Inventory Management lies at the heart of your business. We have many years of Inventory management experience, and we’d like to share our best-practices for this important area of your retail operation.
The aims of an inventory management system are:
• To maintain accurate product information, for all SKUs across all channels
• To ensure that stock holding levels reflect expected sales levels, at the lowest possible cost
• To minimise stock-outs and cancelled customer orders due to stock being unavailable.
• To allocate stock to orders correctly.
• To enable an effective supplier ordering process
• To ensure an efficient and effective good-inwards capability.
• To enable successful two-way communication with suppliers
• To enable problems to be identified and resolved quickly.
and, most crucially:
• to provide managers and business owners with reporting and dashboard capabilities, to support and monitor all facets of Inventory Management with their company.
The Inventory Management software should also be the same system as your order management system. Click here to visit our ‘Ultimate Guide to Order Management Software’.
All products should be entered into your Inventory management system, categorized logically so that the hierarchy of products is easy to navigate. It should be possible to include all fields necessary for each of the channels through which you sell, whether E-Bay, Amazon, Shopify, Magento or any other marketplace.
Product variants and Composite items (a.k.a. ‘Kits’ – multiple products combining to make a single product) should also be definable and entered into the system.
It should also be possible to generate marketplace listings (e.g. for Amazon and E-Bay) from within the system and uploaded automatically.
An Inventory import facility should also be available, in case you have an extract from a legacy system and want to bring the products into the new system.
Maintaining Correct Stock Levels to meet Demand
You should follow best-practice and ensure that your business has appropriate levels of stock – not too much (ties up too much of your hard-earned capital and warehouse space), not too little (you will lose sales if customers they can’t get their products quickly).
We therefore recommend that your Inventory management software system has demand-forecasting built-in. It will typically use historical sales data, or if that is missing, market intelligence tools to gauge stock-demand and provide figures for how much stock you should maintain for a given item.
A common approach for demand forecasting is the ‘Review Stock’ and ‘Safety Stock’ methods, or ‘Safety and Review’ for short.
Purchasing Stock – using a ‘Safety and ‘Review’ approach to Inventory Management
Safety and Review is an excellent way to manage purchasing and is key to a good Inventory Management software system. The safety and review function should show a detailed list of all the required stock and allows for it to easily be added to a Purchase Order.
The term ‘Safety and Review’ refers to two different concepts:
Review Levels: A stock’s ‘review’ level is the level at which the stock should be re-ordered. Once an item has been automatically added to the Safety and Review function, it will be automatically added to a Purchase Order unless the item is subsequently removed.
Safety Stock: The safety level is a number calculated by the Inventory Management software which states how much stock of a certain item needs to be available at all times in order to fulfil average selling rates. If your stock level falls below this value, the Inventory Management system should alert you and you should chase the supplier (if the item is on order) or place an order for stock.
Safety and review levels should be calculated continuously by the Inventory Management software system using statistical methods for demand forecasting and vary according to the sell-rate of the product, the supplier lead-time and the customer service % factor (i.e. the percentage of orders that will always be able to be fulfilled immediately from stock – usually 90% or higher is recommended). The safety and review function will also recommend how many of an item to order from a supplier.
Items Available for Sale across Marketplaces
Any effective Inventory Management system will keep the quantities available on your various marketplaces (Ebay, Amazon, your web site etc) sync’d with your live Inventory. When an item is sold on one marketplace, the others should be immediately adjusted to show the new stock level.
More advanced systems can also be configured to display ‘fixed stock’ on a per-SKU basis (e.g. show fixed stock availability of 100 units across all systems) – useful when you know you can get stock quickly from a supplier and still meet your despatch deadlines. The most advanced systems can also be configured to make stock expected from supplier (i.e. items still in Goods Inwards’) available for sale. However, it is recommended that this last approach is utilised only with suppliers that you know you can rely on to deliver on time.
Ordering from Suppliers
Your inventory Management software should contain a centralised method of generating Purchase Orders. This screen will bring together current PO items from Safety & Review, together with items added manually, and consolidate them into a single PO.
