On average, one out of three businesses miss their delivery deadlines because they just sold a product that’s out of stock. This highlights just how common inventory management issues are. Poor inventory management leads to losses and unhappy customers. Being understocked translates to unfulfilled orders, and excess inventory drives storage and management costs up.
To optimize your order fulfillment process, maintaining your inventory and knowing the best times to re-order are vital. So let’s take a look at common problems to steer clear of, and some solutions to your inventory management issues.
Common Issues with Inventory Management
Some persistent inventory management issues afflict most businesses at some point, which include:
Products Consistently Running Out of Stock
Running out of products consistently is a result of inefficient inventory management. Failing to set accurate reorder points and stock up on in-demand products leads to shortages, which translates to unfulfilled orders.
If you run out of in-demand goods, not only are you losing revenue from potential sales, but your customers may start purchasing from competitors.
Incorrect Demand Forecasting Leads to Inventory Shortages or Too Much Inventory
The idea behind demand forecasting is to analyze industry trends and predict what your inventory levels should be. If a product’s popularity is expected to pick up soon (like chocolates during Valentine’s Day) or decrease soon (like air conditioners towards the end of summer), demand forecasting helps prepare your inventory accordingly.
However, inaccurate demand forecasting causes more problems than it solves. Incorrect predictions throw your stock levels off balance; you may end up overstocking or understocking, inviting respective consequences.
Companies Forget to Re-order Products
Forgetting to re-order products leads to shortages and consequently, unfilled orders. If you don’t have a proper inventory management system in place, forgetting to re-order from suppliers might happen frequently.
How the Inventory Turnover Ratio Affects Inventory Management
Your inventory turnover ratio typically indicates how strong or weak your sales are at a given time.
What is the Inventory Turnover Ratio?
The inventory turnover ratio is an efficiency ratio, and it’s also known as stock turnover or inventory turns. The metric measures how efficiently your brand manages its inventory. The calculation determines the rate of sales and restocks of a particular product during the fiscal year. Your company’s inventory turnover can indicate inventory performance; a high turnover ratio generally means strong sales, while lower inventory turnovers might be due to overstocking.
How to Calculate Inventory Turnover Ratio
You can calculate the inventory turnover ratio by using the inventory turnover formula:
cost of goods sold (COGS) / [(beginning inventory + ending inventory)/2]
Here, the beginning and ending inventory is divided by 2 to calculate the average inventory. Moreover, the average inventory is taken over a particular time period. Alternatively, you can calculate the ratio by dividing sales instead of COGS by the average inventory value. However, since sales include a markup, this method is generally not as accurate.
How to Analyze Inventory Turnover Ratio
The inventory turnover ratio assesses how your rate of sales aligns with your warehouse restock rate. Thus, the ratio actually indicates how efficient your inventory management system is.
To analyze your turnover ratio, important factors to consider include:
- The industry standard as a benchmark to monitor your performance. Low-margin industries generally have higher inventory turnover ratios.
- Cost flow assumptions can cause fluctuations in the turnover ratio, but you don’t necessarily need to have a course of action for them.
- The valuation method you’re using affects your inventory turnover calculation, and thus the result. For example, using LIFO over FIFO generally produces a higher stock turnover, courtesy of the higher cost of goods sold (cogs) with a lower inventory value.
What is an Ideal Inventory Turnover Rate?
What qualifies as a ‘good’ inventory turnover rate largely depends on the industry. You can estimate how healthy your turnover rate is by comparing it to the industry standard. Then, you can better understand your inventory’s success by comparing your turnover rate and seeing if it’s higher or lower.
Low Inventory Turnover
A low inventory turnover generally means your brand is underperforming because it indicates either surplus stock or a lack of sales. However, if you’re expecting shortages or a price hike on the goods soon, then a low turnover rate is beneficial. It means you’re holding out for a better time to sell.
Otherwise, low turnover rates are usually caused by at least one of the following factors:
- Liquidity problems
- Weak sales
- Failed marketing efforts
- Inefficient inventory management
High Inventory Turnover
In most industries, a high inventory turnover ratio is generally a positive indicator. It means your products are selling well, and you’re successfully restocking every 1-2 months.
The ideal inventory turnover ratio is generally between 5-10 and varies across industries. Generally, high inventory turnover indicates improved liquidity, efficient inventory management and strong sales.
However, inadequate inventory or stock shortages also lead to higher inventory turnovers, so you need to assess the contributing factors.
5 Ways to Improve Inventory Management
If you’re looking to improve your inventory management, here are five of the best practices.
Leverage Product Bundles
Product bundling is a technique of grouping multiple products or services and selling them as a single unit. It’s a simple strategy to reduce marketing and distribution costs while guaranteeing a higher average order value (AOV).
You can lump multiple products together, including high and low ticket items, and sell them at a reduced cost. Since you don’t have to market each item individually, the profit margin is still appreciable.
You can also leverage product bundles to sell off slow-moving inventory. Deadstock takes up storage space and drives storage costs up, so pairing a few unwanted items with some in-demand ones can rid you of the excess inventory.
Adjust Product Pricing
Adjusting your pricing strategy helps keep inventory levels balanced by combating both understocking and overstocking problems. If you’ve got too much inventory to manage, dropping the prices on certain products helps you sell them out faster and reduce storage costs.
Alternatively, if you’re understocked, you can increase the prices of the items to temporarily reduce demand. When your inventory is restocked, you can drop the prices again.
Make Use of Automatic Re-orders
Manual reorder processes invite inaccuracies and your personnel may forget to place the orders altogether.
You can leverage inventory management software to set accurate, automatic re-order points, based on real-time inventory levels and demand forecasting. With automatic reorders, you mitigate the risks of running out of inventory or overstocking.
Streamline the Supply Chain
Inventory management is just one stage of your supply chain; by optimizing the processes before and after it, you can collectively streamline distribution and fulfillment efforts. This involves optimizing stocking times, organizing inventory, reducing picking and packing times and improving the delivery process.
Work with a 3PL
Third-party logistics providers help streamline your entire order fulfillment process, including warehouse and inventory management, picking, packing and delivery.
SMBs in particular benefit from working with 3PLs because they don’t have to hire their own, specialized logistics team. 3PL providers optimize your fulfillment process, improving your customer’s experience and reducing unnecessary costs.
Working with a 3PL also guarantees transparency, because unlike with a 4PL, you retain ultimate control. Leading 3PLs also have their own software to give their partners updates and a transparent view of their operations.
Inventory management issues affect your bottom line, leave your customers unhappy and may overwhelm your workforce too. By implementing the best practices, you can mitigate inventory management issues and streamline your workflow.
As your eCommerce brand grows, managing your own inventory becomes increasingly challenging. You have more orders to fill, a larger and geographically diverse customer base, and your employees struggle to keep up with the logistics.