How to manage inventory in a growing business

Inventory management, business growth & expanding product portfolios

At EazyStock we talk to a lot of small- and mid-sized businesses (SMBs) who are struggling to effectively manage their inventory. Three common causes for this are:

• Complex supply chains as businesses rely on a vast network of manufacturers, distributors and retailers
• Expanding product portfolios due to business growth and as customers demand more choice
• Increased stock levels to ensure stock availability

In this three-part blog series we’re looking at each of these inventory management problems. In this post we’re exploring how to manage inventory effectively when you’re faced with a growing product portfolio.

Inventory management challenge 2: expanding product portfolios

Businesses can expand their product portfolios for a number of reasons. Sometimes it’s because customers demand more variety, so companies diversify their product ranges. Other times it can simply be due to healthy expansion. While both are positive strategic moves, operationally, they can lead to a wealth of internal inventory management problems:

• Difficulties managing a wide range of SKUs efficiently – spreadsheets won’t cut it!
• Reducing stock levels to carry more lines (without accurate forecasting and inventory optimization tools) can lead to stockouts and expensive backorders or rush orders from suppliers.
• A build-up of excess inventory and obsolete stock as social trends and technologies quickly change and forecasting models fail to keep up.
• Increased operational costs and a lack of warehouse space.

Businesses need to adapt their inventory management processes to manage stock effectively as they continue to grow. Many are turning to inventory optimization practices to balance their stock levels.

Inventory optimization is critical to growing businesses that carry a wide range of stock. It starts with identifying the demand patterns of your products. Then you can accurately forecast demand and finally optimize your inventory.

Let’s look at each in more detail:

Identifying demand types

All products in your warehouse are in their own product lifecycle. For example, some will be at the growth stage with either positive demand or ‘fast’ demand e.g. selling a steady volume. As an item moves to maturity it’s demand may become ‘erratic’ e.g. have more unpredictable, fluctuating demand, or see a negative demand pattern emerge.

Identifying and tracking demand types will help you accurately forecast future orders and prioritize which products to stock.

Accurate demand forecasts for intelligent procurement

Accurate demand forecasting helps you achieve the right levels of inventory to fulfill orders while preventing the risk of excess or obsolete stock. After all, tying up capital in excess stock increases your opportunity costs, meaning you have less cash to invest in new lines or opportunities.

When demand forecasting, ensure you consider demand variables, such as seasonality, trends and qualitative information sources to make them as accurate as possible. If your objective is to keep spotting opportunities for growth, you need to understand what your customers are buying now and in the future and carry enough stock to meet your projected sales forecasts.

In addition, adjust your forecasting formula to consider the demand types above. Each demand type has a different deviation from its mean and therefore responds better to some forecasting algorithms than others.

Optimizing inventory levels as SKUs grow

When increasing the number of SKUs you carry, you may be tempted to reduce the quantities of each line to free up valuable warehouse space. Growing companies particularly struggle with finding enough shelf space to carry their expanding inventory. However, unless your supplier lead times are short or you have dropshipping arrangements in place, cutting your stock levels can increase your risk of stockouts that can affect customer satisfaction.

Effective inventory management requires you to prioritize the stock you carry based on its value to the business. ABC analysis is a simple way to categorize inventory, so you can stock more category ‘A’ items that sell well and have a good profit margin, versus ‘C’ items that have a low sales rate and bring less value to the business.

With inventory planning software, inventory classification can be much more advanced. For example, EazyStock will base stocking policies on several key criteria:

• The demand volatility of each SKU – EazyStock automatically segments items based on their demand volatility behavior and, therefore, how easy their demand is to forecast.
• The value an annual usage of each SKU – this accounts for sales volume as well as the unit cost of the product.
• How often each SKU gets picked – this distinguishes high volume products with many requests (1000 requests for 1 unit) from high volume products with low requests (2 requests for 500 units).

For example, if you wanted to focus on products with a high value of annual usage, you could prioritize those that have predictable demand patterns and high pick frequencies (as the risk of excess stock is low and you need to ensure you can cover demand) over those with volatile demand and low pick frequencies (as these are expensive to stock and demand is not consistent).

The objective when setting stocking policies is to prioritize products that are forecasted to sell well in the future and make you the most money. Then you can reduce the stock levels of other SKUs, preventing the likelihood of building up excess stock levels which can turn obsolete.

Automated inventory management assists business expansion

Cloud-based inventory optimization software, such as EazyStock, can be very advantageous when you have a growing or large product portfolio to manage. EazyStock is designed to automate demand forecasting, stocking policies and replenishment tasks, helping you manage your stock more effectively.

EazyStock factors in supply and demand variables and dynamically adjusts inventory levels to ensure stock availability while optimizing turnover. Without a reliance on spreadsheets, there will be less risk of human error and complex calculations will be sped up.

Conclusion

Effective stock management is critical if your business and product lines are constantly growing. Many small businesses have already invested in inventory management software, such as enterprise resource planning (ERP) or warehouse management systems (WMS). And while these may be effective at inventory control processes, such as tracking and counting items in your warehouse, many lack the functionality to specifically optimize your inventory levels.

Inventory optimization software can help overcome a wealth of inventory management problems faced by growing businesses. It’s ability to carry out accurate forecasting, set cost-effective stock levels and automate reordering delivers a fast ROI for many businesses.

If you have inventory management problems that you’d like to discuss with our team, or you’d like a demo of EazyStock software, please get in touch.

Read about other inventory management problems and their solutions in this three-part blog series:
Challenge no. 1: Supply chain complexity
Challenge no. 3: Improve Stock Availability