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Updated: Feb 5, 2020
When Goldilocks discovered an empty house in the woods, she decided to help herself to the porridge she found there. One bowl was too hot, the next was too cold and the third was just right. The concept of ‘just right’ or the ideal point between two extremes, is now referred to as the Goldilocks principle.
Effective inventory management is about getting stock levels ‘just right’. Systems to manage inventory levels have been developed over hundreds of years. In 18th Century Europe, the population in Europe was growing, and there was a fear that there wouldn’t be enough firewood. The concept of managing and planning for demand emerged and forest maps were created to measure the number of trees and forecast future requirements.
When you break down inventory management there are 4 elements: having the right amount of product, at the right price, at the right time, and in the right place. Getting everything right will be positive for your business reputation as well as your bottom line.
There’s no questioning the importance of having the right amount of stock on hand. If you order too little, and your customers can’t get what they want, they’ll go elsewhere. Too much stock, then you could be forced discount or risk your stock being out-of-date.
According to a survey by GetApp, 46% of respondents decided when to reorder based on information from previous months. So having the right data is critical, preferably with an automated way to track inventory movements. 15% of respondents use forecasting software and 13% used formulas. Even with these two methods, having accurate historical data is still important.
It can be really difficult to turn down price quantity offers from suppliers (like ordering 30% more to save 15%) but it’s important to consider if it’s the best option for your business. Look at what it costs you to hold onto that extra stock. Storage costs and the risk of not selling it at all may mean the upfront saving isn’t worthwhile.
The goal is to keep carrying costs as low as possible while matching customer demand. The Economic Order Quantity (EOQ) formula is a way to decide on on the inventory level you should maintain – try out this EOQ calculator.
So how do you decide when it’s time to place a new order? The ideal would be to have your stock arrive just as your current stock is about to sell out. Opening backorders is a way to handle with out-of-stock situations, but most customers won’t have the patience to wait for your new stock to arrive, particularly if they can buy it elsewhere.
The reorder point is a calculation that incorporates all the steps involved in getting your stock to you, allowing you to reorder at the right time.
This is most critical if you have multiple sales channels. Getting the right quantity of products to the right place can be a challenge. If you have an online store, chances are your stock is stored in one location. However if your store is showing that you have 10 items in stock, you want to ensure those items are ready to be shipped as soon as they’re purchased. If they’re in a store or on consignment then you risk overselling. Inventory management systems track stock movement in real-time so you know exactly what stock you have on hand, by channel, at any time.
Many businesses start using spreadsheets to manage their inventory, but as they increase their volume and add channels, it’s hard to maintain control. Good inventory management relies on constant tracking of stock movement.
So unless you want to spend endless hours on manual repetitive work, automation is the solution. By automating as much of the process as possible, you can reduce the chance of human error. You’ll also have more time on your hands, allowing you to focus on what’s really important – growing your business.
Contributed by TradeGecko. TradeGecko provides Inventory and Order Management Software to small and medium sized businesses. They offer a free trial. Connect TradeGecko to your sales channels to automate inventory management instantly!
Michael Jones is a Senior Editor for Funding Circle, specializing in small business loans. He holds a degree in International Business and Economics from Boston University's Questrom School of Business. Prior to Funding Circle, Michael was the Head of Content for Bond Street, a venture-backed FinTech company specializing in small business loans. He has written extensively about small business loans, entrepreneurship, and marketing.