8 Steps for Efficient Retail Inventory Management

In a competitive global market, retailers have to be careful in how they handle their inventory. By following these 8 steps, you’ll ensure that your store’s wares are available at all times and boost sales while minimizing overstocking.

Stocking items that consumers desire, utilizing price and promotions to sell economically, and keeping inventory levels that satisfy demand without over-purchasing are all part of retail inventory management. From sensible buying and pricing to processes for receiving, inventory counts, and location monitoring, an overarching inventory management strategy governs how it all gets done.

Let’s go through the steps one by one.

1. Maintain Up-to-Date Product Information

Creating a consolidated record of data for each product supplied is the first step in any inventory management strategy. This allows you to quickly access whatever information you need to fulfill your inventory management activities, including reordering prices and department locations, as well as sales monitoring.

We advocate adopting a POS system to simplify and automate your inventory management process:

• Square: Square is our preferred low-cost cloud-based retail POS system for getting real-time data, reviewing reports, and setting inventory alerts so you never run out of an item.
• Lightspeed; is a cloud-based point-of-sale solution that provides unrivaled inventory management and retail analytics. Lightspeed is excellent for shops with several locations or a somewhat bigger budget.

Regardless of the technology you use—paper logbooks and files, computer spreadsheets, or a point-of-sale system—you must design a protocol that lays out the steps and provides guidance on how to:

• Create a filing location: This might be a feature of your POS system or a separate file cabinet where you can keep actual files. In any case, decide where you’ll store your product information and how you’ll organize it so that visitors can readily discover certain items.
• Decide on a recording technique: Make a decision on when and how you’ll record your stuff. Is it better to store it before or after? When you’re unpacking fresh orders, what do you do? Do you want it to be done by one person or will you distribute the responsibility? Whatever approach you select, be sure it’s consistent to prevent errors.
• Define the product data you’ll be tracking: Decide what sort of data you’d want to include on your product pages. The following are some of the most crucial details to include in your product sheets:
  • Name of the product
  • SKU (stock keeping unit)
  • Colors and sizes
  • Your normal and discount prices
  • Your sales department, category, or class
  • Details about a brand, line, or collection
  • Related retail specials
  • All of the item’s suppliers
  • SKUs and/or UPC codes for suppliers
  • The price of the product
  • Quantities of case packs for stock orders
  • Reordering lead times
  • On-hand inventory (or adjust following new product receipt or a stock count)
• Update product data: Prices and other buying information from vendors vary over time; have a process in place to make these modifications as required.

You may also add a product description and photographs to your product data entries if you utilize a POS system. This makes it easier for shop employees to answer consumer queries, speed up checkout, and link product data to online sales channels.

The product input panels in Square for Retail walk personnel through a straightforward product data entering procedure.

The important thing to remember as you set up this procedure is that smart inventory management requires a full record of product data details—not just an item name, SKU, and stock amount. The more information you track—pricing, The price of the products, vendor lead times, store categories and departments, etc.—the easier it will be to handle other inventory management tasks and gather meaningful data.

2. Keep an eye on stock location

To effectively market and sell your stuff, you must first know where it is. Department or category mapping, SKU numbers, barcode labels, color codes, and even high-tech RFID tagging are all options for tracking stock placements in a shop. Creating an internal SKU system with category or department-specific SKU coding, such as this: is a very easy and efficient choice for any size shop.

This system is simple to set up yet endlessly extendable, making it ideal for solopreneurs with several stores. It also works with or without barcode labels, as well as whatever form of inventory management system you employ, such as paper records, spreadsheets, or a point-of-sale system.

Here’s how to set up a stock monitoring system based on SKUs and departments or categories, similar to the one shown above:

• Make departments (or categories): Make master departments and/or categories for grouping items.
• Identify and map the following departments in the store: Create a physical map indicating these places by connecting these departments or categories to particular spaces and distinctive displays on your sales floor.
• Use identifiers with product SKUs: Create an SKU numbering system that incorporates department or category IDs inside the number—for more information, read our guide on producing SKU numbers.
• SKUs should be assigned to all products: Using this approach, create unique SKUs for all of your items.

