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A Simple 5-step Guide to Efficient Inventory Management for SMBs

Inventory management is often considered pretty straightforward - How much stock did we sell? How much stock do we have remaining? 

But it’s more complicated than just taking stock. 

Inventory management isn’t just about taking stock of what is available or what is out of the door, it is also about predicting what is required to meet consumer demands in the future - you stock too much, you may end wasting a lot of raw materials and increase your warehousing costs; you stock too less, you may end up losing high intent buyers to product stockouts.

Simply put, inventory management is a process that can make or break your revenue. 

And that’s exactly why most small businesses shy away from creating a thorough inventory management strategy. 

What if we told you that efficient inventory management is a simple 5-step process? Don’t believe us? Read on. 

What is inventory management? 

Inventory management refers to the process of building an organized inventory of products you sell. It looks into the entire supply chain to identify the key stages of your product life cycle - right from management of raw materials, components and finished products, warehousing and processing. 

Why is inventory management important for SMBs? 

As we mentioned above, poorly managed inventory can lead to either losing too much money hoarding raw materials and products that don’t sell, or understocking items that limit your sales opportunities. But let’s take a deeper look at why inventory management is important: 

Source: ET Retail

  • Avoid spoilage: If you sell consumables or products that use raw materials that come with an expiry date, inventory management can prevent spoilage. 
  • Avoid dead stock: If you sell products that are seasonal, poor inventory management can lead to stocking up items that are out of season/ trend/ need and won’t sell. This will not just increase your warehousing costs, but also force you to offer higher discounts to get the products sold. 
  • Avoid increased storage costs: If you have a warehouse to stock your products, stocking irrelevant items can add to the costs of storage. Even if you’re managing at home, keeping items well-categorized can become a challenging task. 
  • Avoid cash flow blocks: If you’re holding a product, remember that you have invested in it (paid in cash, check, etc), and you’re going to have to sell it. If the product does not sell, you have only ‘spent’ and not ‘earned’ on it; reducing the cash flow available to you. 
  • Avoid disappointing consumers: If you’re not up-to-date with consumer demand, you may lose them to a competitor simply because of lack of inventory. Good inventory management will help you replenish products in a timely manner. 

No matter what you sell, it’s time to move away from managing your orders and inventory in notebooks and excel spreadsheets and find a more efficient way of keeping things well-streamlined. 

How can small businesses manage inventory better? 

There is no one-size-fits-all approach to running a business. But no matter what stage your business is at, staying prepared will never let you down and inventory management is a form of preparedness for the market. 

1. Consider setting up an online store 

The first step to better inventory management is taking control of all your customer and order data. While managing orders manually and through Instagram DMs may work initially, you will slowly lose track of conversations and insights on consumer demand, making you less prepared for their changing needs. 

By setting up an online store, you can capture visitor data including their demographics, interests, products they’re interested in and products they’re actively purchasing. 

You can also use your storefront to gauge consumer demand before stocking up a product with strategies such as back in stock notifications, where an interested buyer can subscribe to being alerted about a product’s availability. While this makes it simpler for the buyer to keep track of the product, it gives you an insight into just how many people are interested in purchasing it too. 

Whether you sell two products or more, having an online store lays the foundation for better inventory management.

Additional resources: 

If you already have an online store, focus your efforts on the next step. 

2. Define your inventory path 

The next step is to identify the key stages of your product making/ manufacturing process. Break it down into the smallest of steps possible and take note of who you’re dependent on to complete a certain step. For example, if you sell handmade candles online, your inventory path may look like the following: 

  • Sourcing paraffin, beeswax and stearin, and packaging materials  (raw materials) 
  • Purchasing candle-making molds 
  • Making the candles yourself/ with a team 
  • Packaging the finished products 
  • Preparing product pictures/ videos 
  • Uploading the products on your online store 
  • Setting up marketing campaigns to promote the product 

3. Categorize your inventory well 

Before you get started with inventory management, you need to effectively categorize your requirements across the supply chain. This typically includes grouping everything involved in the making of a product into 4 categories: 

  • Raw goods
  • Work-in-progress (WIP)
  • Finished goods
  • Maintenance, repair, and operations goods (MRO)

Remember to also describe the variables taken into account while categorizing your products, and don’t be afraid to create sub-categories. For example, you may want to break your finished goods into categories that describe collections better. We recommend preparing a CSV file of the same. 

This allows you to spend more time and resources managing inventory of things that have a bigger impact on your business. 

