Month: June 2023

Did you know that 43% of small businesses don’t track their inventory for one reason or another? Furthermore, only 63% of retail businesses report accurate supply chain and inventory levels. These alarming inventory management statistics cost businesses millions of dollars every year.

Inventory management refers to the theories, processes, and tools involved in controlling inventory at each stage, from sourcing to storing to selling. The core purpose of inventory management is to ensure you have the right amount of stock on hand at the right time — at the right cost and price. So what is an inventory management system?

An inventory management system describes the processes and tools businesses use (physical and digital) to track, record, and analyze inventory movements and sales performance across the supply chain. Cin7 Core and Cin7 Omni are examples of cloud-based inventory management software (IMS) solutions using an integrated software platform to perform all of these tasks efficiently.

Follow along as we unpack inventory management, why it’s important, and how to optimize your inventory management system.

Why is inventory management important?

You must have enough inventory to run a successful product-focused business with satisfied customers and meet market demand. Therefore, systematic and transparent inventory management is critical to a business’s bottom line. For instance, it costs money to store inventory, so inventory managers or other stakeholders try to determine the minimum space required to store the appropriate amount of inventory.

Businesses will use many metrics to determine whether or not they’re managing inventory well. One of these metrics is the inventory turnover ratio. Generally, the higher the ratio, the better it is for the company because it means that inventory isn’t sitting idle on warehouse shelves, where it doesn’t make money. In fact, it costs money. Rather, a good inventory turnover ratio indicates that it is being used in production or sold.

Types of inventory

There are three main types of inventory — raw materials, work-in-progress goods, and finished goods. However, labeling with further classifications can help anyone understand the status of a product at any time. Below, we’ll cover the nine most common types of inventory in inventory management.

Benefits of inventory management

As a small business owner, it’s important for you to be in the know about your day-to-day and overall performance at any time. Inventory management for small businesses is a critical component of how you can stay involved.

However, the benefits of inventory management go beyond this. Effective inventory management can curb profit loss through efficient planning and forecasting. It also improves workflow and delivery times. Let’s dive deeper into how inventory management can help your business thrive.

1. Enhances planning and forecasting

Managing your inventory brings sense to the data around you. Inventory management can help you analyze and distinguish the products between well-performers and shelf-eaters. Using inventory management tools to identify these products can:

• Improve revenue generation
• Free up cash flow

Also, it would be great if you could forecast your customer’s purchasing pattern and restock your inventory based on that data. Inventory management grants you access to do stuff like this, too.

For example, say your forecasted product “x” will be in massive demand during the sales season. You stockpiled product “x” in your inventory, and it paid off. You will not only generate revenue but can also stockpile your supply again based on the daily sales pattern of your customers.

2. Improves delivery time

Nowadays, customers demand no less than the best in the market, whether it’s the quality of the product delivered or the time taken to ship the product to its end customer. Late delivery due to out-of-stock or inventory mismanagement can affect your brand reputation.

Properly arranged and tracked inventory helps:

• Protect you from mismanagement of inventory
• Increase customer satisfaction by expedited delivery

3. Controls your inventory costs

Inventory management is about overseeing the flow of inventory through your organization. Stock management helps you better understand which stocks are doing well and which stocks are eating up your shelf space. The key is to order the inventory as much as needed — not too little or too much.

Due to accurate forecasting done with the help of inventory management systems, you can order the products in the right amount and save the costs involved in purchasing extra products and storing them.

This also protects you from keeping a less demanding inventory, backorders, excessive inventory, etc. Also, better inventory management helps you understand which products you must reorder and how frequently you must reorder them from your suppliers. This can help you crack deals with your supplier, thus saving money.

4. Boosts efficiency

If you are spending a lot of time searching for the products your customers order, it may be time to invest in inventory management. Inventory management includes allocating specific locations to specific products, so you can track the products and their quantities efficiently.

Systematically managing products:

• Saves time and efforts
• Fosters better employee allocation towards more pressing matters
• Improves overall productivity

In short, companies need inventories to operate, and having the right products available at the right time in the right quantities to meet customer requirements is the key to achieving the company’s objectives. Inventory management and control help do just that; that’s why it is crucial to business operations.