POS solutions like Square for Retail make it simple to keep track of vital product data and provide comprehensive sales, inventory, and profit statistics as required.

• Print product SKU labels: Create and print labels with the new SKUs—with barcodes if you’re using a POS system that prints SKU barcode labels with Name of the products and pricing, like Square for Retail.
• During receiving operations, label current and incoming merchandise using SKU labels.
• Make a note of overstock storage sites in your product data system as required so that stored stock isn’t forgotten.
• In your product data system, make a note of any stock movements or unusual displays.
• Publicize it: Staff should be trained on the new stock monitoring system, and a copy of the sales floor department map should be posted in the backroom and near the registers for convenient reference.

You’ll know where the item is on your sales floor with a fast peek at a product tag or SKU lookup once it’s in place. This allows you to give better customer service and sell more items by speeding up restocking and reshelving processes.

Create a Storage System: You must know where your merchandise is housed in addition to having an orderly sales floor. Unsold items, miscounts, over-ordering, and excess stock come from forgotten things put to the back of displays or storage shelves. A small store will lose money as a result of all of this.

You won’t lose stock if you have a well-organized inventory storage and display system in place, and you’ll be able to keep track of your inventory accurately.

3. Count your inventory on a regular basis.

After you’ve set up your product database and structured your inventory, the following step is to conduct regular and accurate stock counts.

Any good inventory management strategy and retail business operation must include stock counts. It’s tough to make accurate replenishment orders if you don’t know what goods you have in stock and how many of each. This results in sellouts and overstocking, all of which have a negative influence on earnings.

You won’t know when you need to restock or if you have extra product that needs to be marked down if you don’t have precise counts.

All of these expensive difficulties may be avoided by keeping precise stock counts. Counts help you discover inventory concerns in addition to keeping inventory levels on track. Inventory counts reveal issues such as poorly stored or exhibited products, inventory decline due to theft, unreported damage, and receiving problems.

Cycle counts and yearly counts are the two forms of stock counts used by retailers, and Inventory Count Procedures explain how to conduct them.

While we recommend having a POS system to keep track of your inventory as you sell and buy items, you can also use one of our free templates to keep track of your inventory.

• Inventory Counting Procedure (Cycle Count)
• Procedure for Counting Inventory Every Year

Cycle counts are partial counts of a line, department, or other grouping of commodities that occur on a regular basis. A cycle count technique involves the following steps:

• Choose a category: Choose the product you wish to count and either use your POS system to filter that item or generate a list of things to count on paper logs.
• Take a look at your inventory count sheet: Count sheets show you how much inventory you should have on hand right now, assuming no shrinkage. Because your POS system records your inventory levels in real-time as you make sales, this statistic is simple to locate. If you’re utilizing a manual method, you’ll have to calculate this amount manually by subtracting the number of things you should have begun with (based on your buy orders) from the number of items you’ve already sold.

You can filter your inventory and discover how many things you should have in stock at any particular time using Square. (Image courtesy of Seller Community)

• Assign counts to individuals or groups: Give an employee your inventory count sheet and instruct them to count the physical inventory and note any differences. One person can manage counting and recording numbers for modest counts. However, assigning teams of two for greater counts is quicker and more accurate.
• Check for inconsistencies and the cause of the problem: Double-check to verify all goods was identified and tallied correctly if you discover unexpected shortages or overages. If the disparity is correct, you’ll want to look into the shrinking and figure out where the issue began.
• As required, adjust inventory numbers: Make changes to your inventory records to reflect the results of your physical counts. For accounting purposes, make a note of the reasons for any adjustments.

The frequency with which you execute cycle counts is determined by your company and the inventory management system you use:

• Paper logs or spreadsheets: If you don’t modify inventory daily or weekly to reflect sales, you’ll need to complete cycle counts every time you restock to acquire correct stock levels.
• A POS system: Because stock numbers update immediately with each sale when utilizing a POS system, cycle counts will mostly be used to spot-check stock numbers on fast-moving commodities and defend against inventory decline due to receiving mistakes and theft.

