The Ultimate Guide to Retail Inventory Management
When it comes to retail, the inventory is your lifeline. Without an organized and well-managed stock of goods, you’re running a business that’s just about breaking even. When it comes to retail inventory management, you should manage your inventory in a way that works for you, so there is no stress involved.
What Is Inventory Management?
In the retail world, you know what inventory is: it’s all of your products that are being sold to customers. Retail Inventory management is keeping those goods in order.
But managing inventory is more than just organization. It also allows you to order, store and carry your stock in a way that helps get the best return on investment.
Inventory management provides information that is necessary to:
- Increase profit margins
- Reduce excess stock
- Cut down on inventory costs
- Work more efficiently
Effective inventory management can also help you answer these questions:
- What is the current inventory of each item?
- What are the greatest and worst-selling things in your store?
- When do you need to reorder?
- Is your order too much or too little?
- Should you stop selling a particular product ultimately?
- Is there enough space for inventory?
This information can help you with your next stock order and spring promotion campaign.
4 Types of Retail Inventory
Every company has a different inventory. For example, if you primarily resell products, then the types of stock will be vastly different than those who produce their product or offer both for customers.
Raw materials are just that: basic. If you’re producing your inventory, then you’ll likely have some of these on hand at any given time. Not all retailers will deal with this type of material, however.
If you have raw materials in your inventory, it is essential to keep them separate from finished goods. The raw material held for sale should be considered a “finished good” and not just storage.
Work in progress
If you are involved in producing your products, then there is a chance that some items will be work-in-progress inventory. If this happens to you, it’s important not to let these unfinished goods stay at their current stage for too long.
These items do not go on the sales floor, and if they’re being worked on, it needs to be separate.
Finished goods are items in your store or on your website. These may be products you’ve been involved with producing, or they could be purchased from a vendor. This is inventory that you will be focusing on in your retail inventory management.
Maintenance and repair
Say you’re a bike retailer. You sell bikes and parts but also offer repairs for your customers. Labor and tools are needed to work on the bicycles customers will be bringing in.
Warehouse management vs. inventory management
If you operate a warehouse for your retail company, make sure to approach the inventory differently than what is done in-store.
It is essential to keep an eye on sales data when it comes to retail inventory management. With this information, you can see what customers respond well to and which items need more attention.
On the other hand, warehouse management is about tracking and controlling the storage of inventory in a warehouse, which overlaps with some aspects of inventory management. However, they are different enough to require separate systems. Your warehouse inventory exists for either stores or e-commerce customers; it must be set up so that you can track where your products are at all times.
The Importance of Inventory Management
Proper inventory management can help you:
It Helps in Maximizing Profits
Inventory and its performance are critical factors in determining the profitability of your business because you need to keep an eye on what is going on with your stock levels to avoid purchasing products at prices that will lead them to become deadstock. This way, we do not buy goods from suppliers who may have higher costs than others; instead, we purchase only those things that our customers want.
As a retailer, you want to ensure that your store is well-stocked. This helps maximize profits by allowing for more accurate projections of customer demand and when it might be necessary to purchase inventory. For example, knowing the sell-through rate (the percentage of items sold) can help decide whether an item should be restocked.
The economic order quantity formula
The economic order quantity (EOQ) formula can determine the size of an inventory order. It helps you balance storage and ordering costs by minimizing the total amount ordered.
- Q stands for quantity. The order size will be most efficient with your company’s capital investment and production capacity.
- D is the annual demand for a product.
- H is holding cost per unit.
When you’re not looking at the optimal EOQ for every single order, it’s essential to know how to calculate that data in case of emergencies.
Excess inventory should be avoided.
Stock that is not profitable and slow-moving stock is both a drain on your resources.
Deadstock is a waste of time and money because it’s not profitable. It just wastes space in your store or warehouse.
Slow-moving stock is still making money, but it’s not enough to make up for losses in other areas. You can replace the slow-moving product with new products because customers are still buying them, and they’re bringing in some cash flow, but if sales don’t pick up soon, this inventory will become dead stocks.
With an optimized retail inventory management system, you can catch slow-moving stock before it becomes dead stock. That means that if the product is not selling and other products in your store, you can switch promotional strategies to move those items and potentially increase sales.
Just-in-time stock management
Just-in-time (JIT) is a method where businesses order just enough to fulfill demand without excess or empty shelves.
A robust retail inventory management system is needed to make a just-in-time ordering strategy work. Without access to integrated tools and data, you could quickly end up over-ordering or underordering, which would defeat the purpose of JIT.
