According to statistics provided by Shopify, inventory that is mismanaged has serious financial consequences in the retail industry—to the tune of $2 trillion in the U.S. alone every year.
When calculating this number, they took into account all of the hidden costs that come with mismanaged inventory—things like overstocking, managing out-of-stock items, and also preventable returns.
Many companies have managed to work out the kinks in their inventory management systems by avoiding the most common inventory management mistakes that occur in the industry.
In this article, we will look at the most frequent obstacles to effective inventory management that are unfortunately all too common in the retail and manufacturing industries. Not only will that point you to possible issues in your own inventory management system. We will also show you ways that you can be proactive in addressing these issues before further problems can occur.
One of the first decisions you have to make with setting up an inventory management strategy is who is responsible for which part of the process. You have to decide who to put in control of which part of the inventory management workflow. Furthermore, you have to decide who to leave in charge to make inventory-related decisions.
This is a crucial first step, before setting any kind of inventory management strategy into action. Here it's important to decide whether strategic decisions ought to be made by any one manager, or if there will be a team assigned to this task.
You have to put in place a clear organogram delineating the decision-making process and all lines of authority. Everyone needs to know who exactly is in control of the inventory. When things go wrong, someone has to be responsible for taking action to right the ship. This will prevent confusion down the line and have a markedly positive effect on your inventory management efforts.
The global supply chains are extremely complex. It runs all the way from the raw materials that go into factories, through the shipping of those products to wholesalers, onto retailers, and then to the consumer.
Along the way, there are many places where something can go wrong in the supply chain. If an issue pops up at any one of those stages, it will have a negative impact on all the stages down the line of the chain.
As an inventory manager, it's your duty to prepare for any and all disruptions to the supply chains you depend on to run your business. You must have an alternative avenue to get your products prepared and be ready with a fast solution to get things back on track.
For example, it's a good inventory management policy to have excess stock available of all your best-selling products. Then you have to regularly order new stock of these products as you process orders on these products.
This allows you to build up an inventory buffer on your most important product lines in case something goes wrong in the production supply chain of that product.
If there is an issue with the factory obtaining the necessary raw materials to make the product, you will have plenty in your warehouse to tide you over until the problem is resolved. Which means you will prevent stockouts and keep the business afloat.
One of the most crucial ingredients for effective inventory management is properly assigning warehouse space for your needs. When your warehouses are managed properly your whole inventory management operation will run smoother and more efficiently.
Theoretically, it isn’t sound inventory control to hold more stock than what is absolutely necessary of any one product. The benefit is that if your stock levels are kept to a minimum, you don't risk overstocking on items. Plus you avoid the risk of inventory spoilage or running up storage costs for products you cannot sell right away.
This has its drawbacks, however. For example, if there are any disruptions in your supply chains you might not have enough stock on hand to meet demand. Or if the delivery of some products are delayed, you might not have enough warehouse space available to accommodate the delivery once it arrives.
Many warehouse managers only assign enough space to take in incoming products that are to be sold. So when multiple products arrive at once, there could be a serious warehousing space problem.
The solution is to make excess warehouse space available to cater for these types of issues as they occur more often than you would realise. It's better to be prepared than to have to sort out a crisis down the line.
Effective warehouse management is never easy. You have to plan for the space you need in advance—which sounds more simple than it is to achieve in practice. Furthermore, you have to manage your existing warehouse space in a way that is both effective and cost-efficient.
When the warehouse spacing is properly organised, it becomes a lot simpler to stagger stock deliveries in such a way that you always have enough space available to meet customer demand.
Inventory management isn't simply something you can run off a computer. It takes a whole team of dedicated, hard-working staff members to manage inventory properly. Here we're specifically talking about the warehouse team, as they will be the ones who have to handle your inventory on a daily basis.
Warehouse staff members have to receive excellent training and be managed effectively. Otherwise you risk running into problems that can affect the profitability of your entire business.
They should know exactly what you expect of them and which procedures to follow under which circumstances. In this way they are able to work as a team to deliver solid inventory management and keep the orders flowing out of the warehouse as quickly and accurately as possible.
It might not seem like much of a problem, but making more sales than expected can have serious consequences for your inventory management efforts.
Firstly, you would probably have to cancel many of those orders, which will have a negative effect on your bottom line. This will in turn damage your reputation among consumers—which can be detrimental to the company in the long run.
If you sell a product to a customer, you're supposed to be able to actually deliver on that promise. When you've run into the trap of overselling on a product, you run the risk of tanking your reputation in the market. It becomes almost impossible to satisfy your customer's needs in that scenario. You will have to order a new product as soon as possible and hope it arrives before you have to cancel all those extra orders.
Ordering extra products in a short time frame is a costly affair that will hurt your bottom line. Plus it will result in order fulfilment delays—which will not make your customers happy. Many will probably cancel their orders and take their business to a competitor.
The other side of the coin is if you overstock on an item that doesn't sell nearly as well as expected. It often happens that a new product shows marketing potential. But then demand for that product unexpectedly disappears because of shifting trends in the market. Fashions change and consumers are notoriously fickle, after all.