For accounting and tax reasons, annual counts are year-end counts of your whole inventory. Annual counts are usually done after hours or on a day when the business is closed, since they are store-wide chores. Annual counts may be done with simply your employees depending on the size of your company, but if you have a bigger enterprise, you may wish to recruit workers to help speed up the process.

Using a POS system will ease your yearly count procedure, just as it would with cycle counts, since it will produce all of your count sheets for you based on your inventory levels and current sales data. Furthermore, POS systems help simplify your accounting operations and store them all in one spot. If you want to take the manual method, you may use our count sheet templates to keep track of your progress.

Follow these procedures to do your yearly count:

• Prepare the sales floor and storage spaces by organizing and tidying all stock places and locating any excess that isn’t on the sales floor so that counters don’t lose time hunting for things on their lists. When the time comes, it will be easy to locate and count the items.
• If you utilize a POS system, ensure sure all pending sales and refunds are processed before the system shuts down. Then set a system cutoff to ensure that no sales or other inventory-affecting transactions are registered between the time you pull your stock counts and the time you begin counting.
• Print or create inventory count lists, then arrange them by line, category, or department, whatever works best for your counting teams.
• Assign two-person counting teams to count particular areas, lines, or categories: Assign two-person counting teams to count specific areas, lines, or categories. One person should be counting (or scanning) while the other is recording (or spot-checking counts if using paper sheets). The two-person team is a tried-and-true method of getting the task done swiftly and with few, if any, faults.
• Check for inconsistencies and source issues: If you discover unexpected shortages or overages, double-check to confirm that all stock, including overstock, was identified and tallied, and that the proper products were counted. Then attempt to find out what caused the disparity.
• Update inventory numbers: After the counts and spot checks are completed, adjust your on-hand counts in your inventory management system, and indicate the reasons for each modification (damage, shrink, etc.) for accounting and tax purposes.
• Print a year-end inventory report: If you’re using a POS system or spreadsheets, it’s a good idea to make a full copy of your yearly inventory count for your records. This should contain your year-end inventory value for accounting and taxes, as well as your final adjusted on-hand statistics.

If you do cycle counts on a regular basis, your yearly count should be rather unsurprising. If you do have significant shortages or overstocking, consult with your accountant to ensure that adjustments and values are properly reported for tax reasons. Then, if you can identify the issue—for example, poor receiving practices, theft, or erroneous purchases owing to faulty stock counts—use the methods outlined below to prevent it from happening again.

4. Analyze Your Sales & Inventory Metrics

After you’ve cycled through some inventory and gathered data, you’ll need to utilize that information to assess your progress and make changes to your process. Keep in mind that reviewing your data is a continual assessment of its performance, not a separate stage in the retail inventory management process.

We’ll look at some of the most essential indicators in retail inventory management, how to calculate them, and what they can tell you about your company in this article.

If you use POS software like Square or Lightspeed, they’ll generate all of these data for you, and you’ll be able to track them in real-time with a few clicks.

Low Stock Alerts

Low-stock products are an important measure to monitor for effective inventory management. You may do this manually by keeping a watch on your inventory and recognizing low-stock items, or you can do it automatically by utilizing a POS system that sends out low-stock notifications at pre-determined inventory levels.

You may define a low stock level, say 45 units, in both Square and Lightspeed. This will allow your program to notify you when any product exceeds 45 units, indicating that it is time to place a reorder.

Maintaining a close check on your low supply can help you prevent stockouts and dissatisfied consumers. It will also provide you a clearer image of your stock, allowing you to make better decisions in the future.

For example, when my boutique initially added loungewear to our line, we bought in tiny numbers to prevent having an overabundance if the introduction failed. However, we quickly discovered that loungewear was incredibly popular, and if we continued to purchase in such little amounts, we would frequently face low stock notifications and stockouts. Our loungewear orders quickly rose in size, and we were able to maintain stock on hand and satisfy the demands of our consumers.