The system should then be able generate a PDF or Excel file of the purchase order, which can then be e-mailed to a supplier.
Some suppliers may also be able to accept orders via XML feed or other EDI (Electronic Document Interface) method. This can save both time and effort during the supplier order process and removes the need for e-mailing the PO to the supplier.
Once an order has been placed with a supplier, it will be saved to Goods Inwards. It will then appear in the Goods Inwards section of your Inventory Management software, waiting to be received.
Receiving an order will update the stock for the relevant products and allows the option of assigning new stock to any previous backorders that are awaiting specific stock.
If your products have barcodes, then it is recommended that you use a barcode-device which is integrated with the Inventory Management system’s Goods Inwards function. This will enable you to scan items, confirm the number received, then the Inventory Management software will be automatically updated with the items received. If all items have been received, the PO will be automatically closed.
If a PO delivery is incomplete, and all the goods are not ticked off within the Receive Delivery screen, the order should remain in Goods Inwards until all of its items have been ticked and received or the Purchase Order has been closed.
A traffic light system should also be available within Goods Inwards, so that you can easily see which orders are on-time (green icon), are due that day (amber item), or red (the supplier delivery is late).
A well organised warehouse will help with the order pick process. Your Inventory Management system should be able to provide a list of items which are high in demand and which are sold together, indicating that those items should be located in close physical proximity to each other and to the area where they will be packed.
For bulky items, you may wish to consider locating some close to hand, and others in a ‘bulk’ warehouse some distance away. When the close-to-hand stock becomes low, a warehouse transfer of stock can be undertaken and the stock moved. Your Inventory Management system should support this kind of transfer.
At the item level in the warehouse, each physical location should have an alphanumeric identifier, which should be entered into the Inventory management system against the product. The item’s location may also have a label with a barcode, which can be scanned during stock takes. When picking orders, the Order Management system should be capable of guiding the picker to the correct locations in the most efficient manner.
For stock which has a life-cycle or expiry date, you should set up your warehouse product locations so that the oldest products are picked first (First-In First-Out, or FIFO for short). Your Inventory management system should be able to help you to set this up.
Purchase Order History
All Purchase Orders that have been fully received or manually closed should be moved into the Purchase Order History section of your Inventory Management software system.
Within Purchase Order History, it should be possible to search for any historic Purchase order by entering the unique PO number, or by filtering the list by supplier.
Some suppliers may have data feeds of their products, which state how many they currently have in stock, as well as a date when they are expecting more. These data feeds (usually in XML) can be used to integrate with your Inventory Management System. We have many scripts (based on Python for the techies out there), which you can utilise to achieve this.
Stock-takes are an important part of your retail operation, and we recommend undertaking a complete stock take at least once every six months.
Your system should support the stock taking process, preferably via an intelligent barcode/small tablet device. For each item in your warehouse, its barcode should be scanned and the amount currently present entered into the barcode device. The system should then be able to calculate if the stock level is correct, and instantly flag any incorrect items, together with the date and time that the discrepancy was found. A report should then be available for managers to review the results of the stock-take.
We recommend running regular reports across all areas of Inventory Management. A reporting dashboard should be available. Key reports to run will include:
• Current Inventory Levels, by category and purchase/sale value
• Items by Safety and Review level, including current stock level. This report should be integrated with the purchasing function, so that any required orders can be placed easily and quickly.
• Inventory Movements (stock in, items despatched), by SKU item
• Under-selling items, and items not sold in a certain timeframe. This report should be integrated with the sales/marketplace listing functions, so that the items could be put on special offer or promotion quickly and easily.
• Incorrect items identified during stock-take
• Items by Location
• Bulk stock movements
• Goods In report – late supplier deliveries, by supplier
• Goods In – items not received
All report dashboard items should have date selection, and other criteria depending on the particular report. A drill down facility should also be available so that you can see the underlying data behind any report.