Inventory management methods

Selecting an inventory management method isn’t one-size-fits-all — you’ll need to pick the method that suits your business best. There are various ways in which you can manage inventory, and it is up to your organization to choose the inventory management technique that best suits your business.

• Perpetual inventory method: As the name suggests, the perpetual inventory method of accounting inventory is about tracking inventory ‘perpetually’ as it moves throughout the supply chain.
• Periodic inventory management: Inventory is monitored at the beginning and end of the accounting period.
• ABC analysis: ABC analysis typically separates inventory into three categories based on its revenue and control measures required.
• Just-in-time inventory: The just-in-time inventory method refers to having the inventory readily available at the right time and in the right place as per the demand but not overstocking it, creating a deadstock.
• First-in-first-out (FIFO): FIFO is an inventory accounting method where the oldest stock or the inventory that entered the warehouse first gets sold first. FIFO is one of the most popularly used inventory valuation methods.
• Last-in-first-out (LIFO): Compared to FIFO, LIFO is an inventory accounting method where goods produced or purchased most recently get sold first.
• Economic order quantity (EOQ) formula: The economic order quantity is a formula designed to assist companies to not over-or under-stock their inventories and minimize their capital investments in the products they are selling.
• Vendor-managed inventory: Vendor-managed inventory (VMI) is a business model in which the buyer of a product provides certain information to a vendor or the supplier of that product, and the supplier takes full responsibility for maintaining agreed inventory levels of the material, usually at the buyer’s preferred location or store
• Two-bin inventory control: The two-bin method comprises two identical plastic bins that get utilized alternately. Both of them get filled with components fitted onto the final product. The workers on the production line use the first bin until it empties. Once the first bin gets wholly utilized, they will start utilizing the second bin. The empty one will act as a signal for replenishment.
• Fast, slow, non-moving (FSN) inventory: This method separates products based on their consumption rate, quantity, and the rate at which the inventory gets used.

Inventory management challenges

You can minimize or even solve many inventory management challenges with proper inventory management systems. But, if demand changes or sudden inventory shrinkages come out of nowhere, you need a plan to curb the issue.

Implement the following solutions to prevent issues — and meet them head-on.

Inventory shrinkage

Inventory shrinkage is a phenomenon where there is less inventory available due to unforeseen circumstances such as shoplifting or employee theft, damaged or expired products, and vendor error. This is one of the biggest problems a company must plan for since the exact causes are typically left unidentified.

Solutions:

• Safeguard expensive inventory.
• Build trusting vendor relationships.
• Install warehouse security systems.
• Implement employee training and incentives.
• Tighten the process to avoid overlooked inventory shrinkage.

Deadstock

Deadstock, or obsolete inventory, is stock that never sells for one reason or another over a long period without any near future indications of selling. This stock occupies warehouse space, clutters inventory systems, and blocks cash flow. The most common causes of deadstock are incorrect forecasting and lack of demand.

Solutions:

• Prioritize customer relationships to understand what they want.
• Understand market trends.
• Track sales history and demand.
• Communicate with your supplier regularly to learn trends.
• Sell time-sensitive products at discounted prices or donate for tax deductions (if applicable).

Out-of-stock inventory

Harvard Business Review states, “72% of stock-outs were due to faulty in-store ordering and replenishing practices — retailers ordering too little or too late, generating inaccurate demand forecasts, or otherwise mismanaging inventory.”

It’s one of the worst nightmares for any retailer to be out of stock of a particular item, especially when it is in great demand. Being out of stock when the product is in great demand means loss of revenue earning for the company and also decreasing the credibility of your company.

Solutions:

• Create a re-ordering threshold to alert you when it’s time to restock.
• Implement demand forecasting.
• Offer a reserve option to clients when the product is back in stock.
• Indicate online when products are out of stock and show alternatives available to purchase instead.

Demand changes

Unexpected changes in demand can wreak havoc on a company’s inventory. While high demand means a business may profit, they could sell out, unable to keep up with consumers’ needs. On the other hand, low demand results in deadstock and wasted dollars.

Accurate forecasting allows companies to recognize market trends and improve supply chain management. Though forecasts can’t predict all scenarios, it’s the best approach to managing demand changes alongside remaining flexible.

