8 Tips for Small Business Inventory Management

Struggling to keep track of your stocks? We get it. With so many products moving in and out of the warehouse, keeping an eye on everything can be difficult. 

This is where effective inventory management comes in. Ensuring there's always enough stock to meet demand without overstocking is essential for any small business. When you stay on top of your inventory, you can cut unnecessary costs, avoid stockouts, and keep your customers happy!

In this article, we’ll share actionable tips on improving your inventory management for better operations.

But first…

What is Inventory Management?

Inventory management involves overseeing and tracking a company's stock of goods—from raw materials to finished products—to meet customer demand. It also tracks inventory from the point of purchase to distribution.

Why is it crucial for small businesses?

Effective inventory management helps keep stock levels optimal, which helps minimize costs and improve profitability. Other benefits of good inventory management include:

• Improved cash flow
• Better customer service
• Prevents stockouts and overstocking
• Streamlined operations
• Accurate forecasting

How is Inventory Management Different for Small Businesses? 

Unlike larger companies, small businesses typically have fewer resources and smaller budgets. This limits their ability to invest in advanced inventory management systems. Plus, they often rely on basic inventory management methods. 

Small businesses also have limited space, budget, and capacity, so stockouts and overstocking impact them more. Overstocking ties up crucial capital that could be used elsewhere, while stockouts can result in lost sales and missed opportunities.

Additionally, small businesses may need more storage space and creativity in managing their inventory to optimize their resources. But, this flexibility can be a huge advantage, as they can adapt more quickly to changes in demand and make swift inventory adjustments based on emerging trends.

Lastly, small businesses have fewer suppliers and often rely on smaller-scale vendors. They lack the buying power of larger companies, which impacts their ability to negotiate better terms or receive bulk discounts. 

8 Tips for Small Business Inventory Management

Here are practical inventory management tips for your small business to streamline operations, optimize stock levels, and maintain profitability:

Track inventory in real-time

Real-time inventory tracking is essential for keeping the right amount of items on shelves. This also helps:

• Reduce stockouts
• Improve customer satisfaction
• Minimize over-ordering
• Ensure there are enough products to meet demand

A well-documented inventory cycle can alert inventory managers when products should be reordered and record every sale. This way, stock levels are always accurate!

To do this, you can leverage inventory tracking tools such as FreshBooks, Zoho Inventory, Veeqo, Sortly, and even a well-planned spreadsheet. These should save you time and money when managing your inventory.

Categorize your inventory

Categorizing inventory can help you organize stocks more effectively and identify which products require more attention and which need to be ordered less frequently. Here’s a common technique: the ABC method, which categorizes inventory based on value and importance. Other helpful methods include:

• VED Analysis: Items are categorized as Vital, Essential, and Desirable— commonly used in manufacturing or healthcare
• ‍FSN Analysis: Items are categorized as either Fast-moving, Slow-moving, or Non-moving depending on how they are used or sold ‍
• SDE Analysis: Items are categorized as Scarce, Difficult, and Easy Available depending on the availability of the items from suppliers

You can also try other methods based on supply chains, predictability of demand, cost per unit of the inventory, etc. Just make sure to find one that matches your business needs and improves operational efficiency!

Use data to forecast demand

When you want to improve forecasting accuracy in your inventory management, data is key! Insights can help you predict demand, optimize stock levels, and make informed decisions. Accurate demand forecasting helps with the following:

• Identifying relevant trends
• Planning for seasonal fluctuations
• Preventing excess inventory
• Reduces uncertainty
• Allows for better production and purchasing schedule planning

Using data to forecast demand ensures that you’re ordering the right quantity of products to meet customer demands without overstocking. 

Set reorder points

Reorder points (ROPs) ensure your stock is replenished at the right time, preventing stockouts or overstocking. 

So, how do you set ROPs? Start by determining each product's minimum and maximum stock levels. Then, set up automated alerts to notify inventory managers when reordering a product. 