Our loungewear was quite popular, and we rapidly learned how to place bigger purchases. (Photo credit: Pinterest)

Calculate the profit margins

The profitability of individual items is one of the most significant factors to consider when managing your inventory. It’s not always as straightforward as determining which item sells the most or has the highest price tag. As an example, let’s assume your most popular item is hair clips. While they are sold in large quantities, they have a low-profit margin, resulting in a poor total profit. On the other side, assume you only sell a custom gown once a week, but custom gowns are your most lucrative product since they are pricey and have large margins.

Understanding the profitability of your goods can help you determine whether to run sales, whether or not to restock, how much to reorder, and how to price your things. It can also help you with your merchandising.

If you have a POS system, you can run reports on your goods in real-time and check how particular things are doing. Otherwise, you may use our Gross Margin and Markup Calculator or refer to our Gross Margin and Markup Guide to discover how to determine the profitability of your items by hand.

Product data reports may be retrieved in real-time using Lightspeed and other POS systems. (Photo courtesy of Lightspeed)

Check the value of your inventory

Goods value, or the monetary amount that your on-hand inventory is worth, is another measure to be mindful of while managing your inventory. This number may be determined instantly using a POS system. If you pursue the manual method, you’ll have to do regular counts or make educated guesses in order to arrive at an accurate inventory number.

In any case, understanding your inventory is critical not just for your financial accounts, but also for determining how much profit potential you have in unsold goods. Follow these methods to manually determine your inventory value:

1. Count the items in your inventory.
2. Calculate how much money each item would bring in if it were sold.
3. Total the total profit of each individual product.

30 hair clips (gross profit $1.50) + 12 earrings (gross profit $7.00)

1. Your inventory value is the sum of your totals.

While it is possible, this approach takes a significant amount of time and effort. We strongly advise you to use a POS system or inventory management software to do these calculations for you so that you can make better educated business choices.

Identify slow-moving products

The efficiency with which inventory is converted into sales is measured by your inventory turnover ratio. The average turnover percentage in retail is roughly 8.6%. A greater inventory turnover number usually signifies a healthy firm, while a lower figure usually means a struggling business. Of course, there are exceptions to this rule.

Knowing how and when to run sales, whether your pricing is wrong, and what goods will need to be bought more or less often may all be aided by knowing your inventory turnover (or never again).

You should calculate your inventory turnover rate at least once a year. A POS system can generate your rate at any moment, however, if you want to compute your inventory turnover ratio by hand, use the method below:

Inventory Turnover = Average Inventory / Cost of Goods Sold

Prevent Stockouts by Identifying Best Sellers

When it comes to inventory management, you should also keep track of your top and sluggish sales. Your greatest sellers are the items that sell the most often, necessitating higher order amounts and more frequent reorders to prevent stockouts. Slow sellers, on the other hand, are goods that sell less often and hence need fewer restocks and lower order amounts.

On POS systems, you can simply determine your top and sluggish sellers, or you may utilize your own sales data and insights. In any case, understanding your top and slow sellers may help you estimate order amounts, understand consumer preferences, and make better buying choices.

Data on past sales performance

Your prior sales data is the last item you should look at to gain a thorough view of your inventory. Past sales data may reveal seasonal patterns, future demand, and customer preferences, allowing you to make better-informed purchase choices in the long run.

Inventory management and point-of-sale systems may provide reports that forecast future demand based on historical data. They can even take into account seasonality and lead times to assist you plan ahead for your reorders.

5. Implement a data-driven purchasing strategy

You’re ready to make lucrative buying and pricing choices after you’ve set up a data management system, stock monitoring, and inventory count method, as well as a knowledge of how your inventory is moving. You can now integrate your sales and inventory data to make informed buying and pricing choices.

This may vary depending on whether you use a POS system or manually manage your sales and inventory with paper logs or spreadsheets, but it can all be described using processes.

Purchasing processes tell you what you need to buy, how much you need to buy, and how frequently you need to buy it. Slow-selling products are identified using pricing and promotional techniques, and promotions are used to get them out swiftly and profitably. For each job, below are some example techniques.

Create a Retail Purchasing Policy.

