Table of Contents
Inventory management is a crucial part of any small business. In this guide, we’ll walk you through the process of organizing inventory and preparing your company for growth.
The practice of having the correct items, in the right amounts, at the right time to sell to clients is known as inventory management. Stockouts, overstock, and unsold items may all be avoided with proper inventory management. The simplest way to learn how to arrange inventory for small companies is to utilize a software tool to automate the process.
1. Organize Product & Vendor Information
Setting up your stock and supplier information in a reliable and accessible system is the first step in managing your inventory. Manual tracking techniques, such as spreadsheets, are used by certain firms. However, using a point-of-sale (POS) system that keeps a vendor directory and searchable product pages for you is the ideal choice for merchants.
You’ll need to input information about each item and place it on a product page before you can categorize them. You should provide the following product-specific information:
- Name of the product
- Quantity
- Your product’s internal stock-keeping unit (SKU) number
- Universal Product Code (UPC)/European Article Number (EAN) or other unique identifiers from the manufacturer
- A brief summary
- Product category, class, or family
- Cost at wholesale
- MSRP (regular retail price)
- What is your selling price?
- Sizes or colors
- Name of the vendor, supplier, or manufacturer
- Quantities
- Size, weight, box packing, cost, shipment time, and so forth.
- Image of a product or a picture
You’ll also need to input all of your suppliers’ information into your system, in addition to maintaining a record of all your items and their details.
The following details should be included:
- Name of the vendor
- Name of the vendor’s contact person
- Billing information from the vendor
- The phone number for the vendor
- Email address for the vendor
- Website of the vendor
- Volume of orders
- Terms of payment
Establish Business Relationships With Product Providers
Even with the strongest inventory management strategy in place, problems might emerge when you need items right away to complete an order. Retailers are at the mercy of their suppliers when this occurs. If there is a problem with quality control or a conflict with a purchase order (PO), having a strong connection with your supplier might help you rapidly fix the problem.
By keeping with the same suppliers over time, seeing suppliers in person at trade fairs, and, perhaps most crucially, paying bills on time, retail and eCommerce firms may create solid relationships with product suppliers.
2. Create & Submit Accurate Purchase Orders
POs are essentially receipts produced by buyers that record the transaction of things to be delivered at a later date. They are the simplest method to manage your inventory purchases, allowing you to keep track of every stock transaction from order placement through delivery and payment. POs are financial transactions, so make them when you have the opportunity to examine your cash flow and predict your stock requirements realistically.
Businesses may submit POs straight from their software using Lightspeed Retail’s built-in vendor directory and product catalog. (Photo courtesy of Lightspeed)
Keep track of your POs so you have a record of everything you bought from your supplier and can compare your delivery to what you anticipated to get. This will assist you in keeping track of your inventory and preventing shrinkage.
Let’s imagine I want to purchase 300 pairs of shoes from my favorite vendor for the next spring season. I’d fill up a buy order form with the specific shoes and quantity I want, calculate the overall cost, then send my PO to the supplier with a delivery date. Then, when my shoes come in the spring, I can use my PO forms to ensure that the quantities, sizes, and models are correct.
Purchase orders are often sent to suppliers electronically through email or via the vendor’s online buying site. You may use our buy order template to make things simpler if your vendor does not provide an order form. Alternatively, POS systems like Lightspeed include capabilities that may help you make your POs simpler and more efficient.
Many POS systems contain directory tools to store vendor contact information, and some even enable you to submit POs straight from the UI, as we discussed before. Low-stock alerts are also available in POS systems, which notify you when an inventory item falls below a certain minimum level, requiring you to place a new purchase order. This can help you avoid stockouts and the resulting dissatisfied customers.
3. Accurately receive inventory orders
You want to be sure that when you submit your buy order for the correct quantity of stock, you get it correctly. Supplier mistakes are common, and if you aren’t careful about receiving your inventory in a systematic manner, you might be shorted, overcounted, or undercounted, resulting in shrinkage and a reduction in your profits.
