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Management, Retail & Inventory

How to Save Money For Your Retail Biz While Managing Inventory

Inventory often stays backstage while sales, marketing and servicing take precedence in most retail businesses. After all, if you don’t advertise your products, how will you sell?

Yet many retailers fail not because they haven’t made themselves visible enough, but because once they gain traction, their backend doesn’t support the business anymore. Don’t let inventory woes trip you up. Here’s how you can manage inventory efficiently and save money doing so.

  1. Do an inventory audit.

The first step towards successful inventory management is to conduct a full audit of your inventory.

Several retailers use Excel spreadsheets to keep track of their inventory. Since these sheets require continuous and manual updating, the books may not paint an accurate picture of your inventory at all. You may indeed have lesser, or even more, inventory than you thought you did.

There are several ways to count your inventory. If you have warehouse space where you store your products, you can count each shelf or each group of products separately. Add the new values to a new column in your spreadsheet. Counting inventory involves a lot of manual labor, so you can divide your team up and count the entire warehouse at once or count just a few shelves each day. There are benefits to both approaches.

Counting the inventory on hand is only the first step. You then need to reconcile the book value of your inventory to the actual values. Say you have 10 units of a product, but your books say that you have 15. You need to figure out where the five units have gone.

They could have been sold since the last update to the spreadsheet, or they could be in another part of your warehouse. Worse, they may even have been stolen. Depending on what you find out about your actual inventory, you can take steps to save money in the future.

  • If the missing products have been sold (as reflected in invoices), you need a more dynamic way of updating your inventory. Spreadsheets are passé, and a good inventory management system can help you.
  • If the missing products are found elsewhere in the warehouse, you need a more efficient way of labeling your warehouse shelves.
  • If the missing products seem to have been stolen, you need to beef up your security system and figure out if there are internal stakeholders involved.
  • Sometimes, you may find that you have more inventory than what the records say. This is a very important finding that points to your dead stock (stock which you didn’t even know you could sell)! Rethink your stocking practices.

All the money saved from reconciling book values to the actual stock values is freed up working capital that you can now use to grow your business. Moreover, having a good grip on your inventory gives you a strong foundation on which you can expand to as many sales channels as you like.

  1. Stock only as much as you need.

This one is easier said than done. How do we define “as much as you need”? Sometimes you may recognize that you are holding too much stock. Too much inventory takes up warehouse space, ties up your working capital and can even deteriorate over time. All in all, it isn’t doing your retail business any favors.

Luckily, math comes to the rescue. Using a few simple calculations, you can figure out how much stock you need, how much you have and how long it will be before you need to order stock again. Don’t be daunted by the jargon that comes up- the concept behind them is very straightforward.

Reorder level

For example, let’s assume you sell apparel. Graphic t-shirts for men are some of your bestselling products. Each day, you sell about 50 units of these shirts. Your vendor, who manufactures in another country, takes about seven days to ship the products to you. When should you place an order for more products?

In other words, if you know that in the seven days it takes to receive products, you would be selling 350 t-shirts (as seven times 50 is 350). Therefore, you should place an order with your vendor as soon as your t-shirt inventory reaches 350 units. In this case, 350 units are known as the reorder level.

Safety stock

In the ideal world, your vendor will continue to deliver t-shirts to you every seven days after you place the order. In the real world, there are delays. Safety stock helps you tide over them without running out of inventory.

There are two instances where safety stock can save you: First, when you sell more than you anticipate, and second, when your vendor delays a purchase order. Historically, there have been instances where you sold 60 units a day instead of the usual 50.

Also, let’s say your vendor does take ten days sometimes to deliver your products to you. Safety stock can be calculated by multiplying both these maximum sales and removing the average sales. In this case, it would be: (60*10) – (50*7) = 250. By keeping 250 units with you as a safety measure, you can avoid running out of stock on a peak day.

How you save money

Reorder level and safety stock are two simple quantities that can help you avoid stocking up too much or too little. When you avoid stocking too much, you save all that money, and you can further divert it into sales and marketing. When you avoid stocking too little, you build loyalty for your brand, as customers know that they can always count on you and would thus be willing to make repeat purchases from you.

  1. Negative working capital.

In food and diet, you may have heard of the concept of negative calorie foods: Foods that use up more energy breaking down than they themselves provide. It is indeed possible to extend this concept into retail.

One way to do it is by building strong relationships with your vendors. How strong? To the point where they are comfortable offering you extended credit for payment days. For example, if a certain vendor gives you four months to settle his bills, you have that much more time to sell all the product he sends you.

As an extension, you would already have received the money from your customers for goods that you still have to pay your vendor for. You are using his working capital to sell your goods. This is only possible when your vendors trust you to pay on time and to not cheat them.

You’ll be surprised at how much money you can save simply by handling your inventory correctly. If you sell items that are prone to damage of any kind, handling them while stocking and processing a return can damage them. Keep your storage shelves clean. It may even be helpful to have a standard operating procedure in place for how stock should be stored and handled.

How you save money

If you can conduct your business based on credit from vendors, you are effectively spending a sum total of zero on procuring your stock. You only need to pay for the warehouse space and shipping beforehand, and not the actual product itself. Couple this with handling your stock carefully, and you avoid damages and write-offs that can be prevented simply by being diligent.

Mohammed Ali is the Founder and CEO of Primaseller — a MultiChannel Inventory Management software that also helps sellers build brand credibility by ensuring that accurate stock information is reflected across sales channels and orders are fulfilled on time. When not running a startup, Ali is often caught lapping up the latest book in fantasy fiction.

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