Inventory Management Best Practices

Good inventory management keeps stock moving efficiently through your store without tying up resources. Ultimately, it increases sales, maximizes profits, improves customer satisfaction and safeguards a unique identity that customers can remain loyal to. However, managing your inventory can be challenging, as excess or insufficient stock can lead to slowdowns in business and even lost sales. The good news is that inventory management doesn’t have to be as hard as you think. Here are seven best practices to help you master inventory management.

Inventory management best practices

1. Track your inventory
2. Properly set up inventory in your POS system
3. Monitor your total cost
4. Manage inventory from a single system
5. Keep shrinkage to a minimum
6. Monitor your sell-through
7. Manage your aging stock

1. Track your inventory

The first step in successful inventory management is to keep track of your inventory data. This data is your secret weapon, giving you the information you need to make smart, informed decisions. So, how do you track this data? The most common ways are:

• Manually with pencil and paper, using pre-printed inventory cards.
• On a computer, using spreadsheet applications.
• With a retail POS system that includes inventory management features.

While the last of these options requires some investment, it can save you hundreds—if not thousands—of hours and can also minimize inconsistencies. Plus, once you have a system in place, you can use it to apply best practices.

2. Set up information properly in your POS system

Whichever system you decide to use, it’s crucial that you take the time to set it up properly. If you fail to capture information accurately, you’re more likely to make ill-informed decisions.

Information to track on every item

• Stock Keeping Unit (SKU)
• Cost
• Manufacturer
• Category
• Department
• Location
• Vendor-specific information (such as reorder SKU or Vendor ID)

To understand how merchandise is moving, you should also keep track of each item’s lifecycle—from the date of purchase from the supplier to its arrival and sell dates, as well as cost and sell price. A modern POS system will automatically record this data for you.

3. Monitor your total cost

Managing inventory isn’t just about managing the items themselves. Top-performing retailers also manage inventory based on profit margins. To manage by margin, not only do you need to know what’s selling the most, you must have an idea of what’s producing the highest profits.

To calculate margin, subtract the cost of the item from its sell price. To know an item’s cost, check the original purchase orders. For a picture of total costs, take an average of all these costs or assess by individual unit costs. You also need to know the sell price of your items, including any discounts applied to the item. A good POS takes care of this automatically, providing reports that quickly show profit margins on inventory items and categories.

Once you have this information, you can:

• Focus on brands and vendors that yield the highest profits.
• Know your best and worst-performing products by quantity and by margin.
• Better manage your discounts with a precise account of item cost.

4. Manage inventory from a single system

Collecting inventory data from multiple sources can waste time and lead to errors. Opting for a single, centralized inventory management system not only makes it easier to understand how your inventory is moving, but facilitates future plans of expansion to other locations or onto the web.

The benefits of centralized inventory management

• Enter your inventory information just once, instead of repeatedly entering information for every location.
• Reduce errors caused by selling the same inventory twice and other types of clerical errors.
• Fulfill orders more efficiently.
• Monitor inventory levels by location.

5. Keep shrinkage to a minimum

Whether due to damage, theft, misplacement or mismanaged paperwork, inventory shrinkage can reduce your margins significantly. With slender margins in retail, the need to reduce losses caused by shrinkage has become increasingly important.

According to the NRSS, 15.3% of inventory loss due to shrinkage is caused by clerical errors, and while you may not be able to easily prevent theft or merchandise damage, you can maintain full control over clerical processes. With an automated inventory management system, it’s possible to track inventory movement, costs and other crucial data points, making data entry errors a thing of the past.

6. Monitor your sell-through 

You can’t sell what’s not in your store, but too often, shops sell out of their top-performing products. Not only can this lead to missed sales opportunities, but it can also prevent customers from returning down the road. Fortunately, by examining historical sales data and tracking inventory levels, you can better predict your buying needs and ensure that you’re always well-stocked.

Here are a few things to look at to better support your decision-making for nonseasonal and core items:

• Look at your top-selling items. Are they selling faster than expected? You may need to place a special order to take advantage of a trend.
• Calculate your sell-through rate to see how far you are through your inventory.
• Sell-through % = units sold/(units on-hand + units sold).
• Calculate your weeks of supply to see how much inventory you’ll have left if you continue selling at your current rate.
• Weeks of supply = total inventory on hand/average weekly sales.
• Look at lead times for your items.
• Compare weeks of supply to lead times. This will help you to determine your reorder points. If your POS supports it, set an automatic reorder reminder when this point is reached.

7) Manage your aging stock

Old inventory can quickly eat into your profits by preventing you from bringing in new stock and increasing your carrying costs. Managing it properly will help you avoid these pitfalls and ultimately increase your profits.

Sell-through and weeks of supply are useful calculations for managing aging stock. Use them to ensure you aren’t tying up dollars in old or stale inventory or getting stuck with out-of-date merchandise:

• Determine sell-through to see how far you are through a category or item.
• Determine weeks on hand to see how much inventory you have left.
• Compare sell-through to weeks on hand.
• If sell-through is low and weeks on hand is high, consider a more aggressive strategy to move this inventory faster.
• If both sell-through and weeks-on-hand are low, you should determine whether insufficient stock levels (i.e. varieties of size, color) is the cause.

Discounting inventory is never a retailer’s first choice. To push slow-moving stock, consider the following strategies:

• Change up the merchandising: move it to a more prominent location, add new visuals and group with fast-moving products.
• Discount by first re-pricing (also referred to as white-ticketing) if this fails, move on to markdowns (red-ticketing).
• Host or participate in pop-up and special events.
• Items over one year old are typically considered dead. If they cannot be sold, consider donating them to charity for a tax receipt.

To ensure the right inventory is moving at an optimal rate, independent retailers need to track inventory data efficiently and effectively. With the right point of sale system and by following our inventory management best practices, you’ll be set to bring in inventory that your customers want and keep it fresh.