What are the benefits of JIT inventory management?
It also helps if you’re trying to cut down on inventory storage costs by reducing the number of unused products in-store or warehouse space.
JIT inventory management can be disadvantageous because it leaves you without enough products if the supplier unexpectedly shuts down. This is why I suggest researching suppliers in your area so that you will have an alternative place to buy from when this happens.
The best retail inventory management system will be easy to use and accurate. That means you’ll save time on your stock tasks.
If you want to open an eCommerce store, it is essential that your inventory management system can easily integrate with the website. If not, there will be a lot of extra work required to sync up sales data from both places.
Retail Inventory Management Techniques
You can’t just put things in your store and hope for the best. Several tools can help you in retail shop inventory management.
Valuation of inventory
Inventory management is also inventory costing. You need to know how much your purchases are costing you to make the right decisions about what items you buy and when. Inventory costing methods are a way to determine how much you need in your inventory.
The retail method
The retail method is the least accurate way to measure costs because it only provides an approximation of ending inventory balance by comparing the cost and price of your stock.
The retail method is easy to calculate because it assumes that the markup of all items will be consistent. You take your total value for sale and subtract the markup. That would be the approximate cost of your inventory.
You can see that this method has a downside, though. If you have products with different markups (and it’s highly likely), your inventory cost won’t be accurate.
Weighted average method
The weighted average method is helpful when the prices of your products do not often change or by much. To calculate it, you use a pool of costs for all units in one product category and then divide that number by how many items are on hand at any given time.
- For example, let’s say you purchased two batches of a product in the same period. One set cost $50 per unit, and the other was $53
- You purchased ten products per batch, so the total amount spent is $1,030.
- In the weighted average method, you would divide the total cost by the number of units. So you purchased 20 units at an average price of $51.50.
- If you sold three units, you would assume that you sold three units that cost $51.50 each, regardless of the batch they came from.
The simplicity of this method is both its greatest strength and weakness. It makes it easy to see what you have sold, but there are some issues with having a lack of differentiation between batches.
However, your assumptions when using this method can lead to more inaccuracy than other methods like FIFO and LIFO.
FIFO and LIFO
FIFO stands for first in, first out. FIFO assumes the oldest sweater was sold if you have a batch of sweaters and sell one sweater from that batch.
- For example, you purchased two batches of product at a given period. One pack costs $50 per unit, while the other cost $53. If you bought ten teams for each batch, the total amount spent is $1,030.
- Let’s say you sold 11 units. In FIFO, you assume that the units sold were from your oldest batch of inventory first. In this case, it would be the one with a $50 cost per unit.
- Ten of the units you sold cost $50 each, and one unit is worth $53. In total, you sold inventory that cost you $553 to acquire.
On the other hand, LIFO stands for last in, first out. In LIFO, you assume that what was purchased last will be sold next. LIFO is seldomly used in retail because it doesn’t present an accurate valuation.
What are the advantages of FIFO?
For most retailers, FIFO offers the best representation of inventory. You might not be selling older items every single time, but you are likely to sell them before newer ones.
Regular Inventory Reconciliation
Keeping an eye on inventory is the best way to stop theft. Once you’ve noticed a dip in your stock, it’s easier to figure out what caused that decrease.
Physical inventory counts
A complete physical inventory count means counting every unit you have on hand. However, these counts take a lot of time and resources to complete.
One way to stay on top of your inventory is by performing a total count at least once per year. This would be the best time for the last weekend in January or the end of July when you have fewer SKUs.
You can use a cycle counting strategy to get an idea of your inventory levels without having to go through all the trouble of counting everything. Cycle counts are more frequent, so you still have enough information about what’s going on with your stock.
If you want to cycle count, choose a section or two of your inventory and focus on it. For example, the bookstore might decide to do all children’s books for one count while doing non-fiction another time.
It can help identify patterns—do any types of products have more shrinkage than others? Is there anything, in particular, that isn’t moving as much as expected?
If you have high-risk inventory such as low-cost accessories that are not locked behind a case, it might be worth your time to do regular spot checks on them.
Activity-based costing (ABC) inventory classification is based on the idea that 80% of your revenue will come from 20% of your products.
In ABC analysis, your inventory would be sorted into three categories:
- Group A: the 20% of the SKUs which generate 80% of revenue
- Group B: the 30% of the SKUs which create 15% of revenue
- Group C: the 50% of the SKUs which yield 5% of revenue
These three categories are for you to use internally, not with your customers.
How is ABC helpful in retail inventory management?
ABC inventory classification can help you save time when counting your products.
