How to Gauge Your Inventory Management Health

Every day, small and midsize businesses face inventory risks that, if left unmanaged, can negatively impact the bottom line. Too little inventory will result in lost sales and unhappy customers, while too much increases space, transportation and handling expenses.

However, these issues can often be diagnosed well in advance with the right preparation. As you evaluate your goals for a new month, quarter or year, ask yourself and your team the following questions in order to conduct a routine checkup of your inventory management process.

How are we labeling inventory?

It’s not enough to have a general awareness of the items in your inventory. Tracking inventory categories becomes much more intuitive if you label what the product itself and what type of stock it is – whether that’s replenishment, excess or obsolete stock. This labeling technique is a foundational best practice to improve inventory management.

Are we performing daily checks on safety stock levels?

Another important task that’s often overlooked is routinely checking safety stock levels. Examining stock on a daily basis at a granular level goes a long way toward ensuring that inventory data is as up to date as possible. It might seem like a tedious task, but using automated technology can make keeping close tabs on surplus stock in real time easier and help ensure any problems that arise are managed quickly.

Are we tracking distressed inventory?

Tracking distressed inventory is likely the biggest problem for businesses and warehouses. Getting overstocked when product doesn’t sell fast enough is one of the most common causes of large amounts of distressed inventory. In addition to the binary labeling structure discussed above, track how long certain inventory has been in the warehouse so you can move it out before it reaches the point of no return. If you’re unable to sell it, donating distressed inventory is a viable option. Donated inventory can be written it off on your business’s tax return and allow you to “pay it forward” in your community.

What is our most productive inventory?

Many businesses try to keep a level inventory on all of their products, regardless of whether or not it is high or low selling. However it’s important to determine your most productive products and focus purchasing on those items, rather than just trying to maintain the same amount of product across the board. Keeping high levels of inventory on product that sells less frequently increases expenses, and running out of stock on product that sells quickly is lost potential revenue.

How are we aligning with sales and operations?

An astonishing number of businesses keep inventory management separate from sales and operations planning. By integrating the two you maintain a better view of your overall business operations, which leads to better control over inventory. Aligning with sales and operations can lead to more effective inventory forecasting, a practice that involves estimating the quantity of a product or service that consumers will purchase based on data. Historical sales data and current product lifecycle demand will inform your forecast, thus including sales and operations in planning is crucial to creating viable predictions.

Do we know the root cause of excess and obsolete stock?

Performing root-cause analysis on excess and obsolete stock to understand how they are linked is key to creating action plans to control these problems. Organizations with effective inventory management create two task forces with synced action plans. The first task force identifies the root causes and determines ways to reduce the creation of new excess and obsolete stock. The second one concentrates on ways to sell off the stock more effectively. This provides the sales team with a list of top excess or obsolete products to push to ensure that they’re discounting specified excess products.

Healthy inventory means healthy finances. By asking your team these questions on a recurring basis, you continually ensure productive fulfillment center processes which, in turn, will lead to higher customer loyalty and better returns.

John Macomber is director of sales at Deskera