Inventory Strategy: Where to Start

As a small to medium business owner, getting your inventory management right can sometimes seem like a daunting endeavor. Fortunately, most of the stress involved in developing good inventory practice can be resolved by identifying the right inventory management strategies for your business. That’s not to say that there’s an immediately obvious solution for every problem – there are some tricky issues in inventory management however there are well-documented strategies to help you get the basics right.

Be Aggressively Realistic about Inventory Strategy

Although best practice inventory management will differ between businesses and industries, there are some reliable generalizations that hold true for all but the strongest outliers. One such truth is that all inventory has a cost. Aside from the cost of procurement, inventory also involves tying up otherwise productive capital and ‘inventory carrying costs’ such as storage, shrinkage and insurance. Another ‘fundamental truth’ is that inventory shrinks; for all except a handful of industries, inventory in storage will go missing, be damaged or deprecate over time. Understanding these ‘fundamental truths’ – in essence, being realistic about inventory – is a crucial part of any inventory strategy. While successful businesses need optimism, they also require a careful, critical perspective.

Take a Risk-Based Approach

Inventory is both a source of and a response to risk. Inventory can create financial risks, and other inventory management strategies (such as just in time inventory) can introduce operational risk. A good inventory management strategy will involve making realistic risk-based judgments. A risk-based strategy will guide inventory decision making by asking questions such as:

• How crucial is a particular supplier to your business’ overall supply chain?
• How often will supply chain failure occur, and how much harm will a failure cause?
• What will it cost the business to mitigate the risk?

Hold Enough Inventory, But Not Too Much

Although inventory holding costs can put unacceptable financial strain on a growing business, running the business with a near empty tank can be equally as dangerous. Inventory management is all about optimization. A successful inventory strategy will involve constantly adjusting inventory to stay in the ‘Goldilocks zone’ – holding sufficient inventory to prevent stockouts, while avoiding unnecessary inventory holding costs.

Embrace the Power of Data

A successful inventory management strategy will usually involve analysing historic inventory performance to identify trends. Industry leading businesses gain an advantage by leveraging extensive caches of inventory data to predict customer demand with ever increasing accuracy.

Implement Perpetual, Real-Time Inventory

While an extensive analysis of historical inventory is one thing, being able to see inventory performance in real-time is another. Small businesses have traditionally thought about inventory as a periodic chore – with a stocktake as a task to be done at the end of each month, quarter or year. For most businesses, the superior approach is to keep track of stock on a constant, rolling basis. Every time inventory is sold, procured, produced or destroyed, the inventory record should be updated. Having an always-accurate picture of inventory prevents stockouts and the build up of excess inventory. Crucially, it means that your business will never needlessly miss a sale.

Implement a Best In Class, SaaS Inventory Platform

There is a multitude of inventory management options available, but Software-as-a-Service (SaaS) offerings are probably best for most small to medium sized businesses. Consider a platform that is easy to integrate with other business applications you use, such as accounting or point of sale software. SaaS applications, which are hosted in the cloud, reduce IT costs while making it possible to manage or supervise your inventory from practically anywhere on the globe.

Consider Unorthodox Approaches

Once you’ve got the basics of good inventory housekeeping firmly embedded in your business, consider alternative ways of doing things. This is where your inventory management strategy departs from the ‘low hanging’ basics. For example, some businesses have relatively secure supply chains and need to compete strongly in a low margin industry; holding significant amounts of safety stock might not suit those business’ needs, and a ‘just in time’ with dramatically reduced stock levels might work best. While the strategies above are useful starting points, the optimal inventory strategy will be bespoke and take into account the specific dynamics of the business.