such as Cin7, speeds up your workflow and brings a high level of accuracy to your operations by showing you a complete picture of your stock levels in multiple locations.

It increases efficiency

As businesses grow, small inefficiencies add up, gradually draining your finances. Without proper inventory management, many of these inefficiencies will stay hidden or only become noticeable when they’re a huge problem. 

For instance, the cost of goods sold (COGS) calculation is one area where inefficiencies can hide. That’s because it’s easy to misinterpret or incorrectly calculate the expenses directly related to producing goods.  

When calculating your COGS, remember that it’s about more than physical inventory expenditure. You should also factor in every cost related to supply chain management, such as manufacturing, warehousing, and third-party logistics (3PL).

Proper inventory management can help you reduce lead times and boost warehouse staff productivity. For example, without excess inventory clogging up your warehouse shelves, your staff can easily find products and pack them for delivery.

It boosts customer satisfaction and customer loyalty

Without customer-centric inventory management, you might run out of the products your customers want, causing them to leave your brick-and-mortar or e-commerce store unhappy. 

These customers might turn to your competitors and become loyal to them in the long run. A study involving UK grocery shoppers found that 27% of customers would question their loyalty to a grocery retailer if stockouts became a regular occurrence.

With proper inventory management practices, such as setting reorder points and alerts, customers can happily fill their carts and rest assured that your store has a consistent stock of the products they need, ultimately boosting sales. 

Best inventory management rules

Inventory management is a complex set of tasks that need constant attention. And without a guiding set of principles, it’s easy to underestimate the effect that inventory level accuracy has on your bottom line. 

To keep your business on track, follow these inventory management rules for product sellers:

1. Use enterprise-grade inventory management software

Without inventory management software like Cin7, you’ll spend a lot of time manually updating spreadsheets and constantly double-checking inventory quantities in all areas of your business (e.g., stock control, in transit, and physical locations). 

These processes take time, and even with a detailed standard operating procedure, typos and miscounts can happen. 

The best inventory management tools boost stock accuracy and automate many time-intensive tasks, like inventory control, letting you focus on product sales and business growth.  

But with several tools available, it’s crucial to assess your options and choose the software that best suits your requirements. After all, if you use too many inventory tools and processes, you might lose sight of your inventory management goals, such as customer satisfaction and profit maximization.

Excess tools can increase system complexity and decrease the efficiency of your inventory processes. In addition, data incompatibility and inaccurate reporting can prevent you from effectively applying some of our top inventory management rules.     

For that reason, your best option is to use a one-stop inventory management solution like Cin7. With our diverse product features, you’ll get a real-time snapshot of everything from manufacturing and warehousing operations to the point of sale, helping you make informed inventory management decisions and accurately forecast future demand.

2. Maintain optimal stock levels

You don’t want your warehouses and store shelves to be teeming with low-selling goods — or worse, dead stock — but you’ll also need to keep a buffer stock of certain goods to deal with peaks in customer demand. 

This is especially important for products with long lead times. The reorder point formula can help you find out your regular stock needs, but when it comes to reordering, don’t fall into the “set-and-forget” trap. 

Instead, run sales and inventory reports regularly, and ask your warehouse and store staff to take proactive measures to help you identify products with suboptimal stock levels. 

Whatever inventory management strategy you use, bear in mind that cash tied up in slow-moving stock prevents you from investing in different products or other areas of the business, such as marketing. 

What’s more, you may need to discard perishable stock or goods with seasonality (e.g., summer clothing) if they don’t sell in time.

3. Follow the 80/20 rule

The 80/20 rule is widely observed in business and economics, but its usage extends to other areas, such as quality control. According to the 80/20 rule, which is also known as the Pareto principle, 80% of your profits should come from 20% of your stock.

When you break down your sales performance using various metrics, you can refine your stock replenishment approach to focus on the 20% of top-selling products.   

Other traditional inventory management rules and approaches to consider include first-in-first-out (FIFO), last-in-first-out (LIFO), and just-in-time (JIT) inventory.

4. Account for all inventory types

Inventory isn’t just about finished goods. You also have money invested in other types of inventory, such as raw materials, work-in-progress inventory, safety stock, packaging materials, maintenance, repair, and operations (MRO) inventory.     

And if you’re only tracking the levels and value of finished goods on hand, you’ll have an inaccurate idea of your COGS.  

