4 Inventory Management Best Practices

While an inventory management process will — and should — evolve over time, you can lay the groundwork for a successful strategy that matures alongside your business. In discussing inventory management challenges with our customers, I’ve learned how consideration and evaluation of the following practices may help your operation avoid common pitfalls while keeping your business on track.

1. Determine key performance indicators (KPIs).

Some inventory errors are unavoidable and what I consider “growing pains” for many successful businesses. Using — and sticking to — KPIs to manage inventory can be one of the best defenses when it comes to measuring the impact of business operations. Every business and set of KPIs is different, but here are a few common KPIs to pay close attention to:

• Average Days to Sell Inventory (DSI): This is a measure of how long it takes your company to turn inventory into sales, and varies by industry. Remember, large-ticket items typically move slower than small-ticket items or perishables. A formula for calculating DSI is (Inventory/Cost of Sales) x 365.
• Stockouts: This represents the amount of times demand cannot be met due to the absence of required inventory. It can help provide a big picture view of how effective your business is at purchasing and production.
• Rate of Return: This tracks and rates the percentage of orders that are returned and need to be restocked. As you monitor this, you should also track the reason for the returns to address any problems in the supply chain and identify trends that might prevent future costly returns.

2. Define your two ‘W’s.’

Product organization contributes to a smooth inventory management process and can help you pick, pack and ship items more accurately and quickly. At a fundamental level, inventory organization begins with where and what, but expect to make adjustments to the process as your product list and customer base grows:

• Where: Evaluate available storage space and create zones. For example, include number of doors/docks, their size and location, and non-inventory storage space. Within these zones, determine sections — from a simple storage rack to an entire wall or room of product depending on your space. Label each zone section clearly so employees are able to see and easily navigate to them.
• What: It’s important to accurately label each product to avoid confusion and wasted time finding what customers ordered. For a simple description system, start with the noun and then add specifics like size, color and design as differentiators. Then, create unique numbers for each item between five to seven digits. It’s OK to add letters (as long as they can’t be confused with a number at a glance), but avoid matching these to manufacturer numbers or UPCs, which may change without you knowing. You can further expedite the fulfillment process by labeling the specific unit of measurement your products are sold by, such as weight, unit or crate.

3. Choose a smart software.

As your business grows, you'll likely need an inventory management system that grows with it. While a spreadsheet may have previously done the job, the task becomes more complicated with each new product you sell and customer who buys it. If you feel overwhelmed by your simple spreadsheets or off-the-shelf productivity software, consider an inventory management software (IMS) to help streamline multiple processes with a single program.

To find an IMS software that makes sense and will grow with your business, set a budget by determining factors like how much an IMS could save your company and the maximum amount you can realistically spend. Research the top IMS service providers in your industry to understand common price points and use that knowledge to create a list of five to 10 IMS service offerings within your budget.

Next, define the problems you're hoping to solve. Whether it’s overstocking/understocking, incorrect inventory levels or sales reporting, determining these needs will help you have a candid conversation with vendors about the features each IMS offers and how they will address your issues. Take into consideration the level of customization and compatibility with other software programs as you speak with vendors. In the end, if you have difficulty deciding on one IMS over another, assess their customer service capabilities (e.g., 24-hour hotline, dedicated representative) as it can make a big difference when you need additional support.

4. Implement checks-ins

Frequent check-ins can help tie all areas of inventory optimization together. Consider cycle counting programs to gauge the accuracy of your inventory levels by routinely auditing a small sample of products so not all inventory needs to be checked all the time. This can help you understand product sell-through rates, which can then be used to liquidate products that aren’t moving to aid in saving money and storage space. Doing this will also allow you to bring new products into the mix that share similar characteristics with the biggest sellers. Finally, keeping an eye on your product quality and any discrepancies in size, color or style can help increase customer satisfaction and lead to lower return rates.

Similar to a variety of business operations, continued evaluation is key for optimizing your inventory management process. Having a well-run process in place — from inventory organization and software to data and measurement — can support your growing business by adding efficiencies to shipping operations, shortening fulfillment times, lowering return rates and increasing customer satisfaction, all while strengthening your bottom line.

Dennis Nicoski is the acting senior vice president of sales and customer relations for the United States Postal Service.