The lifeblood of a successful retail business is mainly dependent on the retailer’s ability to provide consumers with quality products in sufficient quantity from the right place at the right time. It’s not easy.
Effective inventory management helps you meet your customers’ demands and generate sales. Good inventory planning prevents you from being out of stock or having excess inventory. Retailers lose an estimated $1 trillion every year due to out-of-stock situations.
And as a retail business owner, this is one of the situations you want to avoid at all costs. This blog will walk you through some of the key points that every business owner must understand about retail inventory. We will also share some tips on inventory management and the importance of using automated inventory management software.
Table of Contents
- What are inventory and retail inventory management?
- What are the benefits of inventory management in retail?
- Key inventory management techniques for retail business owners
- Inventory audit methods for retailers
- Invest in a retail inventory management software
In retail, inventory is a detailed listing of all items in stock and sold in a store. The physical inventory of products is held in the store or warehouse to sell to customers at a brick and mortar or eCommerce shop. The inventory covers raw materials, finished goods, and supplies.
Inventory management is the set of policies and controls that track inventory levels and determine what levels to maintain, when to replenish the inventory, and how much to order. Retail inventory management is a process that helps retailers ensure they have the merchandise buyers want without having too little or too much on hand. Inventory management allows retailers to meet customer demand without running out of stock or oversupply.
Effective retail inventory management can reduce costs and provide a better understanding of sales patterns. Inventory management tools and techniques provide retailers with more information to support their business. This information can be vast:
- Ideal amount of inventory to have on hand and in stock
- Items are selling well and which are selling poorly, by location and by sales channel
- Location of products in the store
- Profit margin of each product by style or model
- When to stop ordering a product
Additionally, retailing can be done in several ways:
- Offline – This is the most common form of retailing. It involves selling items through a brick-and-mortar store or just a physical location.
- Online – The business sells products through an eCommerce site or marketplace.
- Multichannel – When a company sells to several different locations, usually a combination of online websites and marketplaces.
You May Also Want To Read: What Is Inventory Valuation In a Retail Business? Why It Matters
Good inventory management comes with a lot of benefits for your business. Here are some of them:
Increase profit margin
Better inventory management means more money in your treasury. It reduces the amount of dead stock and lets you know which products your customers like, so you can buy more products you know will be profitable. Having lower levels of dead stock means you’ve made more sales and generated more profit.
Lower inventory costs
Knowing how much inventory you have in your retail store and how much you need to meet your customers’ needs enables you to determine inventory levels with much greater accuracy. This reduces the cost of storing and transporting excess goods. In addition, you save on shipping expenses, logistics, depreciation, and the opportunity cost of not having another product that might sell better.
Out-of-stock inventory represents a significant loss of revenue for retailers. To avoid disappointing customers and missing out on sales, you can use inventory management techniques and tools to know the “right” amount of inventory to have on hand, neither too much nor too little.
A simple and often used technique is retail ABC analysis which allows you to determine which products or items are selling the best and which are not. In addition to having inventory management software that provides real-time information on sales and inventory, retailers can make quick decisions by placing new orders, transferring inventory from another location, or delivering directly to the customer.
Enhance customers satisfaction
When your customers consistently get the products they want, they are more loyal to your store with fewer errors or stockouts. In other words, better inventory management promotes customer loyalty, which helps maintain or improve foot traffic to your store.
Avoid spoilage and obsolescence
With inventory management, retailers can avoid another source of inefficiencies that occur when products expire or become obsolete. For example, for grocery or convenience store owners, inventory management is even more critical because these types of retail businesses typically sell a variety of perishable goods like milk, meat, etc.
One of the most popular inventory management techniques for controlling perishable inventory is the FIFO method. FIFO stands for first-in, first-out. This technique records the oldest items as being sold first.
It does not mean that the oldest items must be physically sold, but that the costs associated with the perishables purchased first are expensed first. Doing this for inventory control of perishable goods makes you less prone to having to write off expenses related to damaged goods, thereby improving your bottom line.
According to IBISWorld, there are 152,107 small specialty retail businesses in the United States as of 2022. However, as ironic as it may seem, only 18% of small businesses use inventory management software.
In addition, nearly 43% of small businesses do not track their inventory or use a manual process to do so. Human error is at the root of significant inventory loss, with inaccurate reporting leading to poorly maintained inventory levels. That’s why an ideal inventory management system involves technology.
Although many small businesses feel that they don’t need to use inventory management software, it is imperative to invest in these technological tools as they reduce the time spent on inventory management and the expense of holding excess inventory. Moreover, inventory management does not represent an additional workload for you with an integrated system.
Generally, POS systems are integrated with software that can help you better manage your inventory. Make sure you choose a retail POS system that suits your needs and better plan your list.
Retailers can use several inventory management techniques for better inventory planning. Some approaches may be more effective than others and differ from company to company. Below are the most common inventory management techniques.
