If you’re looking to expand your retail business or start your retail journey, understanding the role of inventory management in retail is crucial.
Retailers must find the delicate balance of having enough stock to meet customer demand without overstocking and incurring unnecessary costs.
But effective inventory management is more than just keeping track of stock levels – it’s about optimising operations, reducing costs, and delivering exceptional customer experiences.
In this article, we’ll explore what inventory management is, its key benefits, and how it works, and we’ll provide an effective framework to approach inventory management through location data.
What is inventory management in retail?
Inventory management is the process of ordering, storing, tracking, and optimising the flow of goods within a business.
Effective inventory management is critical for retail businesses of all sizes, as it directly impacts customer satisfaction, efficiency of each of your stores, and profitability.
It ensures that the right products are available in the right quantities, at the right time, and in place, while minimising costs and avoiding overstocking or stockouts.
This typically involves forecasting demand, procurement of stocks, and monitoring stock levels to ensure smooth operations.
Benefits of effective inventory management for retail businesses
The benefits of inventory management in retail go beyond just ensuring your store has optimal products. It’s worth mentioning that only 30% of the total inventory is sold at full price, with the remaining 70% being discounted.
This emphasizes the importance of balancing stock levels to minimize the need for discounting and maximizing profitability.
Below are some of the major benefits you can expect from effective inventory management:
1. Cost efficiency
Proper inventory management helps retail businesses avoid overstocking, which ties up capital and increases storage costs, or understocking, which leads to lost sales and dissatisfied customers. By maintaining optimal stock levels, you can reduce carrying costs and improve cash flow.
2. Customer satisfaction
When inventory is managed effectively, your store can fulfil the local customer base’s orders promptly and accurately. This leads to higher customer satisfaction, repeat business, and positive word-of-mouth.
3. Operational efficiency
A streamlined inventory processes reduce the time and effort required to manage stock. This will allow your employees to focus on other critical tasks. Implementing automation and real-time tracking of your inventory could further improve efficiency.
4. Decision making
Knowing the pulse of your local customer base’s expectations and buying behaviour, especially with location data enables you to make informed decisions about purchasing, production, and marketing strategies.
5. Reduced waste
For businesses dealing with perishable goods or seasonal products, inventory management helps minimize waste by ensuring that stock is sold or used before it expires or becomes obsolete.
Inventory management in retail: How does it work?
Inventory management involves a combination of processes, tools, and strategies to monitor and control stock levels.
Here’s how it typically works:
1. Demand forecasting
Analysing historical sales data, market trends, and external factors (e.g., seasonality, trends, customer buying behaviour) to predict future demand. Accurate forecasting ensures that inventory levels align with customer needs.
With advanced AI and hyperlocal external data points, you can predict demand at the store level. We’ll get into how you can do it in a minute.
2. Stock replenishment
Based on demand forecasts, businesses determine when and how much to reorder. This involves setting reorder points, safety stock levels, and lead times to avoid stockouts.
3. Inventory tracking
As we mentioned earlier, modern inventory management systems are handy and they provide visibility into inventory levels across multiple locations, such as warehouses and retail stores. These systems typically use barcodes, RFID tags, or IoT sensors to track stock in real-time.
4. Performance analysis
Businesses regularly review inventory turnover rates, stockouts, and carrying costs to identify areas for improvement. This data-backed approach helps optimize inventory levels and reduce inefficiencies.
Best way to approach inventory management in retail: Accurate demand planning with location data
One of the most effective ways to approach inventory management is through leveraging location data at both the product and store levels across multiple locations.
Here’s how location data can aid in inventory management for retail:
i) Store-level demand planning
As we mentioned earlier, demand planning involves analysing historical sales data, market trends, and external factors such as seasonality, economic conditions, and competitor activity.
These analyses will be made much easier and more accurate by leveraging location data and advanced machine learning models.
By examining your existing sales patterns, local customer buying preferences, purchasing power, and competitor activities, you can gain deeper insights into demand dynamics at both regional and store levels.
Together, these tools allow businesses to anticipate demand more precisely, optimize inventory levels, and also help stay ahead in terms of emerging trends at the store level.
ii) Product-Level demand planning
Pairing location data in the inventory management strategy helps retailers predict demand at individual product SKU levels.
For instance, a retailer might identify that certain sneakers sell out during back-to-school season or that specific skincare products peak in winter.
Leveraging tools like machine learning and location data improves prediction accuracy by uncovering regional preferences, local event impacts and other external factors.
iii) Regional trends
Location data also reveals regional trends and preferences.
For instance, a grocery chain might find that customers in one region prefer organic products, while another region favours conventional items. This helps you tailor inventory to local customer preferences, to boost sales and reduce waste.
iv) Optimized replenishment
Apart from predicting demand, location data enables you to optimize replenishment by identifying the nearest warehouse or distribution centre with available stock.
It also identifies the optimal route, thus, reducing shipping times and costs, and ensuring that stores receive inventory quickly and efficiently.
Conclusion
Inventory management in retail is the pillar of successful operations. Each store’s customer base varies drastically and so should the inventory management strategies.
Book a 15-minute demo with us to learn more about how location data can help tailor your inventory across locations.