The purpose of buying is to acquire enough inventory to cover sales over time without acquiring too much that you’ll have to mark down later. For every retail business owner, this is one of the most important continuing jobs. The approach you’ll follow is determined by how you keep track of your sales and inventory—by hand, in spreadsheets, or using a POS system that includes automated buying tools.

The stages in a typical retail purchase operation are as follows:

• Set aside time for purchasing: Make sure you have enough time to run your numbers and place sensible refill orders.
• Examine low inventory numbers: A POS will notify you when a number falls below a certain threshold, and you may run reports to check if there are any additional low levels. You can arrange your numbers from low to high if you use a spreadsheet. Pull your low numbers or tallies for paper records.
• Calculate your sales: Check your sales records to identify which of your best-selling and evergreen items are sold out, or are reaching reorder levels. The first item on your reorder list is this. You can accomplish this using a POS system, but you’ll still need to compare spreadsheets or paper records manually.
• Make a shopping list: The first items on your reorder list should be hot-selling, lucrative items that aren’t nearing the end of the season. After that, make low-level reorders depending on stock levels, sales velocity, and the time it takes for things to arrive after they’ve been ordered (lead time). Manual techniques need maintaining up-to-date and correct sales and inventory records, as well as carefully checking them each time you make a purchase order. However, some POS systems allow you to make buy orders fast and efficiently depending on the reorder points you designate.

Purchase Orders: Submit and Store

A purchase order is a document that you use to ask your supplier for items or services. It contains information on the things you wish to buy, such as the unit pricing, a brief description or picture of the item, and the number you desire.

Keep a copy of all of your purchase orders to serve as a reference for verifying received amounts and order correctness. For example, if you get 20 pieces of candles but your purchase order shows that you bought 45, you should contact your supplier.

Lightspeed POS solutions enable you to handle all of your purchase orders in one spot. (Photo courtesy of Lightspeed)

6. Accurately record stock receipts

Simply said, suppliers make errors. They send orders late, have undeclared backorders, and ship the incorrect items; they even cause damage while in transit. You’ll have issues if you don’t have a strict receiving protocol in place to precisely verify and document incoming items and discover mistakes and damage.

Stock receipts that are inaccurate have a direct impact on your counts, and this has a knock-on effect on all inventory management duties. Receiving mistakes eventually lead to unexpected stock outages or unaccounted for overstock, wrong reorders, and paying for products you didn’t purchase, all of which eat into your revenues. Putting in place receiving processes and keeping track of stock receipts is the solution. You’ll avoid major inventory management hassles and expensive blunders if you do so.

Use the following measures to guarantee that your stock receipts are accurate:

• Count all of the packaged units in the shipment before opening boxes or unpacking pallets: Before opening boxes or unpacking pallets, double-check that you got all of the packed units anticipated. Make sure you have all four pieces if your shipment labels or freight bill of lading say “1 of 4, 2 of 4, etc.” Whether not, check to see if they’re still on their way and will arrive separately.
• Organize your unpacking: Unpack the whole cargo and sort things into categories for a receiving count.
• Count the goods in relation to your purchase order: This is the most important stage! Do not depend on your supplier’s order slip for correct receiving—if it made a mistake with your order, it will not show up on the internal slip and will only be seen when compared to your original purchase order.
• Make a list of any faults, shortages, or damage: If the things you get do not match your purchase order, make a note of the discrepancies on your documentation and follow up with your supplier.
• To account for received products, adjust inventory counts as follows: In your inventory management system, update the stock counts. If you utilize a point-of-sale system, you just get the purchase order, and it updates your stock counts automatically. You’ll have to manually modify counts if you’re using paper records or spreadsheets.

You can establish a stock receipt once you’ve double-checked your purchase orders versus what your supplier really supplied. A stock receipt is a record of all the items you received from your supplier. The most important factor is that your receiving numbers are correct. If there are anomalies in your first order count, all subsequent counts will be based on faulty data, leading to incorrect inventory conclusions.

