Poor Inventory Management
Poor inventory management is among the top reasons why small businesses fail. Managing inventory is essentially a balancing act between having too little or too much. How much inventory is “just right” is often a moving target. This is because demand for different SKUs can change throughout the year because of seasonality or over the course of several years because of changing trends in demand.
What is Inventory Management?
Inventory management is more than just simply keeping track of what you have in your store room or warehouse. Inventory management includes, but not limited to, keeping track of specific parts to build your products and/or services, managing your supply vendors, ensuring steady flow of inventory availability in event of surge in demand, and keeping an optimal level of inventory at all times to ensure business continuity.
What is Inventory Management Software?
Typically an inventory management software stores all vital information on your inventory, warehouse, supply vendors, acquisition of stock, costing, movements of stock and more. Usually your inventory management system integrates with your accounting or Enterprise Resource Planning (ERP) software for a seamless process across different functions and departments. The core function of an inventory management software tracks the acquisition of the items, location of your inventory across warehouses or locations, price and cost of inventory, movements and more. Solutions like Microsoft Dynamics 365 and SAP Business One also ties inventory management with Point-of-Sale (POS) software for a complete integration with front-end retail operations.
Poor inventory management can cause various business issues, among them:
Missed Sales From Under-Stocking
This happens when you can’t immediately fulfill an order because of a stock-out of the ordered item. When this happens, the customer looks elsewhere to make his purchase. The damage caused by lost sales depends on the price of the item and the order quantity. Having a stock-out of a popular item during a peak buying season can be very costly.
Lost Customers From Under-Stocking
Customers rarely look back after they find a company that can promptly fulfill their orders at a competitive price. They will continue to give the company their business until they have a reason to do otherwise. If these customers were turned away because of a stock-out problem in your inventory, you have lost their repeat business. Every one of these lost customers is a lost source of recurring profit for your company. As with the previous point, having a stock-out and losing many customers during a peak buying season will have a long term impact on your business.
Tied Up Money From Over-Stocking
Conversely, inventory that doesn’t move is tied up money that could have been put to better use. It is money that could have been used to pay wages, pay off debts, purchase more fast moving inventory, pay the rent, or expand your business. Inventory often has a limited shelf life because of spoilage, obsolescence, material degradation, or changing consumer trends. If your inventory exceeds its shelf life, this tied up money is lost.
Excessive Warehousing Costs From Over-Stocking
The process of storing inventory also costs money. It means paying rent on over-sized warehouses. Excess inventory gets in the way of warehouse operations or it uses up space that could be better used for faster moving items. Management of the excess inventory also has a labor cost.
Beyond having too little or too much inventory, poor inventory management causes inefficiencies because you don’t have accurate real time information on how much inventory you have. This increases the risk of mistakes in reordering inventory from suppliers or of selling nonexistent inventory. These mistakes can also result in lost sales and lost repeat customers or in over-sized inventory of the wrong SKUs.
To learn more about improving your inventory management through the use of the right management system, please contact us.
Tags: Inventory Management