Using Excel Spreadsheets or, worse, guessing your stock levels isn’t only a bad idea, it’ll cost you money.
In addition, it’ll cost you another of your most precious of commodities, your time.
Today we’re taking an in-depth look at inventory management, why it’s so important for Irish retail businesses and how you can start doing essential inventory management correctly.
And we’ll investigate the advantages of inventory management and how to choose the perfect inventory management software for your business.
Finally, we’ll look at creating a synergy between your inventory management and POS and why it’s crucial for multichannel inventory management.
But first, let’s understand the terms.
- What is retail inventory management?
- What is inventory management software?
- 9 Benefits of a good inventory management system
- Methods of inventory management
- How to set up an inventory management system
- What is Multichannel Inventory Management?
- How to choose inventory management software
- Using your POS for effective stock management
What is retail inventory management?
Benjamin Franklin once mused, “Beware of little expenses; a small leak will sink a great ship.”
And almost three hundred years later, we can apply his philosophical thoughts to inventory management.
That’s because those ‘little expenses’ – your stock – need to be accounted for.
TradeGecko defines inventory management succinctly:
“In business terms, inventory management means the right stock, at the right levels, in the right place, at the right time, and the right cost as well as price.”
Good inventory management means your retail business has stock to meet consumer demand.
What is inventory management software?
Thankfully, Irish retailers don’t have to rely on pens and paper or spreadsheets to track their inventory anymore.
Inventory management software is the range of tools, resources and software that a business uses to “track, manage and organise product sales, material purchases and other production processes”.
With technological advances over the last two decades, retailers now use systems – inventory management software – based on RFID (radio-frequency identification) and barcodes to organise everything.
Benefits of a good inventory management system
Retail businesses that prioritise putting an effective retail inventory management system in place enjoy a lot of benefits.
1. Increases sales and profit.
Sales and profit, unsurprisingly, are the ambition for all retail businesses.
Those that utilise inventory management report lower costs and a better understanding of their sales and the patterns that emerge.
And that means better cash flow as you’ll reduce your chances of carrying deadstock (products that aren’t selling and look unlikely to sell in the future).
2. Inventory management allows you to plan and forecast demand.
Patterns that emerge from inventory management help you learn and plan for the future.
Let’s use an example to highlight this.
A DIY store sets up an inventory management system.
In July and August 2020, it sells 7,300 outdoor BBQ sets.
This allows the store to plan for July and August 2021 in terms of stock.
Even better, the store can also now stock similar items related to BBQs, for example, charcoal, covers, cutlery and cleaning equipment.
Ultimately, inventory management helps you focus on fast-selling, high-profit products and spend less time on products that aren’t as successful.
3. A good inventory management system provides you with critical information.
Ultimately, solid retail inventory management arms you with all of the essential information to run your business.
Just as important as knowing what sells successfully and which months it does so is the information on what’s not selling.
You’ll also quickly identify which products have the highest and lowest profit margins, which allows you to tweak your sales and marketing strategies accordingly.
4. Keep on top of stock levels.
Another important aspect of inventory management is keeping track of stock levels.
There’s nothing worse for a retail business than having too much stock that’s hard to shift.
And for your customers, it’s frustrating if you have too little stock, which might alienate them and force them to shop elsewhere.
Setting up low stock level warnings can help you order at the right time so you’re prepared for future sales.
5. Allows you to track product information.
Barcodes, SKUs, QR codes, lot numbers, product numbers; there’s a lot of confusing information regarding your inventory.
But by using an inventory management system, you can create unique product IDs to simplify and streamline the process.
This allows you to find product information quickly and effortlessly.
It also helps you to distinguish between items that might appear similar but are, in fact, different.
6. Prioritise future purchase orders.
If 20% of your products generate 80% of your revenue, you’ll want to know what these products are.
And with most good inventory management systems, the intuitive software will calculate this for you to ensure you’re ordering the right products at the right time.
