The following article is a contribution by Vera Lim of TradeGecko.
What goes into building your business? There’s what’s on the surface and visible to the world, like marketing campaigns to raise awareness for your brand – such as putting together a lookbook or running a social media campaign with influencers. But what of all the legwork going on beneath the surface? Running a business is just like the life of a duck: Stay calm and collected on the surface, but paddle like heck underneath.
And the paddling like heck is what goes on behind the scenes in the back-end of your business. You’ve got loads of orders to fulfill, products to order (and reorder), dead stock to eliminate, and sales channels to manage… along with success to quantify! Doing all these things, on top of running a business, is no small task. In fact, focusing on just the inventory management aspects outlined above can be several hours of work, leaving you with little time to concentrate on growing your business. So today I’d love to share some tips from our eBook Inventory Management: Everything you need to know.
Inventory management revolves around the question of “What’s the right quantity to have at any given time?” And to figure that out, here are two key formulae to guide you along.
- Economic Order Quantity (EOQ)
Simply put, the EOQ helps you to decide the ideal order quantity that’ll balance out inventory costs with customer demand. To calculate this amount, you’ll need to figure out your customer demand, along with the fixed costs spent on procurement, and finally the annual carrying costs on upkeeping your products.
And if you’ve calculated this right, you’ll know exactly how much inventory you should be holding.
As the name suggests, your reorder point serves as a reminder of when it’s time to place a new order to bring your stock back to the EOQ level. In a perfect world, you’d be able to place an order and get your stock delivered instantly; but in the real world, it’ll take time for a new shipment to be delivered. So since you can’t wait for your stock levels to drop to zero before placing a new order, the reorder point is there to help you gauge when it’s time to write up a new purchase order.
*Tip: Did you know inventory management software lets you automate your reorder point? It’ll prompt you to place a new purchase order once stock levels hit the reorder point.
You may have noticed the mention of safety stock when it comes to calculating the reorder point. Your safety stock is also your buffer stock – there to help you when it comes to unexpected circumstances that’ll otherwise put you in the much dreaded out of stock situation!
Now that we’ve settled the formulas you need to ensure that you have the right amount of inventory to match customer demand. The next thing would be to make sure you can put a number to your success. There’s two major areas to focus on when it comes to measuring your success:
How much are you spending on your products? And I’m not talking about how much you’re spending just to purchase inventory – think about the miscellaneous costs associated with your products. These can range from
- Capital costs: The opportunity cost of money invested in the inventory – where else could you have invested your capital?
- Storage costs: Money spent on building and facility maintenance
- Inventory service costs: What other inventory-related costs do you have to bear? These include: insurance, wages, software applications
- Inventory risks costs: Shrinkage and obsolescence can happen
You should be aiming to keep the total of the above at around 25% of your inventory value for a healthy profit – if you’re spending too much on carrying your products, it’s time to look into some cost cutting measures.
Plus, the more stock you keep on hand, the higher the chance of being stuck with dead stock.
Dead stock are products that haven’t sold even a single unit in months, lying unwanted and forgotten in a corner at the back of your warehouse. And if you’re stuck with too much of these on hand, you’re running the risk having to bear a large inventory write-off – which means you’re formally recognizing that part of your inventory no longer has any value.
A large inventory write-off due to unexpected disasters like a warehouse fire is understandable… but if it’s happening regularly due to discovering missing and expired products, it may be time for a company to review its inventory management policies.
Now it’s time to talk about the fun stuff – success. One of the most common metrics used when it comes to measuring your success is to calculate your inventory turnover – that’s the number of times your inventory is sold and replaced over a certain period. Generally, a high number means you’re selling a lot and you’re doing a great job managing your inventory (although if it looks too high, you may want to look into recalculating your EOQ!).
Another great way to look at your business performance is to calculate your return on investment (ROI). It’s a great way to look at how much profit you’re turning after taking your costs into account, and to get an idea of how well your business is doing – especially if you’re embarking on a new venture in your business like carrying a new product line.
When it comes to measuring the success of your supply chain, knowing how long it takes for your product to reach a satisfied customer will let you know your order fulfillment cycle time. If you think there’s room for improvement, inventory management software can improve your business efficiency with packing slips that let you know what goes in every package and corresponding shipping labels to get them to the right destination.
While running a business is all about working really hard behind the scenes (like a duck), you won’t have to paddle that desperately once you’ve got a leaner and healthier inventory. Judging by how 55% of businesses enjoy saving five hours or more a week with inventory management software, it’ll let you take a fair measure of the load off your shoulders, allowing you to stay ahead of the curve while having more time to focus on growing your business.
All images by Joyce Lee
Writer Bio: Vera Lim is an Inbound Marketing Manager with TradeGecko, a company that provides cloud-based inventory management software for growing businesses. Vera writes for TradeGecko’s blog and knowledge base, covering topics ranging from the latest eCommerce developments to explaining how inventory management works… without the jargon.