Managing inventory well is critical for businesses wanting to balance supply and demand. Optimizing inventory levels means you possibly can ensure you will have the right products for your customers and avoid the headaches of having an excessive amount of stock.
In this text, we will explore some practical strategies for maintaining optimal inventory levels, avoiding common inventory mistakes, and boosting your enterprise’s overall efficiency.
Understanding Inventory Management
Efficient inventory management is all about finding the right balance.
One popular strategy is
The foremost challenge is balancing the levels of inventory. If you hold an excessive amount of, it can eat into your profits with all those storage costs. But, if you run out, you would possibly miss out on sales. So, by determining the right strategies, you possibly can keep your money flow smooth, make customers comfortable, and boost your profits overall.
Consequences of Excessive Inventory
One other common practice is finding a warehouse and storing as much inventory as possible. This became rather more popular after the pandemic when the supply lines shut down. Nevertheless, this mentality can have some drawbacks. Listed below are a few to know.
Increased Holding Costs
An excessive amount of inventory can increase hefty holding costs, comparable to storage, insurance, and management expenses. These can eat into profits and divert resources from other vital parts of your enterprise.
The rising costs of renting warehousing space are making it increasingly expensive to store excess inventory.
The price of renting warehouse space for distribution in the US is consistently growing (Source: Bloomberg)
Plus, there are hidden costs like inflation and inventory taxes to consider. And if you’re not careful, overstocking could wipe out a 12 months’s price of profits.
Risk of Obsolescence and Spoilage
Inventory can expire and turn into unusable as time goes by. Take grocery stores — they take care of produce going bad by including a percentage of waste in their pricing. Once they hit max inventory, they often donate the extra to charity and write it off as a loss.
Don’t ignore environmental aspects like humidity, mold, and termites — they’ll really mess up your stock and could even result in a total inventory loss.
Tied-Up Capital
Excess inventory ties up capital that may very well be invested in other areas of your enterprise, comparable to marketing, product development, or expansion efforts. Keeping the correct amount of inventory frees up money for things like payroll or other expenses.
Importance of Maintaining Optimal Inventory Levels
Let’s discuss why inventory optimization is sensible for businesses.
Enhances Money Flow and Reduces Holding Costs
Optimizing inventory levels is a smart strategy to boost money flow by ensuring your capital isn’t tied up in excess stock. Plus, lower holding costs can further improve your financial health, supplying you with more flexibility in resource allocation.
Prevents Stockouts and Overstocking
Optimizing inventory levels prevents stockouts, resulting in lost sales and unhappy customers. It also helps avoid having an excessive amount of stock sitting around, which might add unnecessary costs and risks.
Improves Customer Satisfaction and Loyalty
Having the right products available at the right time enhances customer satisfaction and builds loyalty. Customers usually tend to return to a business that consistently meets their needs and avoids the frustration of
How one can Calculate Minimum and Maximum Inventory Levels
Minimum and maximum levels of inventory are critical components of inventory management.
The minimum level represents the lowest amount of inventory you must hold to avoid stock shortages. In contrast, the maximum level is the highest amount you must keep to prevent excess stock.
Determine Average Each day Demand
Based on historical sales data, average every day demand is the average variety of units sold per day. To calculate this, divide the total variety of units sold in a given time period (e.g., one month) by the variety of days in that period.
As you track the items, you’ll discover some have seasonal highs and lows that shift throughout the 12 months. For instance, you could sell more snow shovels in January than in August. So, keep note of those ups and downs for next 12 months.
By the way, your ecommerce platform can show you how to manage your inventory higher. For example, Ecwid by Lightspeed not only gives business owners a robust online store but additionally comes with handy sales reports.
The Orders report, for example, shows you ways many items customers often buy, what number of you’ve sold over a certain period, and other insights.
Ecwid also provides a Product Sales and Stock Overview report, which provides you a quick summary of your sales over a certain period and your stock levels. You possibly can easily compare these stats to the previous period to see if sales for specific items have increased or decreased.