7. Helps you create an authentic multichannel or omnichannel experience for customers.
In our recent blog post, ‘What Is Omnichannel Sales?’, we spoke about why retailers should embrace omnichannel sales.
With omnichannel sales, it’s super important that your inventory management system is working well, or you’ll have a nightmare managing stock between all platforms.
Thankfully systems like AirPOS manage stock between all channels so you have one source for managing your stock.
8. Reduces shrinkage and aids growth.
Ah, shrinkage, the bane of every retailer.
But what does retail shrinkage actually mean for you?
Well, Matthew Hudson’s definition is an excellent place to start:
“… the term used to describe a reduction in inventory due to shoplifting; employee theft; administrative errors such as record keeping, pricing, and cash counting; and supplier fraud.”
As you’re undoubtedly aware, shrinkage is a massive issue in retail, with the National Retail Federation finding that the average shrink rate in the industry is 1.38% of sales.
This is where a firm grip on your inventory management can reap significant rewards.
That’s because you’ll avoid some of the leading causes of shrinkage: admin errors, recording keeping, pricing and supplier fraud.
And what you’re not losing in monetary terms via shrinkage can help facilitate your company’s growth.
9. Your customers will thank you.
We live in a world of instant gratification.
And customers expect online retail stores to be fully stocked, ready to dispatch and have quick delivery times.
So it’ll come as no surprise to you that customers hate seeing the dreaded ‘Out of stock’ button beside a product.
A recent example of this is the ongoing stock issues for the PlayStation 5.
Yes, customers acknowledge that there’s a global pandemic and Brexit, but… they still want their console as soon as possible.
So, it’s with that in mind that retailers like you need to work hard behind the scenes to ensure a smooth buying process for customers.
They mightn’t personally thank you for it, but at least they won’t riot as they did in Japan for new PS5 stock.
Methods of inventory management
Every retail business has its unique circumstances.
But there are some best-practice methods you can use to make a move from spreadsheets or manual stock counts to a more seamless, holistic approach.
1. First in First Out (FIFO)
Shopify provides a great definition of FIFO:
“The first in, first out, accounting method assumes that sellable assets, such as inventory, raw materials, or components acquired first were sold first. That is, the oldest merchandise is sold first, with its associated costs being used to determine profitability.”
And ABC analysis was born through that principle.
So, what does it mean for your retail business?
Well, as Orderhive explains, ABC Analysis:
“…typically segregates inventory into three categories based on its revenue and control measures required: A is 20% of items with 80% of total revenue and hence asks for tight control; B is 30% items with 15% revenue; whereas ‘C’ is 50% of the things with least 5% revenue and hence treated as most liberal.”
That means that through the ABC Analysis, you can prioritise your time and resources on the inventory that needs it most.
This will turbo-charge your efficiency and help you streamline the buying and selling process.
3. Regular count and audit.
A regular inventory count is an integral part of your arsenal and serves two primary purposes.
Firstly, it allows you to find out the exact quantity of products you have in stock, which aids in planning future orders.
Secondly, a regular count and audit takes away the guesswork and helps you avoid a common issue for retailers: overstocking and understocking.
And while these physical checks are a little more time-consuming than you’d like, even just one or two full counts a year can help you understand and manage your inventory.
If you don’t have the time or resources to do your own manual audit, our partner scanmatix have software and services to really speed up the process. In fact, we actually recommend using them if you’ve not been tracking stock closely, it’ll save you a bunch of time and you’ll get accurate levels of current stock that can be added right into your new system.
4. Set reorder level
If you want to take a proactive approach to your inventory management, setting your reorder level is a great idea.
This is usually done through the inventory tracking software (or your POS system) and means that when the stock goes below a certain – defined by you – level or threshold, then it is reordered automatically.
5. Just in Time (JIT).
If we’ve learnt anything from the global pandemic, it’s that Just in Time (JIT) is risky.
And when a situation changes, it can backfire spectacularly.