Companies should receive and unpack all boxes in the same place, count each box, and compare the things received to the original purchase orders in order to receive inventory accurately.
Receiving your inventory correctly ensures that you have a thorough grasp of your inventory and that no products are missing. (Photo courtesy of Highway Logistics)
It’s extremely vital to double-check all things received against your PO. Packing slips, which specify the products and amounts in your shipment, are usually included by suppliers. While this slip will almost certainly match the real shipment, if the supplier makes a mistake during order input, their packing slip will not match your PO, and the numbers will be inaccurate.
You run the danger of believing you got stuff that didn’t really arrive if you don’t discover order inconsistencies by comparing received items to your PO. Stock shortages, backorders, and, eventually, monetary losses result as a result of this.
How to Receive Stock Shipments Correctly
- Unpack the package and sort the contents by product.
- Ascertain that all boxes, containers, or other items in the cargo are received in accordance with your POs.
- File as received physically or in your POS system if the counts and goods match.
- Note any mistakes you see on your PO, such as incorrect, shorted, or missing products, and contact your supplier right once to fix them.
- All appropriately received goods should be shelved or stored (tag or label first if needed for your system).
- Make a record of your bill in your accounting software.
4. Tag & Label Inventory
Once you have your items in hand, you will need to tag and label your inventory so that it is ready for the floor and organized internally. Two things should be included in your tags:
- The price at which your item will be sold. All of your merchandise will need this before it can be placed on the floor and exposed to customers.
- Product Labels: Your inventory should be labeled in some way so that you can simply arrange and monitor it internally. A barcode system is recommended to make things easier for both consumer checkout and inventory management.
Regardless of the sort of labels you employ, throughout the stock receiving process is an excellent time to tag and label goods. This guarantees that the duty isn’t forgotten and that unlabeled product isn’t shelved or shown for sale.
Labels may be applied immediately on product packaging, price tags, or shelf spaces after they’ve been produced. Some goods may be pre-labeled with the manufacturer’s barcodes, which you may monitor in your POS as well. If you’re not utilizing SKU numbers, your work will be simple. All you have to do now is add a price label.
5. Organize Your Warehouse or Stockroom
Not only will having a well-organized stockroom make items simpler to locate for you and your staff, but it will also enable you to store more products and keep better track of what you currently have.
Tall storage shelves or double-tier hanging racks in retail businesses may optimize wall space while yet allowing for mobility and quick access. Additionally, to maximize floor space, storage containers may be piled and labeled on the ground.
Within lanes with built-in shelving and hanging storage, there is often greater capacity to store items in bigger warehouse environments. The most important thing to remember is to choose storage devices that are appropriate for your items and may be changed over time.
For example, in my store, we had a small storage area with limited space, so we made the most of it by stacking bins and hanging racks. We could mark the racks in any manner we wanted using rack tags, and they were simple to roll. Similarly, the bins were ideal for our heavier/knitted products that took up too much-hanging space or couldn’t be hung, and they were simple to identify depending on our inventory.
Whatever technique you choose to keep goods, make sure it’s well-organized, properly labeled, and easily accessible for pulls and inventory counts. This may be accomplished using the boxes that things arrive in, stacking containers, or even hanging dividers for hung clothing.
6. Inventory Management in Real-Time
Real-time inventory tracking is essential for maintaining the appropriate things on the shelf in the proper quantities—in other words, excellent inventory management. A good inventory management system records every transaction in detail, whether by hand or via your POS system and changes inventory levels as each item is sold.
While a spreadsheet may be used to manage inventory in real-time, we advocate using a POS system to make the process much more efficient. POS systems keep track of inventory levels in real-time and change counts with each transaction. You may set up reorder notifications, stockout warnings, and automated PO creation when your inventory levels drop with each transaction. A POS system will make monitoring inventory levels and restocking supplies simple and straightforward, and well, most crucially, base your inventory on real sales patterns rather than your best estimate.
7. Count your inventory on a regular basis.
Physical inventory counts may be time-consuming and inconvenient. Physical counts, on the other hand, may drastically decrease all forms of inventory issues. Even if you have a POS system, it’s a good idea to undertake smaller partial inventory counts, or Counting Cycles, once a year for tax reasons.
