Inventory management has a direct influence on sales and customer satisfaction.
But to effectively strategise inventory management the right way, you’d need to implement tested and data-backed techniques to develop a tailored one for each of your stores.
The right strategy will ensure optimal stock levels, minimize wastage, and prevent stockouts, all while aligning with the unique needs of each store’s customer base.
This article will guide you through the fundamentals and the essential inventory management techniques and best practices that drive results.
What is inventory management?
Inventory management involves the systematic approach of ordering, storing, and utilizing a company’s stock.
It ensures that products are available to meet customer demand while minimizing excess inventory.
An effective inventory management will balance supply and demand, reduce costs, and improve the overall operational efficiency.
In a retail context, inventory management also involves tracking products across various channels, forecasting demand for specific items at the SKU level across multiple store locations and ensuring seamless re-stocking to avoid stockouts.
How proper inventory management contributes to retail sales
Proper inventory management directly impacts a retail store’s sales performance as mentioned before.
Here’s how:
i) Improved product availability
Inventory management ensures popular items are always in stock, reducing missed sales opportunities. This makes customers are more likely to return to your store that consistently meets their needs.
ii) Improved customer satisfaction
If the store meets customer expectations consistently through product availability, customers will naturally build trust and loyalty. Also, a positive shopping experience encourages positive word-of-mouth referrals.
iii) Reduced overstocks and stockouts
Stockout risks will not only lose customer’s trust but can also drive customers to competitors. Proper inventory management techniques help strike the right balance between minimizing holding costs and preventing lost sales.
iv) Better cash flow management
Efficient inventory management ensures that capital isn’t unnecessarily tied up in excess stock, allowing you to allocate resources more effectively to multiple stores. By maintaining optimal inventory levels, you can improve liquidity and reduce financial strain.
These savings can be re-invested in other growth areas such as geo-fencing marketing, retail expansion, etc.
v) Improved Store Performance
By aligning inventory levels with demand patterns, your stores can improve overall store efficiency, optimize shelf space, and drive higher profitability.
Inventory management process
1. Demand Forecasting
Predicting customer demand using historical data, trends, and market analysis will help curate and cater to your customer base much better.
Identifying peak sales periods and seasonal trends at the store and SKU level across multiple locations builds a strong foundation for inventory management.
We’ll get into the ‘how’ in a minute.
2. Stock procurement
Purchasing the right quantity of stock at the right time from suppliers should be done after identifying the demand for each product across multiple locations.
This involves negotiating contracts, ensuring timely delivery, and aligning procurement with projected demand to avoid excess or insufficient stock.
3. Inventory storage
Organizing and storing stock in warehouses or retail spaces efficiently will be made easy by optimizing warehouse layouts, using shelving systems, and implementing technologies like RFID to streamline storage and retrieval processes.
4. Stock tracking
Implementing tools like barcode systems, IoT devices, or inventory management software can help monitor inventory levels in real-time. Accurate tracking minimizes errors, improves replenishment accuracy, and reduces the risk of theft or loss.
5. Replenishment
This step ensures that popular items are always available, preventing sales losses due to stockouts by restocking inventory when levels fall below predefined thresholds.
6. Review and optimisation
Regularly analyzing inventory performance can help improve processes and reduce costs. This typically involves identifying slow-moving items, optimizing stock levels, and implementing strategies to reduce holding costs while maintaining product availability.
8 Inventory management techniques to boost retail sales
1. Demand planning at store and SKU level:
Demand planning involves analysing past sales data, market trends, and seasonality to accurately forecast demand for products.
But stores at different locations tell a different story with the changing demographics, trends and the overall local market dynamics. Keeping up with this data is hard without utilising location intelligence solutions.
Utilising such solutions can tailor your inventory mix based on local preferences and demand patterns.
For example, a store in a coastal city may stock more summer apparel year-round, while a store in a colder region focuses on winter wear.
Customers of your retail brand at one location differ drastically from another location, resulting in changing consumer behaviour.
Location data solves all these problems by analysing consumer behaviour and recommending the best product mix at each location of your store that reflects local consumer interests.
This strategy maximizes sales potential and minimizes unsold inventory.
| Related: GeoIQ recommended product mix resulted in 45% more sales!
2. FIFO and LIFO:
i) FIFO (First In, First Out)
FIFO is an inventory management method that assumes the first items purchased are the first ones sold. This approach is ideal for perishable goods, as it ensures older stock is sold first, helping reduce waste.
It can be particularly important in industries where expiration dates are critical.
ii) LIFO (Last In, First Out)
LIFO (Last In, First Out) is an inventory management technique where the most recently purchased items are sold first. This method is useful in times of rising costs due to inflation.
For example, supermarkets and pharmacies may benefit from LIFO because almost every product these businesses stock experiences inflation.
3. Dropshipping:
Dropshipping lets a retailer sell products to customers without keeping them in stock. When a customer places an order, the retailer forwards it to a supplier, who then ships the product directly to the customer. The retailer profits by marking up the price they pay the supplier.
Because of this convenience, dropshipping has started being viewed as a business model rather than just an inventory management technique.
4. Economic Order Quantity (EOQ)
Economic Order Quantity (EOQ) helps businesses determine the optimal order quantity to minimise inventory costs, including ordering and holding expenses.
When paired with location intelligence, EOQ actually becomes even more effective.
By analysing factors like local demand, transportation routes, and supplier proximity, businesses can optimise inventory storage and distribution.
So, this combination enables retail businesses to identify optimal delivery routes, reduce transportation costs, and improve delivery efficiency.
5. ABC analysis
ABC analysis is an inventory management technique that classifies inventory into three categories, ie, A, B, and C – based on their importance and value.
- A-items are the most valuable, accounting for a large portion of total value but making up a smaller percentage of the inventory.
- B-items are of moderate value and importance.
- C-items are the least valuable but make up the majority of the inventory.
Here, location data can help businesses identify high-demand products and emerging items at each store location.
This insight helps classify products effectively, allowing you to prioritize resources on high-value (A-items) while managing lower-value items (B and C-items) more efficiently.
6. Safety stock control
Safety Stock Control is an inventory management technique used to prevent stockouts and ensure that a business can meet customer demand even during unexpected fluctuations in supply or demand.
It involves maintaining an additional quantity of inventory (safety stock) above the expected demand to buffer against uncertainties.
The amount of safety stock needed depends on factors like lead time, demand variability, and service level goals.
7. Just-In-Time (JIT) method
Retailers may typically hold larger amounts of stock to avoid stockouts, which leads to higher storage costs and the risk of overstocking. The Just-In-Time technique differs by focusing on reducing inventory levels and maintaining efficient supply chain coordination.
JIT minimizes stock by ordering products only when needed for production or sales, reducing storage costs and waste.
By integrating location data here, businesses can forecast demand more accurately with data.
Conclusion
It’s clear that inventory management is a critical driver of retail success.
By implementing the right processes and leveraging advanced techniques like location intelligence, retailers can optimize stock levels, reduce costs, and boost customer satisfaction and sales.