Just fourteen months ago, there was a global shortage of hand sanitiser and, oddly, toilet roll.
That’s because JIT was used, and as soon as Covid-19 emerged, it buckled under the pressure.
But global pandemics aside, Just in Time can be a great strategy as it mitigates inventory management risks to you and your suppliers.
Favoured by smaller retail businesses with less cash flow, JIT is a decent choice if you’d rather not tie up all your cash in inventory.
Remember: inventory is money.
And if you keep that in mind when setting up an inventory management system, you’ll be able to focus on the most important tasks that will reap the most impressive rewards.
Firstly, it’s a good idea to understand the types of inventory your retail business has.
These usually fall into three distinctive categories:
1. Work in progress (WIP)
WIP goods are those that are in the manufacturing process but aren’t yet ready to sell.
An example might be sofas that need fabric added to them or kitchen tables that need to be painted.
2. Raw materials
These are the materials (or individual components) used to manufacture your finished products.
And for some retailers, these take up a lot of space.
An example might be a retail company that makes bespoke wedding gifts and may purchase the materials for their products from another supplier.
3. Finished goods
These are your packed and ready to sell products that are stored as part of your inventory before being placed in-store, online or for sale through distributors.
How to set up an inventory management system
Thankfully, modern technology has transformed how retail companies – small and large – manage their inventory.
And the process of setting up an inventory management system doesn’t have to be costly or time-consuming.
Here are some of the most important tasks in the process:
1. Forecasts aren’t just for weather watchers.
Predicting the weather is relatively straightforward.
But predicting sales is a little more difficult unless you’ve tracked all the vital data.
That’s why one of your first goals is to understand the demand for all of your products, keeping in mind seasonal variabilities and the latest trends.
To do this, you’ll need good quality accounting software that helps to ascertain what products fly off the shelves at what time of the year and profit margins for best-sellers.
This allows you to manage and carefully adjust your inventory so that you’re left with only what you need.
2. Track, track, track.
The world’s most successful retail companies all share one common trait: they track their inventory every step of their journey.
The two most popular ways of tracking are through barcodes (yes, they’re still in use in 2021!) and RFID (radio-frequency identification) tags, the latter becoming more mainstream due to affordability and improving technology.
And tracking means knowing where your WIPs are, where your raw materials are and where your finished goods are.
The ease of this depends on the size of your business; it might be relatively straightforward for smaller businesses but become increasingly challenging for larger or growing companies.
Whichever software you choose, ensure that it tracks your inventory from raw materials to work in progress right through to finished goods and even through to sold.
With an EPOS system, you can easily do inventory management with barcodes, it’s cheap, it’s effective, and it’s easy to set up.
3. Choose your tools wisely.
If the saying, “a bad workman always blames his tools” is true, then one for retailers might be, “a good retailer always chooses the best tools”.
That’s because the tools and software you choose will directly impact the quality of the inventory management system you use.
Excel spreadsheets might be a friend to sole traders but aren’t the type of software you need for a slick, well-oiled retail company.
Just like you would buy running shoes for running and helmets for cycling, it’s best to choose something that was made for that specific purpose, which in this case, is inventory management software.
All good inventory management software should as a bare minimum:
Let you know real-time stock updates and alerts for low levels of stock.
- Give you access to historical data and seasonal trends.
- Track your inventory from raw materials right through to finished goods.
- Help you to understand the impact of costs, like shipping, for example, of your inventory.
- Take into consideration the differences between your online and offline retail sales, including stock turnover, delivery and popular selling days.
- Have an easily accessible, simple to use accounting workflow that shows you all of the key metrics above.
4. Smell what sells.
On BBC’s The Apprentice, Lord Sugar once said to the candidates, “smell what sells”.
And it’s a great analogy to think about for your retail business; focus on the products that make you the most money and sell in the most quantities.
Again, this is where the 80/20 rule can crystalise things.
Remember to focus on the 20% of your inventory that makes up 80% of your sales.
