It is necessary for every business to monitor their assets and make sure they are in tune with the projected roadmap. Inventory management emerges as a crucial concern to optimise production and revenue generation.
It is a significant factor that affects a business’ scalability and success. However, most SMEs do not know the tricks of effective management and hence, lose out on crucial business opportunities.
It is vital to know what is inventory before the management pointers.
Inventory is any idle stock that a company has. It can be finished products, raw materials, and even property. Broadly speaking, there are 3 types of inventory:
- Raw materials
- Work-in-progress stock
- Finished goods
The success of a company depends in no small extent on the proper management of inventory.
What is the Ideal Inventory Size?
Every business’ requirements are unique, as is their client demand and inventory supply schedule. An enterprise can either suffer from under or overstocking, so there should be a proper supply chain management.
If a business under-stocks their inventory, they may fall short of raw materials for production. They may alternatively fall short of final products for buyers. Either way, under-stocking will cause a shortage in revenue as it will hamper overall production output.
The other side of the story is represented by a business stocking too much inventory, which ultimately causes spoilage. Excess inventory also ties up cash flow and bleeds money for storage and logistics.
Many SMEs operate in sectors or markets which have seasonal demands and will require overstocking inventory to meet it. They can easily avail business loans to overstock their inventory in the hope that their business will boom.
Numerous financial institutions like Bajaj Finserv extend such loans at attractive interest rates and multiple tenor options to help repayment options.
It is the responsibility of a business owner to effectively balance between the two extremes and arrive at a point where they have just enough stock to meet the demand. This is the crux of effective inventory management.
Tips for effective management of inventory
Here is a complete guide on inventory management techniques for every business owner.
1. Accurate Forecasting is the Key
Many SMEs are overly ambitious in their forecast, which isn’t always fulfilled. It often leads to overstocked inventories.
It is crucial to arrive at the most accurate estimates based on previous sales patterns, predicted market trajectory, projected growth rate, the local economics, marketing returns and a host of other parameters. Inventory should be a reflection of the forecast and not the other way around.
2. Employ FIFO Approach
The First-in-First-Out approach is a crucial element of inventory management. The chronological order of arrival and departure of goods is vital for optimised functions. It is especially applicable for perishable items like food and beverages.
3. The Ledger should Match the Inventory
Regular and periodic audit of the stock that you have in your inventory is a must. Even if you employ inventory management software, it is paramount to take a hands-on approach toward your business inventory.
4. Prioritise your Stock
Another vital trick of inventory management is to prioritise the stock according to their commercial value and demand. One should categorise their stock into three categories:
- High-value items with low demand
- Mid-value items with moderate demand
- Low-value item with high demand
The items in the 1st category need more attention than the ones in the 3rd category, as their demand is unreliable and the financial implications are high.
It may take time and a lot of effort to streamline your inventory effectively. Start small and move your way up till you include a complete inventory management schedule. Your business’ success depends on it.