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Inventory monitoring: 4 money-saving tips

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Inventory can tie up a large portion of your working capital. But many entrepreneurs don’t know if they’re managing it well—or even what they have in stock. One solution is monitoring your inventory.

“At a basic level, inventory exists due to a mismatch between demand and supply and all the uncertainty associated with this,” says BDC Business Consultant Ashay Gude, who advises companies on operational efficiency. “If you monitor your inventory, you can manage it better and save money. Most companies don’t do this.”

Here are four basic tips from Gude that every business should follow to monitor their inventory.

1) Label and organize inventory items—It’s helpful to clearly label or tag items in your inventory so you can find them easily. Labels and tags should have easy-to-read item descriptions or numbers. Also be sure to use consistent units of measure to minimize the chance of confusion or error.

2) Create an inventory recording system—The second step is to create a system for recording what you currently have in inventory. This can consist of a database or document, coupled with a way to update it.

“A system to track your inventory is important so you know exactly what and how much you have, plus when to order additional items so you have enough to meet client demand,” Gude says. “It’s common for companies to manage their inventory reactively—always stuck in rush mode trying to keep up with orders.”

Keep a record of your raw material, work in progress and finished goods. Your system also should record when you bought each item, where it’s located in your facility and when you need to order more. All this information should be updated regularly.

Consider buying inventory management software that can help you organize your information better.

3) Review your inventory—You should physically count your inventory on a regular basis to make sure it’s consistent with what’s recorded in your system.

“Your system may show four pieces, but you actually have only one,” Gude says. “A disconnect like that can cost you orders. Counting your inventory can help you catch mistakes.”

An inventory review can be done using one of two common methods. One is a “cycle count.” This means physically counting a small sample of your inventory to make sure the information in your system is accurate. This is typically done daily or weekly.

A second, more time-consuming approach is a physical count. It involves physically counting every inventory item to compare it to what’s recorded in your system. A physical count is typically done annually or semi-annually.

The right approach for your business depends on factors such as your resources and product complexity. Many businesses combine the two approaches—doing both cycle counts and physical count.

4) Track metrics—It’s useful to track various inventory metrics to identify problems and ways to improve management and cut costs. Handy measures include:

  • Inventory count accuracy (how accurate your inventory recording system is compared to actual physical stock)
  • Inventory turnover (number of times you sell your inventory in a period of time, such as a year)
You can track these numbers for specific products and your overall inventory. Watching the data will get your team to think about how to improve and allow you evaluate your progress.

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