Michael Hickins | Content Strategist | April 25, 2023
Inventory management goes to the heart of retail, a business that depends on making the right goods available to customers at the right time and price. Retailers use a combination of data analytics, automation, and experienced staff to ensure that they’re offering the right blend of goods to meet demand at an attractive price while minimizing the expense of carrying too much stock. Efficient inventory management also helps retailers reduce excessive transportation and carrying costs.
Inventory management is the process of tracking and controlling the quantity, cost, and location of inventory, helping businesses identify how much stock to order at what time. It’s a crucial part of the supply chain process, ensuring that the right amount of product is available at the right place and time.
Inventory management focuses on the flow of goods from ordering through storing, distributing, selling, and restocking. For large retailers, inventory management involves managing and accounting for total companywide stocks of goods, as well as for item levels for each of their warehouses, distribution centers, and outlets. Retailers must strike a balance between holding enough inventory to meet customer demand and minimizing the amount of stock they hold in inventory, as unsold items represent carrying costs such as rent and transportation, in addition to the cost of acquiring those stocks.
Retail inventory management is the process of forecasting necessary levels of inventory to be held for sale or in storage for each type of good, across sales channels. It includes using software to help determine demand and value goods held in inventory for accounting and auditing purposes. It also entails a variety of best practices used to ensure that goods are being stored and shipped effectively to retail outlets. The overall goal of inventory management is to ensure that retailers have enough goods on hand to satisfy demand, and to minimize the expense of holding unsold goods.
Effective inventory management is crucial to retailers because it ensures that they have enough product on hand to capture every possible sale, it keeps costs down, and it helps retailers improve their understanding of customers and buying patterns. Sound inventory management also helps prevent retailers from overstocking products that expire or become obsolete, such as perishable foods or medicines, and products prone to obsolescence, such as fashion and holiday items.
In addition, having accurate inventory data across sales channels helps retailers get products to consumers faster, improving customer satisfaction and reducing stress on staffers. It also helps reduce inventory shrinkage—inventory that a retailer should have but doesn’t because of internal theft, incorrect recording of inventory on intake, miscounted inventory, goods damaged or spoiled on arrival, misplaced inventory, or other reasons. Moreover, without strong inventory management, retailers can’t return damaged goods to suppliers because they won’t know how or in what condition those goods were delivered.
Having a firm grip on inventory and sales trends helps retailers manage their supply chains better. Whether using just-in-time ordering to minimize carrying costs or putting in fewer, bigger orders, retailers can better determine economic order quantity—the ideal order size that minimizes the costs of holding inventory.
Inventory management involves tracking goods as they make their way from manufacturer to distributor to warehouse to retail outlet. In some cases, it also involves management of partially built goods, as well as an inventory of maintenance and other goods. Below is a list of some goods that may need to be inventoried.
Inventory management involves tracking, storing, and replenishing goods to ensure that customers can buy what they’re seeking. Below are six techniques retailers use to effectively manage their inventories.
Inventory management is a crucial, if underappreciated, aspect of running a retail business. It involves keeping enough items in demand to keep customers happy but not so much that the business loses money from having to bear the carrying costs of unsold merchandise (such as rent and transportation costs). Proper inventory management involves active monitoring of stocks, the use of technology to forecast demand, and a smart strategy for replenishing stocks as demand begins to lighten inventory of certain items.
The following is a breakdown of the steps retailers take to manage their inventories:
Inventory accounting methods vary, but all of them assign a value to a retailer’s inventory. The accounting method chosen directly affects the amount of revenue the retailer reports on its financial statements, which in turn also affects its tax liabilities. While companies are free to choose their approach, regulators expect them to stick to their chosen method every year without filling out an IRS form or getting IRS permission.
One of the most important aspects of running a successful retail business is managing inventory. That includes ensuring the business has sufficient quantities to meet demand while also minimizing the amount of unsold inventory. The former goal is key to maximizing revenues, while the latter ensures the business doesn’t spend more than necessary on goods that don’t sell.
Below are 17 key performance indicators (KPIs) retailers use to measure their ability to properly manage inventory.
Inventory analysis and forecasting are an important part of retail operations. They help retailers understand their stock levels and predict demand for their products. The goal for retailers is to ensure they have enough stock to meet customer demand and to prevent stockouts, as well as to avoid the unnecessary costs of overstocking. Consider these methods.