Try the following tips if you’re in the thick of demand changes.

Solutions:

• Analyze your current inventory and supplier needs.
• Build a safety stock.
• Restructure fulfillment processes relevant to the moment.
• Implement a strategic demand management system to plan for future challenges.

Poor use of warehouse space

An inefficient warehouse layout negatively impacts workflows, supply chain performance, and shipping times. Optimizing the space you have from the start can save headaches later.

Warehouse design covers much more than building the physical facility. Think about the zoning of each task — like packaging and shipping — and how much space they’ll truly encompass. What’s the best way to store your goods, and what shelving should you use? One frequently forgotten aspect is planning for future growth — will you likely outgrow your warehouse in a year?

Solutions:

• Utilize an inventory organization system that best suits your business — what products should be most accessible?
• Map out the workflow between warehouse departments to determine what functions you should place and where.
• Revamp the picking process in a way that best fits your sales.
• Optimize for accessibility to cut cross-department interference.

How to manage inventory

You now understand the importance of inventory management, but how do you get started? Here are a few tips and best practices for inventory management to remember as you revitalize your processes.

1. Keep safety stock

Every retailer stocks inventory according to its customer’s average demand. Now, sometimes there can be a rush of sales. You will soon be out of stock faster than you can replenish your inventory. It is during such situations that we need a safety stock.

Safety stocks thus help prevent stock-outs when there is a high variation in demand and supply. For instance, during the Coronavirus pandemic, suppliers couldn’t provide products in the given time frame or the quantity retailers expected. Now in such situations, if the retailer has kept safety stock, it will help make sales and keep customers happy.

2. Emphasize merchandise planning

Retailers of modern times might not question the importance of merchandise planning, but for beginners, here are some reasons why you should plan your merchandise.

Merchandise planning can help you stock your warehouse in a way that increases the inventory turnover ratio. It decreases inventory carrying costs because of:

• Fewer unwanted inventory in the warehouse
• Less labor and maintenance costs
• Loss through obsolescence as most of the stock gets sold
• Less depreciation of inventory

3. Track your products

The bread and butter of inventory management is tracking products at all times. You should be able to track a single item from when you order raw materials until the finished goods are in customers’ hands. Create a tracking system for each step by identifying responsible parties, selecting a tracking method, and training employees.

4. Invest in automation with connected inventory performance

It’s been said before — manually tracking inventory is a process that you’ll likely outgrow fast. As your business expands to bigger or multiple locations or online selling, a more robust system is needed. This is where connected inventory performance and inventory management software come into play.

Connected inventory performance uses automation and integrations to drive visibility, traceability, and efficiency throughout the inventory lifecycle. It offers software solutions for understanding real-time insights and analytics on stock levels, sales trends, and more. Cloud-based technologies allow connections between point-of-sale bases that update inventory levels automatically after each transaction or new receiving shipment. It’s also easy to set up alerts for low inventory to avoid selling out of your high-demand items.

5. Audit regularly

Though inventory management software offers endless benefits, you should still periodically count your inventory levels to ensure your stock reflects the software’s levels. Depending on your stock size, it may be best to schedule a thorough inventory review annually or even quarterly.

Regular audits paired with systematic spot-checking may catch unexpected inventory shrinkage, improperly stored items, and more.

Frequently asked questions (FAQ)

Still have inventory management questions? Let us answer them.

What is meant by inventory management?

Inventory management means tracking a company’s complete list of goods. It covers tracking raw materials from the original manufacturers to the warehouse to the point of sale.

What is the 80/20 rule in inventory?

The 80/20 inventory rule states that 20% of your inventory and product range should deliver 80% of your sales. Outside of inventory, it suggests that 20% of customers should drive 80% of profits. You may hear this also be called the Pareto Principle.

Can Excel be used for inventory management?

Most businesses outgrow Excel as an inventory management solution very quickly. Tracking inventory through spreadsheets is a manual, time-consuming process. There’s a greater chance of human error and security breaches when relying on Excel spreadsheets for inventory management.

What is the difference between inventory management and inventory control?