A Product Sales and Stock Overview report in Ecwid admin
Determine Lead Time
Lead time is the time it takes for an order to be fulfilled and delivered from the supplier to your warehouse. Incorporating lead time into your inventory management helps ensure you usually have enough stock on hand.
For instance, if it takes two weeks for a supplier to deliver an item to your warehouse, you must maintain at least two weeks’ price of stock in case there are any delays or unexpected changes in demand.
Again, each item may need its seasonal highs and lows. For instance, snow shovels will take longer to stock in January than in August.
How one can Calculate the Minimum Inventory Level
Multiply average every day usage by the every day lead time to determine the minimum inventory level.
Minimum inventory level = Average every day demand x Lead time
This calculation helps you monitor your inventory levels effectively. If an item nears its minimum inventory level, you possibly can adjust your next order with the supplier accordingly.
For instance, if you sell coffee mugs and your store sells one mug per day, and it takes 7 days for latest mugs to arrive after ordering, you must all the time have at least 7 mugs in stock to avoid running out.
How one can Calculate the Maximum Inventory Level
While tracking your inventory data, you’ll likely tweak your maximum inventory level. A easy place to start is by multiplying your minimum inventory level by 2.5, which permits you to cover a missed cycle together with your supplier.
The utmost inventory you would like in the coffee mug example above is
You need to use this number to resolve if it’s time for a sale. For the reason that average every day usage of snow shovels tends to drop in spring, why not consider a sale to help reduce your inventory below the maximum level?
How one can Calculate the Average Inventory Level
The typical inventory level represents the amount of a product you expect to sell through the next period. This level can vary depending on seasonal fluctuations, lead time, and anticipated sales.
The goal here is to look ahead and determine what you must have in your inventory.
To determine a good start line, calculate your average every day sales, multiply that by the lead time, and then add a safety buffer.
A safety buffer is typically a percentage that accounts for unexpected changes or delays. Depending on your industry and business, it may very well be anywhere from 10% to 20%.
On condition that, the formula for the average inventory level is:
Average inventory level = (Average every day sales x lead time) + Safety buffer
Adjust this based on your warehouse capability, available money, and the product’s sales velocity.
This approach could be used as your optimal inventory level formula. The secret’s setting an initial safety buffer and monitoring your inventory. Constantly adjust and reassess this buffer to ensure it stays effective.
More Suggestions for Inventory Optimization
Let’s discuss other inventory optimization techniques that may improve your overall efficiency.
Real-Time Inventory Tracking
Tracking inventory in
Your ecommerce platform also can help with inventory tracking. For example, if you’re using Ecwid by Lightspeed, you possibly can easily set the stock quantity for your products. When customers make purchases, our system robotically updates your stock levels.
Automated Reorder Alerts
Many inventory software systems show you how to manage your current stock by alerting you whenever you’re nearing minimum inventory levels. This prevents stockouts and helps maintain optimal inventory levels.
For example, if you’re using Ecwid by Lightspeed for your online store, you possibly can arrange
Ecwid sends you
Demand Forecasting
Together with managing current stock levels, demand forecasting is one other vital aspect of inventory management. This involves predicting how much inventory might want to be stocked in the future based on past trends and customer habits.
Your most precious tool for demand forecasting is your personal inventory data, which reflects your seasonal trends and customer habits. You possibly can do this manually using spreadsheets or software to analyze your data and generate accurate forecasts.
If you’re using Ecwid by Lightspeed for your online store, you possibly can take a look at the Orders report back to see what number of items people typically buy, what number of you’ve sold during a specific period, and more. This can assist with demand forecasting.
Multi-Echelon Inventory Optimization
This approach may very well be pricey, effortful, and
Wrap Up
Keeping an optimal level of inventory is critical to maintaining consistent sales. Finding this optimal level requires balancing demand forecasting, supply chain management, and inventory optimization strategies.
When picking an ecommerce platform for your enterprise, go for one with inventory management tools and order reports to track your stock levels easily. For instance, Ecwid by Lightspeed. It helps you streamline your inventory, prep for seasonal spikes, and manage your online store more efficiently.
