Buying in Bulk: Strategies for Keeping Track of Inventory
Before getting into inventory management we have to take a look at what inventory actually means and the different types it can have. We all know what inventory is, the sum of goods that you keep on stock, and inventory management is keeping this stock neatly in order. But of course, when it comes to inventory management, you have to pay attention to many more things than just keeping everything organized.
Good inventory management can assist you with several aspects of your business, such as improving your cash flow, optimizing the amount spent on storage and warehousing, and sourcing new wholesale stock. All these factors then affect your ROI (Return On Investment), so inventory management is definitely something you would want to master in your business. If you are keeping track of your inventory in the right way, there are several benefits you can enjoy. For example, increased profit margins decrease excess stock and inventory costs, and also you will be able to oversee your inventory easier that will allow you to work more efficiently.
Types of inventory
There are multiple types of inventory you could be managing in your business at a time. Starting with raw materials, which are simply the raw materials needed for production, and the work-in-progress goods that are running in production at the moment. When you have plenty of work-in-progress inventory you would want to make sure that the goods do not stay in this stage and get finished as soon as possible, so they can go straight to your shelves. As an eCommerce or brick-and-mortar store owner, you are not likely to have to deal with these two types of inventory. But you will definitely have to manage finished goods and those that came back to you for repair or refund. Finished merchandise can be goods that you bought from a supplier or made yourself, but these will be the ones you will be focusing on when creating your inventory management plan. At the same time, you would not want to lose sight of your inventory that has been sent back to you for repair or refund. These are the ones that can seriously hurt your profit margin.
Why is inventory management important and how do you know how much you should buy?
It is rather straightforward that better inventory management means more money in your pocket. Not only because you will end up with less overstock at the end of the season but also because keeping an eye on what sells and what does not can give you a great indication of what your customers like. This way you will not only be able to understand them better but also make sure that you buy into goods that will actually sell and ensure long-term customer satisfaction. Also, once you understand the sell-through rate of each product you can plan and budget your future purchases accordingly. For example, when you have something that sells through quickly, you could buy that product in bulk which will allow you a better position when negotiating discounts with your supplier.
Forecast the amount you need
When you keep track of your inventory, you will end up with tons of data that you can use for forecasting the ideal purchase quantity of each product. This is especially important when you are planning a bulk purchase. You can use the economic order quantity (EOQ) formula to do so.
To understand this formula, see below what each letter stands for,
- Q – will be the optimized order quantity you would want to purchase;
- D – is the demand for that given product over a period of time;
- S – is the cost of the order per purchase order;
- H – is the holding cost of the inventory for the same time period as you looked at with demand.
With better forecasting comes better inventory management and you will be able to avoid excess stock. If you still end up with overstock inventory, you should learn how you can eliminate it and still make some profit or decrease the toll it has on your profit margin. But you should definitely try using the below inventory management techniques to improve the way you keep track of your stock levels and future orders.
Inventory management techniques you need to know
The weighted average method
This can be useful to you when the price of the product you are sourcing does not change too much. To calculate your weighted average, you add the cost of your new purchase to the pool cost of the product then you divide this overall cost with the total number of products you have purchased over a given period in time. This will provide you with an average cost for the product you are selling, regardless of the batch you have purchased it in. This method is rather simple which can both be its biggest strength and weakness. It really does make costing easy but there are more accurate methods, such as the next one on our list.
FIFO and LIFO
FIFO stands for First In First Out, while LIFO is the opposite, Last In First Out. FIFO is more widely used than LIFO especially among retailers and it also needs to be mentioned that LIFO is banned in some parts of the world by the International Financial Reporting Standards. FIFO is a great technique to use especially when you are selling seasonal products and inventory that has an increasing sourcing price over time. With the FIFO method, you will always be moving the oldest inventory out and the remaining goods on hand will be a better reflection of market value. This way you assume that the cost associated with the purchase of the first inventory will be realized first. As an example, your company purchased 50 products for $10 each and later another 50 for $15 each. When you start selling, the cost of goods sold will be $10 until you sell all 50 units that you purchased at this price and for the next 50 units, the cost will increase to $15. For most retailers, especially in the fast-moving world of the fashion industry, this technique will represent their inventory the best.
This method indicates that you are always keeping track of the movement of your inventory. To be doing this you will regularly need to compare your physical on-hand stock with your inventory records. We all know that physical stock rarely matches what you have on record, so this is a crucial step if you want to be on top of your inventory levels.
A full physical inventory count is the best and most accurate way to get a picture of what you actually have on hand. Although these values will represent your actual inventory level the best, it is rather time-consuming to perform. Even if you are not doing it often, make sure that you do it at least once a year when your SKU levels are the lowest to save time. Inbetween full physical counts, you can keep track of your inventory with cycle counts. This means that you would be counting smaller amounts of inventory on a regular basis and adjust your records accordingly. Always choose one or two product categories, depending on their sizes, to cycle count. These counts will allow you to save time and yet keep an eye on your stock levels throughout the whole year.
You can also decide to spot-check some parts of your inventory when you want to detect an unusual movement. When performing this, you count a certain part of your inventory at different points in time on a regular basis. This will help you spot patterns that you would need to keep your eyes on.
ABC classification stands for Activity Based Costing. This method is based on the idea that 80% of your revenue will come from 20% of your products that are performing the best. When using this method, you should be grouping your inventory into three categories.
- Group A: best performing 20% that generates that 80% in revenue,
- Group B: 30% of your products that generate another 15% in revenue,
- Group C: half of your products that only generate 5% of your revenue.
This technique can not only help you to determine which products are moving faster and what you would want to make a bulk purchase of but also determine which inventory groups you should look out for more often. While Group B and C are still generating revenue, you would not want to waste your time and count them as often as Group A. But do not ignore them either, and make sure that you count them occasionally as well.
When you have an inventory management system in place that works well for your business and the industry you operate in, that means that you will be less likely surprised. You will also have a better understanding of your business and the needs and wants of your customers so you can serve them the best you could. Last, but not least you can find growth areas and opportunities just by keeping track of what is happening with your inventory. Make sure you have a good system in place and prepare yourself for the unexpected, so you do not have to worry about going out of business due to the volatile nature of today’s retail world.