9 Inventory Management Tips that Might Just Save Your Business

By September 6, 2018Purchase Order Plus
9 inventory management tips to save your business

Since there are no two companies with exactly the same inventory and stock or the same supply chain, inventory management is therefore different from company to company. That said, you should strive to customize your inventory management system in such a way that it minimizes human error and maximizes productivity. Here are 9 inventory management tips that might just save your business and increase cash flow.

1. Plan for the Worst

Things rarely work out exactly as you plan them in your head. The same goes for inventory management, needless to say. Don’t think if something will happen, but when it will happen. This way, when the problem does occur, it won’t take you by surprise and you will be ready to tackle it.

Be sure to know the risks that are in front of you and the problems that might arise. For example, the manufacturer might run out of the product just when you need it to fill the orders. Or, you run out of warehouse space. Here, it pays out to ask a question, “what is the worst that could happen” before starting a new enterprise, just like stoics do.

2. Know Who is Responsible

Inventory management should be done ad-hoc. You need to have a person responsible for it. Whether that person is you, if you’re the owner or you hire a professional inventory manager is up to you and will depend on the size of your business, how big your inventory and stock are, the size of your purchase orders, how many clients and vendors you have and so on.

The important thing here is to have someone you can wake up in the middle of the night (please don’t do that literally) with a question about the state of your inventory and get an accurate answer.


FIFO or First In First Out is one of the key principles of inventory management where the oldest stock (first in) gets sold first (first out). This is an important principle you should hold on to if you have product that are susceptible to spoilage such as food.

That said, FIFO can be used for non-perishables as well. For example, new mobile phone models are released every few months. If you have a stock of them in your warehouse, you need to move them quickly as they will lose value the longer you keep them (customers are looking for new and better models).

Interestingly enough, FIFO is also used in computing, where it represents a method for organizing and manipulating data buffers. Namely, the oldest (first in) needs to get processed first (first out).

FIFO won’t work if your warehouse is not adequately organized. If you’re running your own warehouse, be sure to add a new product from the back and move old ones to the front.

4. Valuable Product Prioritization

Not all your products are equal. Some will simply get you more money than others. That’s basically the Pareto principle in action, which in this case, means that 80% of demand will be generated by just 20% of your products.

It is with these 20% that you need to put your focus the most. Then the next 30%, which will generate 10% less and finally, the remaining 50%, which typically generate only 10%. Of course, don’t take these percentages too literally, maybe it won’t be 20%, but 15% of 25%, but the principle is the same.

5. Set Par Levels

A “par level” represents the lowest amount of the product that you must have on hand and it’s a good thing to set them for all of your products. This gives you enough time to order more when you see that you are soon going to run out of stock.

Par-leveling does requires some upfront research, but it will make your inventory management considerably easier and allow you to make decisions about the product quicker. Of course, keep in mind that you don’t always need to order the same amount. Keep in mind the seasonality and other factors before you set par levels.

6. Audit on  Regular Basis

Be sure to audit your inventory regularly. This is important if you want to know whether all your reports (warehouse and others) match. Here are a few methods that will help you with this:

  • Spot checking

Spot checking involves choosing a single product, counting it and comparing to what you should have. This is a very good method if you do a full physical inventory and have a lot of products or often run into problems (such as low stock).

  • Physical inventory

Many businesses count all their inventory at once at the end of the year since this ties in with filing income tax. The problem with this method is that, if you have a lot of products, doing physical inventory can be very time consuming. Also, if you do find an error, it will be very hard to deduce where it came from just from an end-year inventory.

  • Cycle counting

The first two methods mean doing a full physical inventory, but that might not always be the best choice for an inventory audit. Instead, what you can do is use cycle counting and check  a different product at the end of the week or month. Typically, you want to count the higher value items more often than lower value ones.

7. Think About Dropshipping

You’ve probably heard someone say they are opening a dropshipping business or that they are running one (and often making a lot of money) and wondered, what is dropshipping? Basically, dropshipping differs from other retail fulfillment methods in that you don’t keep the products you sell in the stock, but buy them off from a third-party (usually a wholesaler), who then ships the product directly to the customer. That way, you don’t have to handle any inventory and can concentrate on acquiring customers.

You might be wondering, why doesn’t the wholesaler sell the product himself? One reason for this is that the wholesaler may not have the customer-acquiring, product promotion or selling tools that you do, so this is usually a win-win situation for both.

8. Have an Action Plan for Excess Stock

Poor sales forecasting inevitably leads to excess stock. To prevent this, you need to have two “task forces”. One will be responsible for selling off that excess inventory, while the other looks for the cause of this inefficiency. Of course, these two task forces need to communicate well, otherwise the whole plan will be liable to failing.

9. Accurate Forecasting

Accurately predicting demand is an important part of inventory management. A couple of thing that you need to consider when forecasting your future sales are:

  1. Market trends
  2. Growth year this year
  3. Guaranteed sales (subscriptions and contracts)
  4. What were the sales like last year on the same week or month
  5. Upcoming promotions
  6. Product seasonality
  7. Overall economy (consider both local and global economy if you sell internationally).

There are many other ways to improve your inventory management, but these 9 inventory management tips should help you operate a more effective supply chain, improve your cash flow and run a successful business. So don’t waste time and implement these tips today.

Do you have any questions or have any other inventory management tips to share? Let’s hear from you in the comments below and don’t forget to sign up for a free trial for Purchase Order Plus.

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