Inventory management involves the calculation of the appropriate amount of product units (SKUs) to have on hand at all times. Stock levels that dip too low can cause you to run out of products, which may lead to missed sales, back orders, and customer service problems. A stock out occurs when a company’s inventory on hand does not match customer orders for a product. A situation like this generally occurs when demand for products exceeds expectations, and inventory and safety stock are not sufficient to fill all orders.
An increasing quantity of stock makes it more difficult and expensive to manage. Inventory costs (including warehousing, breakage, shrinkage, and quality control) can be high, especially when adding new products to your growing company. Reduce holding costs by balancing between not overstocking and not stocking out.
This article discusses 6 approaches to avoiding stock outs and reducing holding costs. Let’s begin.
- Maintain Accurate Inventory Records
Your stock counting procedures may be out of whack if you have understocked inventory. It is wise for you to start with a standard counting procedure if your inventory management system does not include it.
Inventory counting can be done in several ways:
- Counting inventory physically
- Counting cycles
Physical inventory counts involve assigning employees to cover different areas of your store in order to conduct a count of your entire inventory. Cycle counting is a more efficient method because it isn’t as time-consuming as physical inventory counting. In this method, inventory is divided into segments and counted over the course of a reporting cycle.
Counting items that account for a greater proportion of your sales is done more often in cycle-counting systems than counting items that sell for less frequently. It is important to consider several factors when choosing an inventory counting method. These factors include the size of your inventory, the availability of your staff, and your need for financial reporting.
- Implement inventory-management software
By using inventory-management software, you can improve the efficiency of inventory counting. You can sync your point-of-sale system with your inventory database to automatically update your inventory count as each transaction is made.
Overstocking can also be avoided with inventory management software. By using such software programs, you can easily control your stock ordering and scheduling.
- Choose the right reorder point
By understanding when to order a new product and how much to order, you can avoid overstocking or having too little inventory to meet demand. Utilize a demand forecasting tool to determine when to reorder. Examine the sales data over the past few years, taking into account seasonality, geographical location, and the most popular channels used by customers.
- Lead times should be monitored and managed
When you place an order with a supplier, there is a lag time between when you place the order and when it arrives. You can avoid stock outs by planning your orders based on how long it takes to reorder stock.
Taking steps to reduce supplier lead times is one way to reduce inventory holding costs. Think of a situation where a new shipment could be delivered to your warehouse in seven days instead of 10. By reducing the lead time, you can reduce the amount of stock you hold. You can also reduce carrying costs by reducing order quantities per shipment since the amount of storage space required is lower.
You can reduce lead times to avoid overstock inventory and reduce holding costs and increase lead times to avoid stock out. Depending on your situation, you may choose to increase your inventory if you are getting too many sales requests and your current inventory is going to waste; otherwise, you may decide to reduce your inventory.
- Identify points for reordering
You should allow your inventory to reach your reorder point for an item so that you can order more before placing an order to replenish it. Using the daily sales demand multiplied by the number of days you need to restock the item, you can calculate your safety stock level.
You can identify your reorder point with the help of a logistics consultant. If your inventory reaches reorder point, or even if you place a reorder automatically, your logistics software can notify you automatically. Your inventory will be less likely to run out of stock if you know when to reorder.
- Use Vendor-Managed Inventory
The vendor-managed inventory approach (VMI) involves transferring responsibility for avoiding stockouts to theour vendor. You and your vendor agree to maintain a set stock level and your vendor tracks your inventory data to ensure there is always enough stock on hand. Your vendor is responsible for handling most of the inventory management tasks since they are given the inventory information you provide.
As a result, VMI reduces inventory costs and avoids overstocking. You rely on your vendor to manage your inventory, so they know exactly how much stock you require in a given month and when you need it delivered.
Conclusion
The fastest, most cost-effective way to reduce inventory holding costs is to sign up for a cloud-based inventory management software solution. Checkout Inventooly to solve all your problems related to inventory management, such as overstock inventory or stock out inventory, both can be a serious problem for your business. Inventooly is inventory management software that can help you in the following ways.
- Understand inventory insights
- Keeps you updated on stock levels and re-order items if there is a need to.
- Helps you in supply chain management