Depending on the nature of the business, the product, and the supply chain, there are different ways to calculate your reorder point:

• Reorder Point without Safety Stock: This formula determines the reorder point based on the daily sales volume and the lead time, which is how long it takes for a new order to be delivered.‍
• Reorder Point with Safety Stock: This approach lets you add safety stock accounts for unexpected delays or demand spikes. It’s ideal to keep extra stock as a buffer, which provides extra inventory in case of supplier delays or unforeseen circumstances.
• ‍Reorder Point Based on Demand Forecasting: This involves analyzing historical and seasonal sales data to estimate future demands. For example, higher sales are expected during the holiday season, so reorder points must be adjusted to meet the anticipated surge in demand.

Conduct regular audits

Regular physical counts or audits ensure that the inventory matches your system's recorded inventory. This also helps identify discrepancies such as lost, misplaced, or damaged items. 

In addition, accurate inventory counts can avoid stockouts or overstocking, leading to better customer satisfaction. Inventory audits provide businesses with precise data on stock levels, which helps improve demand forecasting and provides insights into sales trends. 

Embrace technology and automation

If you want to streamline inventory management processes, reduce errors, and improve overall efficiency, then it’s time to embrace technology! Here are some ways small businesses can use tech for smoother operations:

• Use inventory management software to automate manual tasks like tracking stock levels and recording sales

• Set up automated reordering systems that use predefined reorder points to automatically generate purchase orders when a stock reaches a certain level

• Utilize barcoding technology to track products by scanning barcodes with handheld devices or mobile apps

• Leverage cloud-based inventory management for flexibility, real-time data synchronization, and scalability, which is useful for small businesses with multiple locations

• Implement Radio Frequency Identification (RFID) to identify and track inventory items without requiring direct line-of-sight scanning, like barcodes. This is ideal for businesses with large inventories.

Determine your inventory strategy

There are many inventory techniques you can try to meet customer demands consistently. Here are some inventory strategies to consider:

• Just-in-Time (JIT) Inventory: Here, you order and receive inventory that's enough to meet current customer demand instead of stocking up in advance. This minimizes excess inventory and waste but requires accurate demand forecasting and reliable supplies to avoid stockouts.

• First In, First Out (FIFO): This ensures that the oldest inventory is sold first, so you can avoid waste and prevent the expiration of perishable goods. However, this may not be ideal for handling non-perishable or high-demand items.

• Last-In, First-Out (LIFO): This strategy uses or sells the most recently acquired inventory while older inventory remains in stock. It lets you match the cost of more recent, higher-priced inventory with revenue. However, this results in older inventory being recorded at its original cost, which undervalues inventory, especially if prices have increased.

• Perpetual Inventory System: This system tracks real-time inventory levels through software or barcoding systems. It provides real-time visibility into inventory levels. But, it may require investment in management software and training, which can be costly for small businesses.

• Economic Order Quantity (EOQ): The EOQ formula calculates the ideal order quantity based on demand, ordering, and holding costs. This helps businesses find the most cost-effective way to manage stock levels, but accurate estimates are required to calculate the EOQ effectively.

Manage supplier relationships

It’s no secret that building close and reliable relationships with suppliers results in:

• Better negotiations
• Faster deliveries
• More flexibility when adjusting order quantities

Good communication can also help you manage supply chain disruptions effectively. Plus, suppliers may offer discounted bulk orders or reduced fees for expedited shipping, which can reduce inventory costs!

Optimize Your Inventory Management and Make Smarter Business Decisions with iDrive Logistics

A well-organized inventory management system is essential for small businesses to balance supply and demand, prevent overstocking and understocking, and improve order accuracy. Given the limited resources and smaller budgets, small businesses must plan inventory management wisely and strategically to maintain a competitive edge in the market.

At iDrive Logistics, you can count on our all-in-one fulfillment solution to remove the hassles of handling your stocks. Get in touch with us today, and we'll help you optimize inventory management for your business.