Inventory control is a facet of inventory management that manages in-stock inventory, including the day-to-day processes of receiving stock, sending orders, and storing.

What is the difference between inventory management and order management?

Inventory management and order management work hand-in-hand. Whereas inventory management typically handles products before and while it’s in the warehouse, order management takes over once a customer purchases the product. Order management involves receiving, sending, and tracking orders once shipped.

What is the difference between inventory management and ERP?

Enterprise resource planning (ERP) is a multi-faceted system for managing and unifying all business functions within a company. It differs from inventory management as it can include operations, finances, supply chain, human resources, customer relationships, and inventory management.

What is the best way to manage inventory?

While it may come as a surprise, you’re likely not cutting any costs by manually tracking inventory on spreadsheets. Between time loss and human error, your business might be ready to move on to inventory management software.

With an automated, all-in-one system like Cin7 Core or Cin7 Omni, you’ll have real-time visibility on your inventory, allowing you to improve your supply chain, keep customers happy, and minimize inventory loss.

Core and Omni are efficient in handling inventory-related tasks and can automate the entire e-commerce operations process. You can conveniently manage back-end operations of selling your products across multiple channels, multiple locations, and multi-currency by using one software.

To learn more about inventory management software, try a Cin7 demo today.

It’s no secret that global supply chains have experienced issues over the last few years. For example, the war in Ukraine increased the price of commodities like gas and oil, food products, and fertilizers across the globe in 2022. Hurricane Ian hit Florida in 2022 and led to port and rail transportation shutdowns. Port Tampa Bay alone had a “$17 billion economic impact.” In a global environment, procurement teams need to be creative and plan to stay ahead of disruptions and competitors.

So, what is procurement? In the broadest business sense, procurement is the process of sourcing and obtaining goods or services. Procurement begins with identifying business needs and ends with paying a supplier for goods and services. The process involves a lot of communication, strategy, documentation, and financial analysis. Procurement involves many stakeholders including:

• Suppliers
• Accountants
• Legal teams
• Product and manufacturing teams
• Procurement managers

We’ve outlined the four types of procurement, how the process works from start to finish, procurement software, and more. We hope this guide helps you consider the process and its impact on your business.

Why procurement is important for business

Procurement is important because it’s vital to a business’s ability to function. Without certain goods and services, most businesses cannot operate. Direct procurement addresses the core functions of a business, and indirect procurement addresses the less direct elements, such as rent and HR services. For example, car manufacturers need to procure goods such as steel, rubber, and plastic, as these raw materials are critical to their ability to create a product. Any changes in availability or cost can have a significant impact.

Since procurement takes up 40%-80% of a business’s external spending, even a small difference in cost can significantly affect profit. Strategic approaches to procurement can minimize the cost of goods sold and also mitigate potential supply-related issues and disruptions that can impact business performance, such as:

• Supplier delays
• Supply chain issues
• Increased cost of goods and services

Supply chain disruptions and market shifts are inevitable, and the global marketplace must respond to remain buoyant. For example, a sudden increase in fuel costs can impact the associated costs of transportation and storage. To mitigate the impact of those rising costs, companies might use procurement analytics to manage their potential risk and remain profitable. In fact, procurement analytics is becoming so critical to navigating a turbulent supply chain that the market is projected to reach $19 billion by 2023, according to a recent study by Verified Market Research.

4 types of procurement

The four types of procurement include direct, indirect, goods, and services. Whether procurement is direct or indirect depends on the type of product a business creates. For example, car manufacturers indirectly procure office supplies, but office supplies are not an integral element of a vehicle. On the other hand, an office supply store directly procures office supplies from a wholesaler. This is considered direct procurement because office supplies are core to their retail business. Procurement types are important for planning and prioritization.

Direct procurement

Direct procurement refers to the procurement of goods and services that are critical to a business. Think of direct procurement as “directly related.” These goods and services generally get procured in large quantities at a low frequency. In a broad sense, this encompasses anything a business needs for creating a finished product.

Examples of direct procurement include:

• Raw materials such as coal, metal, plastic, corn, lumber, and more.
• Semi-finished goods and works in progress, including computer chips, sugar, paper, and anything processed.
• Finished products that retailers purchase from wholesalers, such as t-shirts and candles.

