Managing inventory in a growing business

Inventory management, business growth and expanding product ranges

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

• Difficulties managing a breadth of SKUs efficiently – spreadsheets won’t cut it!
• Reducing stock levels to carry more lines (without accurate forecasting and inventory optimisation tools) can lead to stockouts, expensive backorders, or rush orders from suppliers.
• A build-up of excess inventory and obsolete stock as forecasting models fail to keep up with quickly changing social trends and technologies.
• 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 optimisation practices to balance their stock levels.

Inventory optimisation is critical to growing businesses with a wide breadth of stock. It starts with identifying the demand patterns of your products. You can then accurately forecast demand and finally optimise your stock.

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 or ‘fast’ demand, e.g. selling a steady volume. As an item moves to maturity, its 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 prioritise which products to stock.

Accurate demand forecasts for smart procurement

Accurate demand forecasting helps you achieve the right inventory levels to fulfil orders while preventing excess or obsolete stock risk. After all, tying up capital in excess stock increases opportunity costs, meaning you have less cash to invest in new lines or react to 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. Read this eBook for more guidance on accurate demand forecasting.

Optimising 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, in particular, struggle with finding enough shelf space to carry their expanding inventory. However, unless your supplier lead times are short or you have drop shipping arrangements in place, cutting your stock levels can increase your risk of stockouts that can affect customer satisfaction.

Effective inventory management requires you to prioritise the stock you carry based on its value to the business. ABC analysis is a simple way to categorise 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, stock 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 behaviour and, therefore, how easy their demand is to forecast.
• The value and 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, suppose you wanted to focus on products with a high annual usage value. You could prioritise 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 prioritise products that are forecasted to sell well in the future and make you the most money. You can then 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 optimisation software, such as EazyStock, can be very advantageous when you manage a growing or large product portfolio. EazyStock is designed to automate demand forecasting, stocking policies and replenishment tasks, helping you manage your stock more effectively.

It factors in supply and demand variables and dynamically adjusts inventory levels to ensure stock availability whilst optimising turnover. Without reliance on spreadsheets, there will be less risk of human error, and complex calculations will be speeded-up.

Effective inventory management is critical to business growth

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 whilst these may be effective at inventory control processes, such as tracking and counting items in your warehouse, many lack the functionality to optimise your inventory levels.

Inventory optimisation software can help overcome a wealth of inventory management problems faced by growing businesses. Its 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.