Availability of Stock
The basis of both annual and cycle inventory counts is your current Availability of Stock (QOH) or the amount of inventory you should have in stock for every item you carry. The formula for QOH is as follows:
(Previous QOH + Received Inventory)-Sold Inventory is the QOH formula.
Your QOH is the benchmark against which you’ll compare your yearly and Counting Cycles. So, if my QOH calculation indicated that I should have 272 packs of gum, I would check for 272 packs of gum in my cycle or the yearly count. If I discovered a disparity, say between 250 and 500 packets of gum, that would suggest a mistake or theft, which I might investigate further.
Inventory Counts on an Annual Basis
Inventory Counts on an Annual Basis are a complete inventory count, typically done at the close of each fiscal year for income tax purposes. These counts give you an overall picture of how much inventory you have on hand at the close of your year. Inventory Counts on an annual basis can also help businesses uncover inventory shortages due to miscounts, shrinkage issues, misplaced stock, and/or receiving errors.
While most retailers perform more frequent counts, some small businesses with limited staff or small inventories will only perform this type of inventory count each year. While Inventory Counts on an Annual Basis are a good practice regardless, by year’s end, it’s too late to fix most of the problems they reveal. To catch inventory issues before they become costly, you’ll want to also conduct periodic counts, called Counting Cycles.
Counting Cycles
Counting Cycles are periodic spot counts that take inventory of specific categories or subsets of products. For example, at a boutique, you would do a couple of Counting Cycles each week for different types of clothing—basics T-shirts one day, jeans another, earrings the next.
Typically, you perform Counting Cycles regularly. So you might decide to count shirts every other Wednesday and jeans every two months. As a best practice, you would cycle count all of your products daily to keep a good grasp on their levels. Without the right tech and staff, however, this is next to impossible. Schedule your Counting Cycles based on the speed with which you move through your inventory, with items that sell faster getting more frequent counts.
Counting by hand or by machine
You have two alternatives when it comes to counting your inventory. You may do it manually or automate your procedures using a POS system. We’ll look at both manual and automated inventory management alternatives, as well as how they might benefit your company.
Counting by Hand
While we recommend utilizing a POS system to count your inventory for you, if you want to do it manually, your first step will be to calculate your QOH using your POs, last year’s inventory, and a sales tally for each item sold. Then you’ll need to make inventory count sheets to keep track of your physical counts and start counting.
While hand counting is possible, it is less precise and time-consuming than using an automated POS system.
Automated Point-of-Sale Counting
While a POS system can’t count all of the actual things in your inventory, it can provide current QOH counts and inventory lists at your fingertips to help you speed up and simplify inventory counts. We recommend a point-of-sale system to assist reduce inventory management problems and increase the efficiency of your organization.
8. Reconcile Inconsistencies
Your physical inventory counts should, in theory, match your expected QOHs. That isn’t always the case, however. If you have more or less of a product than you expected, you’ll need to look into the issue and reconcile the discrepancy. Shrink is the term used in the retail industry to describe this disparity.
The gap between the number of things you believed you had and the number of products you actually have in your inventory is known as shrinkage.
Inventory shrinkage may be caused by one of two factors. Either there was a clerical mistake or someone stole the money. Clerical mistakes aren’t always true losses—an item may have been lost or a key written incorrectly. Shrinkage may also imply genuine loss, which should be investigated so that you can try to avoid it in the future.
If you find out that your missing product is indeed gone, make the necessary changes to your QOH in your records. After that, you must report the monetary value lost due to inventory shrinkage.
Conclusion
An effective inventory management system ensures that you always have an accurate view of your supply, allowing you to reduce waste and give your consumers the merchandise and experience they expect. Using these instructions, you can get started on creating an efficient inventory management system. These fundamental ideas can help you set up and simplify your operations, whether you’re trying to master the basics of how to arrange inventory for small companies or revive a current system that has gotten disorderly.