Indirect procurement

Indirect procurement refers to the procurement of goods and services that are important but not critical to a business. These goods and services generally get procured in smaller quantities and at a higher frequency. Think of indirect procurement as “indirectly related” to the business. However, don’t be misled, these goods and services are just as vital for the day-to-day operations of a business.

Examples of indirect procurement include:

• Office supplies such as computers, task management software, pencils, and more.
• Operation consumables like lubricant, water, sewing machine needles, bobbins, and chemicals.
• Outsourced services such as maintenance services, marketing services, business consultants, and any third-party services that help the business function.

Goods Procurement

Goods procurement refers to the process of acquiring physical items, which can range from a simple lightbulb to a fleet of vehicles. Unlike services, goods require transportation and storage. It’s important to note that software is considered a good, while software as a service (SaaS) is considered a service.

Examples of goods procurement include:

• Raw materials such as tin, grain, cotton, and petroleum.
• Semi-finished goods like steel, canola oil, yarn, and sugar.
• Finished products such as smartphones, clothing, cooked sausages, or furniture.
• Software, including on-premise software and non-subscription software.

Services Procurement

Service procurement refers to the process of sourcing and purchasing services. We can categorize this type of procurement under indirect and direct procurement, depending on how critical the service is to the company’s core function.

Examples of services procurement include:

• Business consultants like legal consultants, operational consultants, and HR consultants.
• Marketing agencies such as advertising agencies, PR agencies, and digital marketing agencies.
• Building maintenance services that include janitorial, landscaping, HVAC.
• Software as a Service (SaaS) like Amazon Web Services (AWS), Salesforce, and Slack.

Procurement misconceptions

With such a complex subject, it’s no surprise that people frequently misuse the term procurement. In this section, we’ll explore some of the most common misconceptions surrounding the topic, how it relates to the larger inventory management lifecycle, and how to avoid any miscommunication.

Procurement vs. purchasing

Purchasing is a part of the procurement process, but isn’t interchangeable with procurement. The two terms often get mixed up because they both involve acquiring goods and services. However, procurement addresses larger business concerns like profitability, while purchasing addresses lesser concerns such as order costs.

The purchasing process involves creating purchase orders, auditing shipments, and making payments. This stage of procurement does not involve identifying business needs or selecting vendors.

Procurement vs. supply chain management

Procurement is a significant part of the supply chain lifecycle that supports creating a product, but we shouldn’t confuse it with the entire supply chain management (SCM) process. Procurement and SCM both support the creation of a product, meaning they’re both concerned with materials, vendors, and manufacturing.

The procurement process ends when all the materials are in place for creating a final product. Procurement isn’t directly involved in manufacturing, distribution, and retail locations.

Procurement vs. sourcing

Sourcing plays a crucial role in the procurement process. It starts once the business identifies its needs and seeks potential vendors, vets them, and chooses the best option to fulfill the business’s needs.

Sourcing is a very early stage of procurement. Once sourcing is complete, the purchasing stage of procurement can begin. This stage involves ordering, monitoring, receiving, and making final payments for goods.

Procurement vs. contract management

Contract management is part of the procurement process, which addresses vendor relationships, purchase orders, and payment for goods received. Contract management is the process of managing those agreements.

Contract management and procurement share the same goal of building positive vendor relationships, making contract management relevant to each stage of the procurement process. But the terms should not be used interchangeably.

How the procurement process works (8 steps)

1. Identify business needs

This first stage of the procurement process identifies what a business needs to create a product or provide a service. Consulting with relevant stakeholders can ensure the satisfaction of all parties. This process is sometimes referred to as a business needs analysis (BNA).

These granular product details will inform sourcing and purchasing in the following stages. Departments make requests for a wide range of needs, which can range from raw materials to office buildings. The procurement process continues once the business has adequately identified its needs.

2. Research vendors and suppliers

Following the BNA, procurement specialists begin to research vendors and suppliers. Knowing what they require for products and services is only half the battle, as this research-heavy stage of procurement informs larger business strategies.

Vendor considerations can include:

• Cost of goods or services: How much the business will pay the vendor.
• Scope of the contract: How long the contract will last.

