For large organizations, inventory management is an entirely separate facet of the business in many ways.
A large business might have a warehouse or even multiple warehouses with inventory. They often have professional security guards who are on duty at all times to protect the inventory, and there’s a team of employees working just on inventory logistics.
For a small business, inventory management can be quite a bit different and can also be a massive challenge.
The following are some of the key things to know about inventory management if you’re a small business, particularly in 2022.
An Overview of Inventory Management
When you’re a small business, it’s important to evaluate all aspects of how you do things on a regular basis to ensure you’re on the right track. Inventory management is one of these areas deserving of regular scrutiny.
You want to think about generally how you’ve done in terms of inventory management and whether you had the right products available to your customers when they needed them. Were you losing money because of excess stock? Did you lose out on potential business because you didn’t have any stock?
Inventory management is the component of the supply chain that works to make sure the right products are available for sale in the right quantities and also at the right times.
When you’re a small business that does inventory management well, you’re reducing the costs that are associated with carrying excess inventory but simultaneously maximizing your sales.
Well-managed inventory means that you don’t have money tied up in excess stock, and you can work on making sure all products are sold ahead of any spoilage issues. You can also reduce your spending on stock that takes up space, including in a warehouse.
Supply Chain Issues
One thing that’s somewhat unique to 2022 impacting businesses of all sizes is issues with the supply chain. For small businesses, supply chain management is a challenge even on the best of days, but right now, because of the COVID-19 pandemic and a host of other issues, the supply chain is particularly problematic.
Supply chain disruptions disproportionately affect smaller businesses. Issues include shortages of raw materials and products, shipping and manufacturing delays, and higher costs, particularly for freight shipping containers.
A lot of small businesses don’t have the infrastructure and money of their larger competitors to deal with these issues.
The business supply chain typically starts with product sourcing and then moves on to transportation logistics from there.
Warehousing and inventory management are the next part of the supply chain, and following is fulfillment and delivery.
So what can small businesses do to make themselves more resilient, improve their inventory management and supply chain management, and address problems happening on a larger scale?
Tips for Small Businesses to Deal with Supply Chain and Inventory Management Issues
The following are some of the general things small businesses can do right now to deal with the issues specific to 2022 as far as supply chains and managing their inventories.
Make Sure You’re Using the Right Inventory Method For Your Business
Evaluate your current inventory method and make sure it remains the right one for your business.
Inventory costing or inventory cost accounting is when you assign costs to the products you have in your inventory. This process helps you make sure you hold the proper amount of inventory, and it has tax implications.
You need to use the best method to determine the cost of inventory in your business, and there are four popular ways to do that.
The FIFO method, also known as first-in, first-out, is fairly straightforward. A business sells its oldest inventory first. This is a relevant method if you’re a business that sells items that are perishable or could become outdated quickly. You’re likely to see higher profit margins with this method, and it tends to be simple and accurate.
LIFO is the last-in, first-out method. This is an approach where you sell your newest inventory first. The advantage here is that you can match your most recent costs against your revenue. That will increase the valuation of your inventory and lower your net income.
A third option is the specific identification method where you track every item in your inventory, assigning it a cost, and then adjusting the balances when inventory is sold and purchased. For small businesses, the advantage of this method is its accuracy. It’s also good for low-volume sales but not an option for high-volume businesses.
A fourth commonly used inventory method is called the weight average cost method. This uses a weighted cost that averages the price of all inventory you purchase.
This method is good for inventory items that are nearly identical to each other or when you wouldn’t realistically be able to assign a specific cost to items. It’s also easy because you only need one calculation.
Use Inventory and Demand Forecasting
A small business should be proactive right now and not reactive. When you’re proactive, you can begin to reduce some of the issues in a supply chain.
Forecasting demand and inventory are good examples of proactive steps you can take to protect your business from shortages and other supply and inventory-related issues.
If you estimate future customer demand for products and you focus on ordering accurately, you can prepare yourselves for changing trends and seasonal demands. You’re also more agile and able to adapt in the face of the current situation, whatever that may be at any given time. Retail Stocktake is also very important for the proper management of inventory and improving the efficiency of business.
There are analytics tools that are available to small businesses for forecasting inventory requirements using factors like inventory turnover, data on purchasing rates, and seasonal trends.
Use the data and insights to make better buying decisions and keep optimal inventory levels in warehouses and stores.
Connect with Alternate Suppliers
When you rely too heavily on the same supplier or suppliers, it becomes an issue when they can’t meet your needs.
If you want to make sure that you always have inventory on your shelves, diversify your suppliers.
Ideally, your suppliers should be a mix of international and domestic companies. If you can source at least part of your inventory through local suppliers, you’re going to have more control over your supply chain and also reduce your environmental footprint.
Consider Getting Help with Logistics
If you’re a small business, you probably don’t have the in-house resources to efficiently manage your logistics. This makes you more likely to feel the significant impacts of supply chain challenges simply because you don’t have the level of expertise required to respond quickly.
If you can outsource your logistics, you can have an expert deal with some of the more complex challenges.
Focus on Quality Control
As a small business, one advantage that you have is that you can personally oversee quality control, which is necessary throughout your process of inventory management. You need to implement quality control standards to reduce waste and make sure everything is meeting standards.
Quality control shouldn’t be one step, however. It should be part of each step of your inventory management process.
Could Dropshipping Be Right For Your Business?
If you’re a startup and you’re in the phase of things where you’re deciding whether or not you even want to hold inventory at all, you might think about dropshipping. Dropshipping allows you to be an agile business, and you can pivot much more easily in an uncertain environment when you go with this option.
With drop shipping, suppliers are shipping products straight from their warehouses to the customer. You’re then not required to keep the product on hand, and you can eliminate all the related inventory costs.
Rather than controlling every aspect of the product lifecycle, what you’re responsible for is mostly the marketing and sale.
Your profit is coming from the difference that exists between the wholesale price of a product and its retail price, minus any costs linked to selling and marketing.
The big challenge here is realizing that you’re not going to have control over some of the most pivotal elements of the customer experience, and you’ll need a partner you can trust.
Receive Any Inventory Accurately
As a small business, if you do receive inventory, you should always review it and compare it against the purchase order to make sure there’s accuracy. You have to verify you got the correct item in the quantities you ordered and that you were charged the price you agreed on.
Your staff plays a big role in this part of things. Staff needs to be trained to know the proper steps to take when they receive inventory. When you have accuracy from the moment of arrival, your entire inventory management process is going to be better.
Finally, you should formalize and standardize all of your processes involving inventory management and use the technology available to you when possible. When you formalize and standardize your inventory management processes, you can improve efficiency and reduce human error.