Inventory audit methods let retailers identify discrepancies in their inventory and financial records and make sure their systems and reconciliations are efficient and accurate. Retailers use the following inventory auditing methods:
Inventory management can be boiled down to several logical steps: Make sure you have enough inventory to meet demand. Make sure you can ship or deliver those items to your customers in a timely and cost-effective manner. Make sure you know where your goods are coming from, that you have a method for reordering them before you run out, and that you have found a reliable way of forecasting demand, so you know when and how often to replenish your inventory. Below is a summary of the more granular best practices.
ABC analysis represents the most basic first step in intelligent inventory management, which is making sure you have enough of the inventory that’s most valuable to your business.
Using ABC analysis, divide your inventory into three (or more) broad categories, ranked in order of sales volume or profitability, and prioritize your inventory accordingly. The Pareto Principle is a good rule of thumb: Hold 20% of inventory in goods that generate 80% of sales or profits—in the A category. The C category is for the least profitable or popular items, and the B category is for items in the middle. Retailers use this type of analysis to help determine future ordering as well as decisions on marketing, displays, and merchandising.
Demand forecasting is the process of predicting the demand of a stock item over a defined upcoming period. Forecast demand by reviewing historical sales and other data combined with applying knowledge of upcoming seasonality, market trends, and special events, such as holidays and promotions. Retailers can do their demand forecasting either by holding a finger in the wind or by using data analytics software, which has a good chance of outperforming even the most sensitive index fingers.
There’s an adage that what doesn’t get measured doesn’t get managed—which should be tempered by the idea that too many metrics spoil the broth. It’s important to set a fixed, and manageable, number of key performance indicators that are crucial to your business—such as inventory turns, sell-through rate, gross margin return on investment, and inventory shrinkage—and make sure people working toward those metrics produce the results you desire.
A slow inventory turn can indicate decreased market demand, which could indicate it’s time to reduce reorder quantities and safety stock, change pricing, offer incentives to reduce stock levels, or change the mix of goods offered for sale. Most items move through a lifecycle of increasing demand, followed by a leveling off and maturity before an eventual decline. Focus on items entering their decline stage and reduce stock levels before they become obsolete. On the flipside, a high turn means you’re not purchasing enough inventory to meet demand, or that it’s potentially time to raise prices to stabilize the ratio and boost unit profit margins.
The reorder point is the stock level that triggers replenishment in an inventory management system. While retailers can establish reorder points manually, using demand planning software helps avoid stockouts and ensures that the right items are ordered at the right time. Retailers use a reorder point formula as a trigger to replenish a given product. Broadly speaking, the reorder point is the daily usage in units multiplied by the days of lead time necessary for replacement, plus the units of safety stock, or the following:
Reorder point = (number of units used daily x number of days lead time) + number of units of safety stock
Safety stock acts as an inventory buffer that cushions retailers against surprisingly strong demand, supplier delays, inaccurate (gasp!) demand forecasting, or a failure to place timely reorders. This represents the ultimate opportunity cost for retailers: In 2021, sales lost to stockouts cost US retailers $82 billion in consumer packaged goods sales alone. Retailers can maintain an appropriate level of safety stock by taking the number of products they sell per day and multiplying it by the number of days' worth of safety stock they want—an appropriate level depends on your business. A retailer selling 200 items a day that wants seven days' worth of safety stock would multiply 200 by 7, for a safety stock of 1,400 units.
Pick and pack processes involve the physical steps that warehouse staff take to fulfill customer orders. A simple method for smaller operations is to have staff fulfill each order one at a time. Other methods include batch picking (multiples of the same item gathered at the same time for different orders), wave picking (similar orders filled at the same time), and zone picking (staff pick products only within assigned warehouse zones). Each approach seeks to fill customer orders accurately and in a timely manner, at the lowest cost to the retailer.
Lot tracking helps retailers organize and store inventory to ensure quality control, traceability, and proper fulfillment. It can be used to trace parts or ingredients associated with a group (or lot) of products back to their manufacturer or distributor, often to organize perishable goods by production or expiration date. Other uses include complying with regulations and tracing inventory that was recalled after it has been shipped.