To dig deeper into the priority level of different types of inventory, you can categorize and analyze stock based on certain criteria, such as value or lead time. 

For example, in an ABC analysis, you can categorize stock as class A, B, or C based on its perceived value. Items under A would be high-value goods, while C items have the lowest value.

5. Use forecasting

To accurately predict future sales, you’ll need more than a hunch and a product promotion plan. Good inventory management involves making data-driven decisions that drive sustainable growth.       

For effective demand planning, you’ll need to look at previous sales and anticipate periods of increased sales. For example, e-commerce sellers may need to triple their order of top-selling products in time for Cyber Monday and Black Friday. 

Remember that your inventory management approach is only as good as the data you use to implement it.Cin7’s  real-time reporting provides accurate data on COGS, job costing, and stock levels, helping you make informed decisions.

6. Narrow down your stock-keeping units (SKUs)

When you’re focused on increasing your product mix to give your customers more choices, you might forget about getting rid of the products that are holding you back (e.g., low-performing products). 

If you’ve found that your SKU list has grown out of control (SKU proliferation), apply SKU rationalization to streamline warehouse management and simplify sales and reporting.   

That involves reducing the number of SKUs in your inventory management system or consolidating them to make ordering and reporting easier. 

If you only stock a few product lines, SKU rationalization is a relatively simple process. But as your product list grows, this task becomes trickier but more important. For best results, use advanced reporting tools to identify excessive SKUs objectively.

7. Automate wherever possible

Inventory managers have a constant stream of critical tasks, and even small oversights can hurt sales. By automating inventory management processes, you can save time and take some pressure off your staff. 

Cin7 brings automation to various inventory-related tasks, such as creating purchase orders, sending in-app and email notifications, and reporting. This lets you step back and focus on promoting and selling your products.

8. Consolidate your tech stack

If you use multiple software programs (e.g., inventory management, tax compliance, and accounting software) to operate your product business, you might need to transfer data manually and double-check for accuracy. 

And the more disconnected tools you use, the trickier data transfers become. To mitigate this problem, stick to tools that integrate with other applications in your tech stack. 

Cin7 is your go-to hub for all the digital processes you use to run your business.

Our growing list of 700+ integration partners includes QuickBooks Online and Xero for accounting, Inventoro for inventory forecasting, and ShipStation for product shipping. 

These integrations help you do all your inventory management tasks in one place and easily sync inventory data from multiple apps. Without the distraction of switching between apps, you’ll save time you can spend making other areas of your business more efficient.

9. Audit regularly

While it’s tempting to believe that your inventory and sales reports are accurate, this isn’t the best practice for inventory managers. Even something as small as a typing error can distort your inventory count and inaccurately portray product sales. 

Say you receive two items from your supplier, but the stock control manager incorrectly enters “20” into your inventory management system. After selling these two items, the system will still say you have 18 left in stock. On a basic sales report, it will appear that these 18 phantom items aren’t selling, when the reality is they can’t sell because they’re out of stock.  

Here’s where inventory audits come into play. These audits ensure that physical inventory counts align with your inventory records. 

Once you identify discrepancies, you should investigate their cause, such as stock miscounts, incorrect units of measure or barcodes, or lax recording procedures. Then, focus on rectifying the issues and changing your standard operating procedures to prevent them from happening again.

Instead of relying on year-end audits, it’s best to run historical and real-time inventory management reports regularly and do physical spot checks to ensure everything is in order.   

Cin7 has 100+ customizable reports to help you with your inventory auditing. Furthermore, your homepage dashboard shows you real-time sales and inventory data across the board at a glance, so you don’t have to jump between multiple software to access the data you need.

10. Be proactive

Inventory management approaches differ based on sales volume and product lines, so you may need to try a few methods before finding the best one for your business. 

But, if you don’t see results within a reasonable time frame, it could be best to try something new. Whatever approach you use, you can implement it effectively using Cin7’s host of inventory management features.

Cin7 helps you follow inventory management rules

Sticking to our top 10 inventory management rules may seem time-consuming, but it doesn’t have to be, especially if you use robust inventory management software like Cin7.   

With Cin7’s Connected Inventory Performance, you can integrate your key business applications and automate many steps in your inventory management process. 

Cin7’s capabilities help you save valuable time, implement inventory management rules without effort, and gain full visibility of your inventory. Sign up for a free 14-day trial today to see why our 8,000+ customers love our inventory management solutions.

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