Tips for Optimized Retail Inventory Management

Line Art

Retail inventory management and optimization are two of the most important, and challenging, areas of business operations. It’s difficult to have enough, but not too much, stock on hand. Carrying (or holding) excess inventory saps profit in the form of warehousing costs, foregone interest earnings on the dollars used to pay for that inventory, and obsolescence cost on items that spoil, become less useful, or become useless. This excess is sold at a loss or written off. On the other hand, too little product means stock-outs, lost sales, and potentially lost customers. The good news is that modern statistical and data analytics enables more dynamic and accurate retail inventory planning than ever before.

Determine Risk Areas for Retail Inventory

Unpredictability is to be expected, but you can manage your response to unforeseen challenges. Review your supply chain regularly, upstream and down, to determine the greatest points of variability. Next, set up contingency plans and policies to handle shortages, overages, stoppages, and other unforeseen events. If you’re launching a new product shipped from a new supplier, think about potential delays in shipment, damaged goods, or whether sales have been tested online before committing to stocking your shelves.

Determine ahead of time how to survive the problems that will inevitably arise practically and financially. You may have the money to cover bad product, but will that take care of bad publicity?

Perform ABC analysis

Larger retailers sell products at multitudinous price points. To maintain healthy stock levels without tying up too much cash, know ahead of time the accounting values, sales margins, and turn rates of respective products. This allows you to prioritize management efforts accordingly as A, B, or C:

  • A products: High value but sell infrequently
  • B products: Moderate value with moderate sales volumes
  • C products: Low value but turn frequently

Cash-on-hand may spike when you sell an A product, but dip when you replace it in your inventory. Understanding which items are responsible for peaks and valleys in revenue (and how) help you predict and manage retail inventory levels and supply chain communications.

Set Par Levels for Retail Inventory

Ahhh, the the sweet spot of stocking! Par level is the exact amount of inventory level you want to have on-hand for a particular item. When you are low, your par tells you how much to order. Knowing the right par level requires some serious statistical analysis of trends, patterns, and drivers of product sales. A certain product may move much faster at certain times of the year, or in one location more than another. Use your historical sales data and (hopefully automated) forecasting and inventory analytics to extrapolate a dynamic view of sales and financially optimal stocking levels.

Collaborate with Suppliers for Retail Inventory

When it comes to retail inventory management, visibility and agility are crucial. Your ability to respond to changing market needs and unexpected roadblocks will largely depend on your relationship with, and understand of, your suppliers. Build strong connections with them. When the time comes, they may be willing to negotiate down minimum order quantities, or fees for rush orders. Do your part; have the people and technology systems in place to give suppliers a heads up if you anticipate a larger supply need than normal.

Develop Short- and Long-term Forecasts

Perhaps the most crucial element in managing retail inventory is understanding the numbers. In addition to the rate of turnover (by product, location, season, etc.), a comprehensive and dynamic statistical analysis of demand can help you plan the next three months, and the next year. You may discover that you have a lengthy lead time for a prized product. You may be competing with other retailers for the chance to sell that coveted item. Whatever the case, plan ahead to have the systems in place.