The sad result is that you're left with thousands of unsold items in your warehouse. This not only has a negative impact on your cash flow, but those products take up valuable warehouse space that could have been filled with products that your customers actually want.
If you don’t buy enough stock of an item that turns out to be much more popular than expected, it will also hurt your sales. You will have to order more stock—which will cause delays on delivering those products to customers and order cancellations.
One solution here is to maintain open lines of communication with your suppliers. If you experience a sudden surge in product orders, you will then be able to notify your suppliers in advance so that they can increase their production. This will only be effective if you use suppliers who are nimble and able to respond to any sudden shifts in the market.
With the right vendor partners as part of your team, you will be able to meet customer demand while still maintaining reasonable stock levels for all your products.
Making accurate predictions as to consumer demand can be tricky. But you have to invest in technology and tools that will help you do accurate demand forecasting. You need tools that are able to analyse your sales data and other data points and then make accurate predictions as to how much product is going to sell over a specific time period.
Here we are talking about stockouts. Even though stock outs might not have as serious consequences as overselling, it may still create problems for your company.
When a popular item is out of stock for an extended period of time, your customers will probably migrate to the nearest competitor. This also means that you risk losing their business for good.
When something runs out of stock, you have to remedy the situation as quickly as possible—before it snowballs into an even bigger problem for your company down the line.
If you're going to be a manager in the retail industry, you have to be an effective communicator. You have to maintain excellent lines of communication with all your manufacturers and suppliers. Otherwise you could run into serious problems with your inventory management down the line.
The bigger your organisation becomes, the more effective your communication has to be. If you run both online and physical stores, you have to be extra organised. If you run a large scale business, your communication skills have to be exemplary.
Good inventory managers not only have to implement company policy when it comes to inventory, but also need to communicate this policy in an effective manner to all employees involved. They should be skilled at training his staff members to put these policies in practice on the warehouse floor.
The inventory manager must also keep a close watch on lead-times and other information with regards to suppliers. Then they have to communicate this information to all warehousing staff involved in physically managing the inventory.
For inventory managers to be effective communicators, they have to use every technology and tool at their disposal to ensure strong lines of communication both with suppliers and staff members.
Management should seriously consider handing over their inventory information management to automated systems. For example, the company could implement dedicated warehouse management software and other inventory management technologies to handle these crucial tasks.
One thing that inventory managers don't often take into account, is the activity of the competition. We have to operate in a global marketplace for the same consumer dollars.
When competition increases, you have to take certain protective measures as far as your inventory management is concerned. For instance, you might have to consider taking in extra stock of your most important products and keep it on hand at all times.
If you ever run out of an item, it will be easy for your customers to run to the competition—and then you might just lose their business for good. More choice means customers have less incentive sticking to just one retailer. Which is why you have to ensure that you're always in position to fulfil their requests.
Another problem with more competitors in the market, is that more retailers have to compete for fewer resources and raw materials. Everyone has to keep a certain number of items in stock, even if they don't sell. This increases warehousing costs as well as the likelihood that you might run out of a popular stock item. So plan appropriately.
When the packaging of an item is changed, all of the items with the old packaging are suddenly out-of-date. If the sale department decides to change the look of an item, you might just end up with reams of unsold stock. Or the old items will have to be sold at a discount, which will end up hurting your bottom line.
Often packaging changes are inevitable. Consumers are becoming more and more sophisticated where it comes to packaging. Tastes and fashion changes very quickly.
Another reason for packaging changes is when there is some significant change to the product itself. For example, the ingredients of the product might change. Or you want to introduce a limited edition of a certain item. The result is that the packaging has to change.
But the marketing department cannot make these types of decisions in a bubble, as it will devalue your existing products and shorten their shelf-life. It could make them unsellable, which will turn a selling product into a loss.
Any packaging changes makes the life of an inventory manager even more difficult. That is why packaging changes have to be planned and timed carefully to produce the least disruption possible.
In this article we looked at several of the mistakes that are commonly made in inventory management—and how to avoid those mistakes. Along the way, we also considered several steps that you could take to build a robust inventory management system.
When inventory management is done right, the order fulfilment process runs like a well-oiled machine. On the other hand, if there are issues in the warehouse and inventory levels tank, the whole business will suffer.
Here you have to invest in the right technology solutions to make your inventory management a success. There are several warehouse and inventory management packages available. Many Order Management Systems (OMS) also include inventory management modules.
These packages might be expensive and time-consuming to implement and get right, but the benefits to your company will be immense.
With the right technology in place, you will be able to minimise your stock holding costs. You will also be able to keep a tight rein on your inventory levels, know when it's time to replenish stock, get rid of old stock, and stock up on a fresh line-up of products.
Great inventory management will improve the profitability of your company, increase your cash flow, make better use of your limited warehousing space, and ensure that you're only keeping on stock that actually sells. In short, it's crucial to your success as a company.
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