7. Establish Procedures for Handling Returns & Unsellable Inventory

It’s critical to remove unsold merchandise off your shelves—and off your books—as soon as possible. Unsellable returns, faulty or damaged product shipments, in-store damages, and unsold stock such as seasonal items may all be returned to the supplier in this manner. This inventory, sometimes known as “deadstock,” has a nasty tendency of piling up and interfering with inventory counts and value reports. As a result, you’ll need to deal with these items on a regular basis, revising counts and values, noting reasons, and disposing of as required.

When inventory is modified, Square for Retail prompts you for a reason so you always know where your product has gone.

Here are the steps to creating your own deadstock system that maintains your business clean and your stock counts and records current.

• Keep track of any damages and returns that can’t be sold: Keep track of damaged items and unsellable client returns, and deal with them on a regular basis, such as weekly, bimonthly, or monthly.
• Unsellable client returns may be eliminated from stock counts when returns are processed, and in-store damages can be corrected when discovered or in a weekly batch if you utilize a POS system. Regularly examine your tracking records, whether they’re on paper or in a spreadsheet, and make any necessary revisions.
• Designate a holding room away from the sales floor to store damaged, unsellable, and mis-shipped items.
• Regularly dispose of unsaleable items: Don’t let your holding space fill up. Maintain order by giving unsold but otherwise useable items to local charity on a regular basis and returning mis-shipped or faulty items to suppliers, ideally using their prepaid return shipping labels. Photograph any broken or faulty products as a record for supplier credits if necessary. Follow the supplier’s instructions for handling these materials.
• Pullbacks are unsold seasonal products or other unsold items with return agreements that are withdrawn from the sales floor and returned back to suppliers for payment. To earn credit and clear your sales floor for lucrative products, pull, record, and return pullbacks according to supplier instructions in a timely way.

8. Use Markdown & Promotions to Move Sellable Dead Stock

You’ll want to evaluate sales velocity and levels on slow-moving goods on a frequent basis, in addition to buying to maintain stock levels on hot sellers and evergreen products. To free up cash and floor space for more lucrative things, slow movers should be marked down and moved out as soon as feasible.

Slow-moving items include:

• Slowing trend products: Trends strike strong, and these things might be some of your best-selling items for a long. If you bought a lot, put them on sale as soon as the trend changes, since they seldom come back.
• Products that are reaching the end of their season: Swimsuits, holiday-themed items, outdoor eating, winter sports gear, and so on are just a few examples of seasonal goods. Put these things on sale in the middle of the season to avoid having to sell them at a loss months later. Alternatively, many companies have return arrangements in place with suppliers for unsold seasonal products.
• Tea cozies aren’t the comeback hit you thought they’d be, are they? Or aren’t the must-have see-through jeans selling like hotcakes? By reducing pricing, you can quickly cut your losses on failed deals. Alternatively, if you’re taking a risk on specialized market items, have a return arrangement in place with your supplier in case the product turns out to be a dud.

Don’t be afraid to use discount and promotion techniques to clear away your sluggish sellers on a frequent basis.

• Identify slow-moving items: Scanning for slow-moving items throughout the purchasing process is a smart idea.
• Create markdown schedules: Create a markdown plan for a certain period of time—for example, 10% discount for week one, 15% off for week two, and so on. Instead of offering quick big discounts, this boosts sales at more lucrative price points.
• Don’t conceal your sale products in a sad clearance section; instead, use sales and savings displays. Instead, utilize them to create eye-catching displays that will entice consumers into your business.
• Send out promotions: Use social media, advertisements, email, and loyalty program promos to promote specials like buy-one-get-one (BOGO) discounts or invitation-only clearance events.

Discounts and markdowns are an important component of good inventory management, so don’t avoid them. Use this process to maintain inventory going out so that new stock may be brought in. When done correctly, sales promotions bring people in for the discount while also allowing you to cross-sell more lucrative items.

Conclusion

Inventory management in retail is essential for efficient operations and cash management. To guarantee that product data, stock counts, receiving, and location monitoring are all handled swiftly and properly, it’s useful to transform inventory management strategies into a set of processes. Procedures may be built around whatever inventory management tools you’re using, whether they’re paper records, spreadsheets, or a POS system that connects inventory to all sales operations.