Inventory management software helps businesses keep accurate track of inventory and automate important functions, such as reordering and distribution. Sophisticated inventory management applications also help with forecasting so that retailers can project demand, avoid having to discount, and improve customer service and satisfaction.
1. Improve customer service: Inventory management software improves customer service by helping ensure that retailers keep items in stock. The software does that by providing accurate estimates of which out-of-inventory goods will be received by the retailer or warehouse and shipped to the customer, and by indicating which items are in stock that customers might accept as an alternative to the item they were seeking.
2. Increase the number of selling channels: Inventory management applications help businesses branch into new retail channels by letting them leverage current inventory across those channels. This practice helps retailers fulfill online orders without frustrating customers with stockouts, and it helps guide decisions about discounting or offering goods through the retailer’s discount-branded stores.
3. Accurate inventory tracking: Simply put, you can’t sell what you don’t know you have. Successful retailers precisely track what they have in inventory, what needs to be reordered, and whether they need to do something (such as offer discounts) to move inventory that’s getting stale.
4. Prevent overselling: Overselling occurs when a retailer sells more items online than it has in stock, resulting in a stockout that frustrates customers, damages its brand, and costs it sales. Overselling is usually the result of slow data synchronization between inventory systems and digital stores.
5. More accurate reordering: Inventory management software won’t forget an important milestone in the retail calendar or let inventories fall below the reorder point.
6. Manage multilocation warehouses: Retailers with multiple physical locations or ecommerce activities can use retail management software to shift goods between distribution centers, bringing goods closer to where they’re in high demand—or where storage is available or less expensive—so it’s then possible to ship goods more quickly and cost effectively to local stores.
7. Reduce costs: Inventory management software helps reduce excessive orders due to poor forecasting or warehouse distribution, and it reduces redundant processes that increase labor costs.
8. Forecast seasonality: Inventory management applications help retailers maintain appropriate stocks of goods across different selling seasons.
9. Improve productivity: Inventory management applications help automate rote tasks, reducing the number of steps employees need to take to complete such tasks while freeing them to focus more on making higher-level decisions.
10. Reduce aged inventory and deadstock: By determining appropriate inventory levels through ABC analyses and other analytic methods, inventory management software helps ensure retailers don’t acquire more stock than necessary.
11. Better expense tracking: Inventory management applications help retailers understand which goods are being bought, how and where they’re being stored, and how much it costs to store, transport, ship, distribute, and merchandise them.
12. Improve supply chain KPIs: Inventory management applications help manage the inflows and outflows of goods offered for sale, helping retail business leaders manage suppliers and reduce back orders, excessive shipping costs resulting from too many rush orders, and missed opportunities for selling goods in high demand. They also improve the accuracy with which key performance indicators are measured.
Oracle Retail Inventory and Planning Management applications provide visibility into and control of goods flowing across a retail business so that retailers can take action as needed to manage events needing their attention. The Oracle Cloud applications also help retailers manage costs and working capital, as well as meet revenue goals by determining necessary inventory levels across locations.
Inventory management is one of the most important aspects of running a successful retail business. It’s a process of tracking and controlling the supply of goods available for sale, essential in ensuring customers have access to the products they want in a timely manner.
Automating inventory management through a variety of applications helps retailers more accurately track inventory levels, reduce manual data-entry errors, and increase warehouse efficiency. Automation also helps retailers quickly identify potential stockouts, enabling them to take preemptive action. Customer-demand forecasting helps retailers keep enough stock on hand while helping them adjust their pricing strategies. Inventory management is how retailers set stock levels, manage inventory costs, and identify and dispose of any excess or obsolete stock to reduce costs.
What are the three major inventory management techniques?
The three major inventory management techniques are inventory valuation, used to determine the value of stock held in retail outlets and in storage; regular reconciliation, used to ensure the recorded inventory matches what can be physically counted; and ABC analysis, which helps retailers prioritize their inventories to focus more on best-selling items.
What are the most important KPIs for inventory management?
The most important key performance indicators for inventory management include inventory turnover, shrinkage, demand forecast accuracy, sell-through rate, days on hand, backorder rate, average inventory, and lead time.
What is the difference between the stock-to-sales ratio and the inventory turnover ratio?
The main difference between the two is that the stock-to-sales ratio references the monetary value of inventory, whereas the inventory turnover ratio is based on units or volume sold.