First In, First Out (FIFO)
As we mentioned above, the FIFO inventory management method for a retailer assumes that you sell the oldest products in your inventory first. This technique is easier to execute because it follows the natural life cycle of merchandise. In general, retailers favor selling the oldest products first, to prevent them from spoiling, becoming obsolete, or otherwise losing value.
Inventory can gain value over time, making it more valuable when it’s sold than when it was initially acquired. This is because, over time, the expenses associated with inventory generally increase. Thus, older inventory is generally acquired at a lower price.
Let’s say you sell men’s pants in your retail store, and the inventory management technique you use is FIFO. Earlier in the year, you bought men’s pants at $20 each. A few months later, the unit price of these pants has increased to $25 at your supplier. According to the FIFO method, the pants purchased at $20 were sold first. If you had attributed these first sales to the $25 pants, your profit margins would have been lower.
The FIFO method is ideal for retail businesses that sell perishable products. Grocery stores and convenience stores are ideal for this type of method. It is also suitable for businesses that sell seasonal goods.
Last-in, first-out (LIFO)
The LIFO technique involves selling the newest inventory first. These goods often have a higher cost than older inventory, reducing reported profits and taxes. However, this strategy has the danger of leaving inventory on the books indefinitely and undervaluing or overvaluing it relative to market costs. Let’s use the example of our men’s pants again.
Using the FIFO method, a pair of pants you purchased for $20 and sold for $40 will earn you $40. This profit will continue until you run out of the $20 pants in your inventory, at which point a new purchase price will be applied to the margin calculation.
On the other hand, the LIFO method calculated the profit margin based on the price of the newest batch of pants that you ordered. Say that you had ordered some pants at $20 each another batch at $25 each. Margin calculations will be done against the newest batch at $25, bringing down your overall profit and lowering your taxable income.
LIFO is an inventory data management technique commonly used in the U.S. but requires more book handling and is less simple than FIFO. This method is most appropriate for non-perishable products and heavy raw materials.
FSN stands for fast-moving, slow-moving and non-moving items. This method essentially divides inventory into three categories. The analysis looks at the quantity, consumption rate, frequency of issue, and use of the item.
- F refers to fast-moving items, which are items in your inventory that are issued or used frequently.
- S designates slow-consuming items, which are items that are issued or used during a specific period of time.
- Finally, N refers to non-moving items that are not issued or used during a specific time period.
FSN analysis is similar to ABC analysis which allows you to go through your product list and identify products to be prioritized. To learn more about inventory control methods, visit our guide on the most common retail inventory control methods.
Inventory auditing methods help verify product databases and prevent retailers from running out of stock and carrying dead stock. Inaccuracies lead to inefficiencies, shortfalls, and difficulties in budgeting and forecasting. Below are a few inventory audit methods:
Cycle counting is the daily counting of a portion of the inventory. While most retailers periodically conduct a full physical inventory count, there is no need to stop operations for this type of count. Cycle counting is the ideal solution for businesses that are not able to suspend their business to perform a full physical inventory. However, without using inventory management software, this method can be difficult.
Spot checking is an effective technique for identifying problems with inventory procedures before they become serious. Managers should regularly conduct inventory spot checks, especially after a new plan or a significant change in the inventory management plan. The most effective way to spot-check inventory is to use a cycle count system. Instead of doing a full physical count on a monthly or quarterly basis, consider spot-checking different parts of the inventory at a time.
Physical inventory audit
The physical inventory audit involves matching your financial records with your physical asset count. In a formal audit, an accountant monitors the physical count. Typically, operations must be temporarily suspended, meaning that no inventory in the warehouse can be moved in or out during the count. The count can last several days or even a week plus. Cyclic counting is much less painful. For large companies, physical inventory audits require a lot of resources, time, and planning, but are an excellent way to control inventory shrinkage.
Inventory management software is an essential tool in running a retail business. Even as a small retail business with low inventory, you need to prioritize cutting down on human error and have a better insight into your inventory. By choosing to invest in a point of sale and inventory management system, you can ensure that you can automate many tasks in your business. No more manually counting products, looking at spreadsheets, annoying frustration, or not knowing what product to order.
Real-time inventory management tools automatically handle the data you need. Plus, all information will be up to date after an item is sold before your customer even leaves the store.
See related: What Is Inventory Management Software Analytics?
Inventory management software allows you to make smart decisions about what to buy when to buy it, and how to price it.
There are two options: either you choose a separate POS software from your inventory management or you choose a system that integrates your POS and inventory management, (which we highly recommend!). KORONA POS is the best retail inventory management software for all kinds of retail businesses. Here are some of the advantages of KORONA POS:
- Advanced inventory management
- Smart inventory reporting and analytics
- Multi-store and franchise features
- Business and marketing automation
- Reorder levels
- Shipment tracking
If you want to learn more about KORONA POS, don’t hesitate to click on the button below for a free product demo from one of our product specialists.
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