If you’re using cycle counting to keep an eye on your inventory, you must pay close attention to the top performers. These products will need minor checking regarding inventory levels, but they’ll still need monitoring.
One way to make inventory counts more efficient is by splitting your products into three groups: A, B, and C. Focus on counting Group A inventory more frequently and counting Group B and Group C categories less often.
Setup Recommendations for a POS Inventory System
The goal of retail inventory management is to provide information and data so that you can be in control. Your POS should not just move products, but instead, it should work for your business and make things easier.
To ensure that you are following the best practices for store inventory management, follow these tips.
Organize your categories into a hierarchy.
The categories should be consistent and not change much over time to get the most actionable information. Classes that are too specific for a small number of products will give bad results.
For example, let’s take a clothing retailer who sells turtleneck and v-neck sweaters from three different brands.
- The top-level category should be sweaters.
- The sub-categories should be v-neck and turtleneck.
- The POS system should automatically keep track of the brands. You do not need to put them in a category.
Make sure to keep your top-level categories as concise and straightforward as possible. Do not go beyond ten sub-categories under a single top-level category.
Count the items in your inventory.
We’ve already mentioned the importance of inventory counting in this guide, and that is because it is so important. You have to do cycle counts consistently if you want to reduce shrinkage.
Set up reorder points for all of your stock.
A POS will store reorder points so you can focus on what needs to be replenished. Setting your desired inventory level is the only way to automate this process.
Purchases can be managed through your POS system.
If you rely on inventory management software, it is less likely that your employees will make human entry errors and save valuable time.
How to keep track of inventory? Track critical information like:
- Current inventory levels
- Cost per unit for each vendor
- Open orders, stock on order
- Inventory in transit
- Historical sales figures
Examples of Inventory Management
Different industries need different things. Here are some examples of how a retail store might deal with inventory in each sector.
Golf pro shop inventory management
Inventory management for a golf pro shop is a very specialized process that requires constant monitoring of the store’s stock.
Store inventory control is classified by importance. Pro shop owners can use the ABC method. Some of the most popular items are on display at all times because it’s easier for customers if they don’t have to go elsewhere after their round.
When inventory is grouped into categories, the pro shop owner will know when to reorder Group A items to prevent stockouts.
Fashion merchants’ inventory management
In the fashion retail industry, stockouts might be a common problem. However, they can also lead to more customers walking out of your store empty-handed and not making any purchases at all. Some stores have found success by using inventory management software, so they know how often it’s necessary to make orders.
In fashion, the quicker you can get new pieces onto the sales floor and out to customers without gambling on excess inventory, you will be more successful. For example, Zara uses just-in-time stock management, which quickly gets their clothing into stores while ensuring that they don’t overproduce.
How to Buy Your Inventory
After you’ve sorted out your inventory management, what happens? One of the benefits is that it’s easier to manage inventory. You’ll have data at your fingertips, which will help you make more informed decisions.
Step 1: Plan
Optimizing your inventory management system can make it easier to forecast demand. You’ll be able to see which categories and products are doing well, as well as those that aren’t.
Setting up and maintaining your inventory through technology means having a better picture of what you’re selling. If you measure sell-through rates, it will help predict demand, which helps when ordering products.
- When you have a high sell-through rate, it means that your inventory is selling quickly. When ordering new products, keep an eye on those with a higher than average sales velocity.
- Low-selling products need new promotional plans through discounts or other means.
Data on inventory performance helps you set a budget that makes sense. It also provides an accurate prediction of demand, which lets you see the ROI for your inventory better.
Step 2: Buy
Once you have a plan for your budget and know what products are selling well, it’s time to purchase inventory.
A POS system can help you stay on top of your inventory by having built-in purchase orders. When adding new categories to your list, make sure you are under the same hierarchy as before.
Step 3: Manage
After planning, purchasing, and receiving your inventory, it is time to manage it.
- Set aside time to check your inventory performance and sell-through rate every week. This will help you stay on top of what’s selling in the store.
- If you find that your sell-through rate is not where it should be, then adjust accordingly.
- Keep an eye on how quickly or slowly your inventory sells and adjust the reorder point as needed.
- Keep a close eye on your inventory and do regular cycle counts to ensure you’re not wasting money.
Final Thoughts on Retail Inventory Management
You’ll know what sells and what doesn’t, so you can always serve customers without wasting time on things that don’t sell.
Now that you have the knowledge to start your business continuity plan, it’s time to take what you learned and put it into action. You can’t predict everything in advance but be prepared for the unexpected.