4. Understand and identify the right inventory method 

Depending on what you sell, the inventory management method you choose may vary. Here’s taking a quick look at some of the key inventory management techniques used by small businesses: 

  • Economic order quantity - Managing your inventory on the basis of set variables such as cost of production and demand rate. For example, if you have only INR 10,000 to spend, this inventory management system will nudge you to buy only as much raw material to be able to manufacture the product and get it sold. 
  • Minimum order quantity - This inventory management system is based on the simple logic of how much stock you’re willing to sell. For example, if you sell handcrafted luxury products, you may not require keeping as much inventory as bulk produced, cheaper items. 
  • ABC analysis - In this, your inventory categorization is split into 3 categories to identify items that have an impact on your overall costs. Category A refers to products that get you the most profit; B refers to products that have a mid-level demand and C refers to those products that are vital to sell, but don’t contribute much to your business revenue. 
  • Just-in-time inventory management (JIT) - In this case, your business receives inventory based on an as-and-when-required model instead of preordering it all. 
  • Safety stock inventory - This technique focuses on preventing stock outs caused by incorrect forecasting or change in consumer demands by ordering more inventory than actual demand. 
  • FIFO and LIFO - First in, first out (FIFO) focuses on keeping inventory fresh, by assuming older inventory gets sold first. Last in, first out (LIFO) is focused on selling newer inventory first to prevent it from going bad/ out of fashion. 
  • Reorder point - This inventory management technique used by businesses that have their own purchase and sales cycle on a per-product basis. In this case, a reorder point is usually higher than a safety stock number to keep a buffer for errors. 
  • Batch tracking - Quality control inventory management wherein you group products and monitor the performance of the stock with similar traits, predicting their demand accordingly. 
  • Consignment inventory - This technique involves purchasing goods (raw or finished) from a local consignment store (vendor or wholesale) without paying for the inventory upfront. You only pay when an item gets sold. 
  • Perpetual inventory management - The most basic form of inventory management, wherein you take stock of inventory as soon as it arrives or sells. 
  • Dropshipping - Inventory management method wherein the store holds no inventory of the products being sold. When a sale is made, the item purchased is picked up from a third-party provider and shipped to the consumer. 
  • Lean manufacturing - Focused on keeping business activities streamlined to reduce aspects that don’t add value towards the overall growth in revenue. It is also focused on running lean to improve efficiency. 
  • Demand forecasting - Using historical sales data, a business estimates the upcoming sales/ consumer demand and prepares inventory accordingly. 

Remember, you may choose to apply a mix of inventory techniques for your business, or go with one. It entirely depends on what your product cycle looks like and who your target audience is. 

For example, if you sell tea or coffee online, your focus should be on delivering the brews fresh. The LIFO technique of inventory management is what suits you best. 

Additional reads: 

5. Invest in an inventory management tool 

To make things simpler for your small business, look for a tool that you can integrate your store with to apply the above techniques. These tools come with a simple interface that gives you the ability to either connect the platform to your online store, or upload a CSV of products you sell. 

Based on the workflow you set up, they automatically track your inventory, alert you for restocks and also help you predict/ forecast consumer demand based on insights from ongoing sales. 

Additional reads: 

Conclusion - Always keep optimizing your inventory management strategy 

As you start to grow your small business, your inventory management techniques may evolve as well. Continually keep a watch on how the inventory management method you’re following helps you meet all business goals, where you face challenges and what aspects you need to account for in your supply chain workflow. 

Don’t set it and forget it. 

Keep your inventory management strategy optimized as per your small business needs to always stay on top of things. 

Ready to get better at inventory management and meeting consumer demand? 

Take the first step and set up an online store with Shopify today

Small business inventory management FAQs  

People also asked

Why should you not use spreadsheets for inventory management?

Managing inventory data across the supply chain on a spreadsheet, is prone to human error. The manual entry of data and cross-checking the same makes the process even more cumbersome. The two added together result in lapses in product planning and demand forecasting, leading to loss in business. As a small business, it is important for you to use your time and resources wisely and hence automating inventory management is crucial.

How do small businesses organize their inventory?

Most small businesses approach inventory management manually. They keep track of orders in notebooks and spreadsheets initially. But as small businesses grow, they start to organize their inventory based on the requirements at each stage of the product life cycle that includes taking into account raw materials, packaging and similar aspects. This is where having an inventory management software comes in handy to keep data streamlined.

What are the 4 types of inventory?

The 4 types of inventory you need to take into account includes - raw materials/ components, work in progress, finished goods, and maintenance, repair and operating supplies (MRO). Raw materials are the goods you require to make a product, work in progress are products in manufacture, finished goods are products available for sale and MRO are goods required to run the business.

What are the 3 major inventory management techniques?

The most common types of inventory management techniques used by small businesses include FIFO (first in, first out), LIFO (last in, first out) and JIT (just-in-time). Each of these methods are focused on minimizing redundant inventory that may add to the storage costs of a business.

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