• Timing for payment: When to make payment.

• Termination requirements: What conditions can support the termination of the contract.

• Insurance details: Who will handle insurance during the transportation stage.

• Consequences: Details of the ramifications that can occur when contractual obligations are not fulfilled.

Strategy occurs during this stage using data analysis, market research, and supplier negotiation. This concept is known as strategic sourcing. For example, market research can inform a choice of suppliers from a particular geographic location, and internal demand data can support the choice of vendors and suppliers.

3. Choose vendors and suppliers

With all the necessary research in place, it’s time to choose vendors and suppliers. Before reaching out, the business will consider the budget and analyze the requested goods and services again. This stage includes validating the vendors before the business makes any commitments. This helps the business avoid potential scams, illegitimate claims, or other negative outcomes.

At this stage, the business will send a request for quotation (RFQ) to potential vendors. With an approved vendor quote, the business can send an official purchase order.

4. Create the purchase order

After selecting a vendor and receiving a quote, the business creates a purchase order (PO). Depending on its size and cost, the POs may require approval from various departments. Once approved, the PO is sent to the supplier.

Purchase orders contain important information, such as:

• An internal PO tracking number
• A description of goods being purchased
• Quality and quantity specifications
• Detailed vendor information
• Terms and conditions
• Payment terms and conditions

Once the vendor accepts the PO from a business, it becomes a legally binding contract between the two parties, complete with pertinent information. For example, the PO will indicate when the vendor receives payment from the business.

5. Monitor order

The order will be monitored as the supplier fulfills it, and as it moves through transit towards the paying business. Orders in transit can get lost, damaged, or delayed, and businesses and suppliers will share these supply chain visibility concerns. With so many stakeholders, it’s important that procurement specialists communicate diligently.

Procurement specialists and stakeholders need to prepare for:

• Receiving the order
• Auditing the order
• Storing the order

Businesses need to monitor shipments so relevant stakeholders can stay informed and prepared. The monitoring process begins with the creation of a purchase order. From there, procurement will stay in contact with the supplier who will send advanced shipping notifications (ASNs). The ASN is a document that provides all the necessary details about the incoming order, allowing the business to stay informed and keep track of their order.

6. Receive and audit goods

You must audit received goods for quality control and to ensure all agreements have been met. Document irregularities in case of vendor error or fraud. An internal auditor, or auditing team, will be in charge of the auditing process, and the PO will assess whether the goods meet expectations.

The PO will help answer questions like:

• Were all ordered goods received?
• What is the quality of the goods?
• Was the order received on time?

Detailed documentation is vital for informing the final phase of procurement. You can’t release payment for the order without a successful audit and an approved invoice.

The auditing process can provide useful insights to improve a business’s efficiency and profitability. Insights made during the audit can be compared against internal departments and external trends in the market.

7. Review and approve invoice

The invoice and PO are different documents that serve separate functions. The invoice is the document that needs approval before a vendor receives payment. While the PO is made available when receiving goods, the invoice may arrive at a later date.

Once they receive an invoice, the accounting team will typically perform three-way matching. Three-way matching ensures the PO matches the order receipt and invoice.

This stage ensures that:

• Payment is deserved (following audit)
• Payment is only for the items received
• Negotiated discounts will be honored
• Funds will be dispersed correctly

8. Make payment and update records

Payment is finally issued upon the approval of accounts payable. Businesses need to have an efficient approval process in place to ensure invoices are paid in a timely manner. Both parties have stipulations outlined in the final purchase order.

It is absolutely important to keep these records updated. Businesses must be prepared for potential audits or contractual disputes. Well-maintained records can also support data analysis. These accounting records may inform strategies, and can help improve inventory management, vendor relationships, and the procurement process overall.

What is procurement software?

Procurement software streamlines and simplifies tasks associated with the procurement process. Procurement software simplifies redundant manual tasks and increases efficiency simultaneously. The right software can make data accessible and help improve business efficiency.

Our inventory management platform provides robust reporting for small and medium-size businesses. And Cin7’s ability to integrate with commerce platforms makes it an all-in-one system for product sellers.

Sign up for a free trial to see how Cin7 Core can help you reach your business goals quicker and easier.