A retail store’s inventory is one of its most valuable assets, and also one of its greatest potential liabilities. Investopedia explains that not having sufficient inventory when and where it’s needed can stop a successful retail operation in its tracks. Yet having too much inventory can be just as damaging to a retail operation due to expenses related to spoilage, damage, theft, and changes in demand as markets and customer preferences shift.
Determining just the right amount of the right products can be the difference between success and failure for a retailer. Fortunately, striking that perfect balance of retail inventory doesn’t require having a PhD in statistics on your staff. New tools and techniques make inventory management for retail stores both easier and more efficient than ever.
Important Features of Inventory Management for Retail Stores
At its most basic level, inventory management keeps an accurate account of stock levels on hand so that products can be reordered before the supply runs out. Just as important is the ability to accurately forecast demand for products to avoid having insufficient supply with no oversupply—being stuck with more of a product than can be sold is just as bad as not having enough.
Having excessive inventory also increases storage costs and heightens the risk of loss due to “shrinkage,” which reduces a retailer’s profits as a result of theft, damage, accounting errors, and other causes. It also makes it more difficult for a retailer to know exactly how much of each product it has on hand at a given time. Avoiding oversupplies and undersupplies begins by having an accurate count of current inventory levels.
Anticipating demand is one of the greatest challenges for retail inventory management, and Software Advice lists the key features of inventory management for retail stores:
- Sort inventory items by department or type.
- Determine minimum thresholds for products and send alerts automatically when the thresholds are reached.
- Set price, cost, and quantity for various combinations of items, including by size, color, style, and other characteristics.
- Track inventory in real time.
How Inventory Management Benefits Retailers
A report by Global Market Insight states that small and midsize businesses accounted for more than 70 percent of total inventory management software sales in 2017. A primary reason for the popularity of inventory management for retail stores is the high cost of overstocks and out-of stocks: UPS reports on a study conducted by IHL Group that estimates U.S. retailers lose $123.4 billion each year due to overstocks, and $129.5 billion every year as a result of out-of-stocks.
The benefits of inventory management to retailers extend to all aspects of the business’s operations, including its positive impact on customer experience.
- The last thing customers want to hear is that the product they want to purchase is out of stock. Real-time inventory tracking keeps retailers up-to-date on the products they need to reorder before stock is exhausted. The results are higher in-stock percentage, faster turnover (the time between a retailer receiving a product and selling it), fewer stock-outs, and less shrinkage via first in-first out (FIFO) inventory management.
- The ability to create and print barcodes for scanning into inventory makes tracking inventory faster and more efficient. The barcodes allow retailers to determine the colors, sizes, and other attributes of in-stock items quickly. They also make it easier for employees to sort, stock, and restock inventory items, which allows workers to spend more time helping customers.
- By creating custom product variations and combinations, retailers can avoid having piles of excess inventory or marking products for clearance. Inventory reports let retailers identify sales trends and anticipate future demand. Retailers can improve their return on investment by emphasizing their best-selling stock keeping units (SKUs).
- Product returns disappoint customers and take a toll on a retailer’s profitability. Inventory management for retail stores reduces the likelihood that a customer will return a product by minimizing returns due to incorrect SKUs.
Approaches to Inventory Management for Retail Stores
A retailer’s choice of inventory management method depends on the types of products it sells, the amount of variation within its product categories, the sales rates for specific products, and the amount of each product it needs to have available to meet customer demand. These are among the common forms of inventory management for retailers:
- Just-in-time management: JIT was pioneered by large Japanese manufacturers in the 1960s and 1970s. Today JIT is used by companies large and small in many different industries. It is characterized by limiting on-hand inventory to the amount required to meet current demand, which saves money and reduces waste when inventory forecasting is accurate. However, it increases the risk of products being out of stock if demand spikes unexpectedly or if there are even slight delays in deliveries.
- Materials requirement planning: MRP depends on accurate sales forecasting, which in turn requires accurate, up-to-date sales records. MRP also needs open channels of communication with suppliers to ensure timely delivery of products whose stock is running low. If sales forecasts are off or suppliers are unable to fulfill orders, a retailer’s inventory may not be able to keep pace with demand for its products.
- Economic order quantity: EOQ determines the number of products a retailer needs to request in each large batch of orders. Batch orders are intended to reduce holding, setup, and other costs related to maintaining inventory. The EOQ model assumes constant demand for the business’s products. The goal of the model is to have fewer but more accurate orders to prevent keeping unnecessary inventory on hand.
- Days sales of inventory: DSI calculates the average time in days required for a retailer to convert its inventory into sales. DSI is also referred to as the average age of inventory, days inventory outstanding (DIO), and days in inventory (DII), among other forms. Because it measures how long it would take to deplete existing inventory, a lower DSI indicates a shorter time to clear inventory, and thus more efficient and cost-effective management.
Competition for customers’ attention has never been stiffer. Retailers need to take advantage of every opportunity to make their business processes more efficient to give them an edge and boost profitability. Yet the benefits to retailers of automating inventory management extend beyond more cost-effective operations. Customers are more likely to find the products they are looking for, and employees are able to spend more time helping customers.
If you are looking to simplify inventory management in retail stores for yourself and your employees, consider partnering with talech to implement a POS system that can get you the kind of data you need to make the smartest decisions possible, and with a team of experts ready to support you. Reach out to us today to sign up for a demo and to learn more about how talech can be your valued POS partner.