6 Ways to Better Inventory Management

If inventory value is rising and back order rates are holding steady or increasing, this is a sign that your inventory is out of control. Before you confront your inventory management team, however, consider this: It might not be the team’s fault.

Effective inventory management is a combination of art and science. The process seems simple: Review historical sales, project future sales, place orders and receive products. Simple doesn’t mean it’s easy. It requires someone with good instincts to predict trends and analytical skills to transform data into information.

The old rules have changed. Economist Vilfredo Pareto’s 80/20 law worked because 80 percent (+/-) of the movement was generated by 20 percent of the products. If you focused on managing the top items, you’d keep your inventory balanced.

But the Internet has changed movement dynamics. The 80/20 ratio is evolving. Top-selling items are selling less while low movement ones are selling more. This means more resources must be allocated to manage the same number of SKUs.

If you don’t adapt to the evolution, your demand and available stock will be continuously out of balance. Rising costs and customer dissatisfaction will undermine even the best marketing.

What can you do? Here’s a look at six tips to help you get a better handle on your inventory.

1. Monitor back order rates, inventory valuation and fill ratios daily. How they’re trending is more important than the actual number. If the trend is in the wrong direction, identify and correct the causes quickly.

2. Rethink the inventory management process. When our market evolves and the dynamics change, adapt or die. Find the best system for your company at the time. Then continue to modify it as needed.

3. Allocate enough resources to manage your inventory well. Back orders alienate customers. When back orders occur once or twice, buyers will forgive you and try again. Three or more orders with out-of-stock items will drive them to your competition.

4. Create or expand a drop-ship program to reduce your costs and improve service. Build relationships with your vendors, and make sure they’re reliable. Monitor their performance weekly, recognizing good performance and requiring correction of poor performance.

5. Renegotiate terms with existing vendors. Request case pricing without case purchases. If your annual volume is substantial, most vendors will agree. It’ll allow you to use just-in-time management for slower moving items.

6. When possible (and ethical), use multiple vendors for the same products. This will prevent your vendor’s poor inventory management from becoming your problem.

Debra Ellis is president/founder of Wilson & Ellis Consulting, a management, marketing and operational solutions consulting firm. She can be reached at dellis@wilsonellisconsulting.com.