How an inventory strategy can save you time and money
3-minute read
Inventory management is often done haphazardly and without a lot of foresight. But the payoffs can be surprisingly large if you are strategic about how you order, store and use your inventory.
An inventory strategy can lower your costs, reduce losses, make you more productive and improve customer satisfaction.
Here are three steps for creating an inventory strategy for your business.
1. Decide how much stock to keep
The first step is to decide the number of days of supply to keep for each item. You want enough to handle customer demand or, in the case of raw materials, to meet production needs. The ideal amount varies by item and industry.
Appropriate levels also depend on factors such as variability in demand, costs, lead time, supplier reliability, and the accuracy of your sales forecasts and inventory monitoring.
Inventory levels should also be based on your production and distribution strategy along with your overall business strategy. For example, does it make sense to buy a full truck-load of products to obtain a volume discount? What if you wind up with excess stock?
In fact, you may decide not to carry some low-volume products at all. Instead, you might decide to order them only on demand.
Once you set your target levels, be sure to track your actual inventory usage and supplier performance to optimize your stock levels.
2. Decide where to store it
When deciding where to keep your inventory, you'll want to reduce the amount of handling and transport. For example, you can store raw materials or work in progress near the machines they’ll be used with.
With other items, such as finished goods, you may prefer to keep them in a single designated storage area. Stock is easier to measure when it’s in one place.
The choices become more complex if you operate in several locations. Here, you may need to balance customer service targets (i.e., having stock near customers) against the cost of operating multiple storage facilities.
Be sure to regularly check stock to make sure it’s properly identified, accurately recorded in your system and in the right location.
3. Decide how to replenish it
Another important component of your strategy is how to replenish inventory. You have two main options—a push or a pull approach.
The push approach, the more conventional of the two, involves replenishing inventory based on sales forecasts. This can be a good approach if your demand is stable, or if you get a lot of savings from buying large quantities or making large product batches.
The main risk is having too much or too little inventory on hand if your forecasts are wrong.
The pull approach involves replenishing inventory based on demand. You purchase stock in response to orders. This is a leaner approach and might be your best option if you’ve got highly variable or uncertain demand. It can work well if your suppliers offer short lead times and provide reliable delivery with minimal errors.
You can also use a blend of push for some inventory items and pull for others.
Take the next step
Learn more about setting the right KPIs to ensure you always have the right amount of inventory on hand by downloading our free guide for entrepreneurs: Inventory Management.