Whichever inventory management software you choose, use it to create reports that show you your best selling products in terms of quantity sold, profit margins and overall revenue.
8 bonus tips to remember when you’re setting up an inventory management system
- Create unique short items numbers, like SKU’s.
- Add unique descriptions for each item.
- Count existing stock.
- Update inventory management software of POS with correct stock levels.
- Set rules for stock orders based on the method you choose for inventory management.
- If items are in different locations, ensure the areas are labelled correctly to save confusion.
- Make sure units of measurement are consistent.
- Make sure labels are used correctly in your warehouse or storage area.
What is Multichannel Inventory Management?
In the modern era, retailers are selling through physical stores.
And an ecommerce website, Facebook Marketplace, Gumtree, eBay, Amazon and another dozen platforms.
Oh, and they could be selling from multiple locations, for example, a physical store in each big city.
But the more platforms you’re selling on and the more locations you sell through, the more difficult it is to keep track of your inventory across each.
Stock management becomes an increasingly challenging issue.
That’s where a multichannel inventory management system earns its keep.
Because it allows you to identify data across various channels and makes the process of managing inventory straightforward and efficient.
If you’re nodding along and saying to yourself, “that’s me”, then you should consider prioritising using a POS (point of sale) system.
The POS will track and manage your inventory across all locations in one platform.
How to choose inventory management software
Every retail business has unique requirements.
And knowing which inventory management software is a good fit for you can be challenging.
But if you want the software to do all the hard work in managing your inventory, then there are some things to keep in mind.
You’ll want software that does all the calculations automatically and removes any guesswork.
There are four main types of software: Standalone; Integrated with POS; Integrated with POS and Ecommerce (multichannel); and Integrated with accounting software for PO’s.
And choosing free inventory software might not be sufficient for what you need.
As a bare minimum requirement, you should aim to have software that includes:
Automations and rules: This is especially handy if you’re an omnichannel or multichannel retailer, as it will dictate how much stock shows on each platform.
Live tracking: People shop at different times of the day and night and on different devices. As a result, you’ll want software that provides live tracking of your inventory across all platforms and warehouses.
Forecasting: Spotting trends and patterns allows retailers to build for the future. All of the best inventory management software should include forecasting capabilities to enable you to make assumptions and plans about future inventory.
Purchasing: Managing suppliers and PO numbers yourself is time-consuming.
And you’re busy.
That’s why you should aim to get inventory management software that helps you manage suppliers and purchase orders to remain on top of stock demands.
When using a POS system for inventory management make sure it integrates with accounting software like Xero so you can manage any POs this way your tax and accounting will be done correctly.
Using your POS for effective stock management
Ultimately, your POS should act as a reliable watch-keeper for your business by structuring your products into categories and a hierarchy.
When used consistently, taking stock and setting low stock levels will be automated, freeing you to concentrate on other parts of the business.
As we mentioned earlier, one of the essential facets of a POS is the knowledge to know when to purchase more stock.
AirPOS integrated inventory management
AirPOS makes stock control simple, and best of all, you can get a total overview of stock on one device.
Say goodbye to spreadsheets, confusing notes and operating on a wing and a prayer; our software makes inventory management easy.
And say goodbye to long-drawn, demoralising stock takes; AirPOS integrates seamlessly with single-store, multi-store, Shopify, multichannel and omnichannel retailers.
AirPOS also connects directly with Xero accounting so you can process your POs and have taxes calculated correctly, whilst being able to reconcile any sales in your accounts.
Unsurprisingly, given the last fifteen months, everything has moved online.
But it’s no longer adequate to make a quick spreadsheet to keep on top of your inventory online, in-store and through all of your selling platforms, mistakes will be made.
As the retail industry edges closer to multichannel and omnichannel sales, there is a real need for intuitive, seamless stock management software that connects all the individual parts of a retail business.
And for the vast majority of retailers, getting a good inventory management system is no longer seen as a luxury but a necessity for future success.