In this article, we'll cover the basics of what inventory management is, how it works, provide top tips for keeping your (virtual) shelves stocked and show how retail loans and inventory finance can help you ensure you always have key products available when you need them.
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If you’re in any business that sells physical goods - be it in-person retail or ecommerce - inventory management is an essential skill to master. Having the right stock at the right time influences everything from your customer satisfaction to your available working capital. However, given the challenges of fickle customer demand, supply chain variability and seasonal trends, inventory management can also be complex and confusing.
Inventory management covers the process of ordering, storing, using, and selling a company’s inventory.
The details of this can vary depending on your industry and business model, so it could include anything from managing raw materials, components, and finished products, to warehousing and processing such items.
Profitability in retail rests on the margin you make per product and the length of time between taking in stock and selling it. Inventory management is key to both of these, ensuring that the correct amount of stock is available at the right time, minimising costs associated with holding excess inventory while avoiding stock outs or too much discounting on goods you just need to shift.
If you’re a retailer or ecommerce business, your inventory literally is your product. That means that the way you manage that inventory is the foundation of your service and your promise to your customers. If you can keep providing what they want, then they’ll keep coming back to buy it (in theory).
Effective inventory management is important because it promotes:
Different types of inventory require different approaches. Effective inventory management requires tracking products across their whole lifecycle to ensure you have adequate resources at each stage of the pipeline. And of course the more stages you have, the more complex the task.
Inventory management is a highly specialised business today – think of the amount of stock-keeping units (SKUs) a global retailer has to manage across hundreds of stores, manufacturers and sales channels. But as a start, we can look at the key terms below to help guide your strategy:
Ecommerce businesses face unique challenges in inventory management due to the nature of online retail.
Unlike brick-and-mortar stores, ecommerce companies often need to handle a wide variety of products, manage orders from multiple channels, and ensure speedy delivery to customers. This means being aware of:
While there’s no magic wand for effective inventory management, there are a range of strategies and focus areas you can implement to ensure you get the most out of your stock and available capital.
Making the right decisions about your inventory starts with reliable data. This should include tracking SKUs, barcodes, supplier details, and cost history.
By keeping detailed records, you ensure you have all the necessary information for each product, you can treat each item as a distinct element within your inventory ecosystem.
For example, with consistent SKU codes, you can track items from the point of ordering with the manufacturer all the way to the warehouse and shelves, to create a holistic view of inventory across your supply chain.
The whole point of inventory is to meet customer demand, so the ability to make the right predictions is key. Accurate retail demand planning helps predict future sales and avoid overstocking or stockouts, highlighting the products that matter..
You are likely already sitting on much of the data you need to forecast demand – historical sales information, customer traffic and the average length of time to sell certain products. Combine this with some broader analysis of market trends and seasonal fluctuations to anticipate demand and plan your inventory accordingly.
Not all inventory is created equal, which is why retailers often segment products into certain categories.
Using the ABC analysis method to categorise inventory into priority groups can help you focus on the most important items. Classify your inventory into A, B, and C groups where 'A' items are high-value with low sales frequency, 'B' items are moderate in value and sales frequency, and 'C' items are low-value but high-frequency. This approach helps allocate resources effectively, ensuring you’re investing in the right products at the right frequency.
If you're holding large volumes of stock, especially across multiple locations and channels, it can be easy to lose track.
Regular inventory audits help you maintain accurate stock records, highlighting areas of overstocking or slow moving SKUs.
Manual inventory management can be time consuming, meaning you spend more time counting products and less time understanding the data. Investing in inventory management software can automate many of these tasks, reducing manual errors and saving time.
Choose a system that integrates with your existing sales platforms, providing real-time updates on stock levels and sales. Inventory management technology also helps streamline day-to-day stocking operations, improve forecast accuracy, and provides more in-depth control over your product categories.
Building strong relationships with reliable suppliers is crucial for maintaining a smooth supply chain. By understanding supplier performance, including delivery times and order accuracy, you can time your orders properly and be sure that you’re going to receive the right products at the right time.
However, it’s also a two-way street. Your suppliers want a steady supply of orders, manageable time frames and consistent communication. By putting the work into your working relationships you can create a win-win with suppliers you trust that can help power reliable inventory management.
Supply chains are inevitably prone to disruptions. Unexpected events, such as supplier issues, shipping delays or sudden changes in demand, can impact your inventory levels.
In these scenarios it pays to have flexibility in your supply chain. Develop contingency plans to address these situations, such as having backup suppliers or alternative sourcing options, or using alternative forms of shipping and transport, for example expediting an urgent order by air instead of sea. Being prepared for unexpected events helps you build alternative acceptable scenarios where you can choose between options rather than being forced into a certain route – with the attendant costs and risks that brings.
Buffer stock acts as a safety net to protect against stockouts during demand fluctuations or supply chain disruptions, however holding too much can tie up valuable working capital.
The right level can make the difference between running out of stock when an inbound order is delayed and continuing your sales, however, all buffer stock is a risk.
In times of uncertainty, it can be tempting to go big on orders and ensure you’re holding more than you need, while also only paying for the shipping you need. However, this ties up large amounts of working capital and limits your flexibility.
Instead of placing large orders infrequently, you might aim for smaller, more frequent restocking. This approach helps you maintain fresher inventory, reduce holding costs, and respond more quickly to changes in demand. 'Little and often' restocking ensures you always have the right amount of stock on hand, while also giving you more freedom to accelerate or slow down orders as needed.
Inventory finance allows you to use unsold inventory as collateral to secure funding. By leveraging the value of your current or to-be-purchased inventory, you can secure a loan to purchase the additional stock needed to meet customer demand, even when you don’t have the cash on hand.
This can provide the necessary flexibility to respond to customer demand or other business needs without waiting for existing inventory to sell.
Setting service level agreements (SLAs) for your sales cycles helps you determine the optimal time to promote and boost products.
By understanding the typical sales cycle for each product, you can plan marketing efforts and restocking schedules more effectively. For example, if a certain product usually sells in a week but has been sitting on the shelf for a month, then you may need to take steps to boost demand. Similarly, if a product is regularly selling in advance of its usual cycle, it may be a sign that this product needs more priority in your ordering.
Retail moves fast, and businesses often need to spend money to make money. That’s why our flexible business loans are built for speed, transparency and control. Whether you’re looking to purchase additional stock or invest in marketing, we can help you access the capital you need.
