The definition of inventory management is pretty straightforward. It’s the process of ordering, storing, and managing your store’s inventory. But inventory management is so much more than just counting up what’s in stock. Effective inventory management gives you visibility into the stock you have on hand, where it sits in your stores or warehouses, and how it’s moving in and out.
When you’ve got a handle on your inventory management, you can keep your finger on your retail business’s pulse. Knowing how much stock you have, how much you have invested, and how it’s selling can help you reduce costs, optimize your customer experience, and prevent loss. And when your inventory management and point-of-sale (POS) system are integrated, it’s simple to take your inventory insights far beyond knowing what you have on the shelf.
So, how good is your inventory management game? If your inventory reports can answer these five questions, you’re optimizing your inventory and your retail operation.
1. How are specific products performing?
Of course, your inventory reports will give you an overall view of what you have on hand and the fluctuations of stock over time. Dig deeper into the numbers for true insights at the product category, individual product, and even SKU level.
Monitor the sell-through rate – the percentage of items sold compared to the number for sale – by product or SKU within a defined time period, such as a month or week. Calculating the sell-through rate is simple, divide the number of items sold by the original inventory quantity. Then, multiply your result by 100 to determine the percentage.
When you do, you’ll identify patterns and potential trends. Build in transaction dates, so you know the date of the first sale of an item and the most recent, and calculate the average time items are in stock before selling. Use the information to calculate your DIO (Days Inventory Outstanding) rate, which tells you the number of days it takes for inventory to turn into sales. Divide the cost of average inventory by the cost of goods sold. Then, multiply your result by 365 to determine your DIO. Generally, the lower the DIO, the healthier the business.
2. What’s your stock turn?
Your stock turn rate, also known as inventory turnover, tells you the number of times an item in inventory sells through in a set time period, such as a month or year. When it’s higher, it means you’re selling a lot, but you’re not overstocking the amount you have in inventory. Low inventory turnover rates could mean you’re holding more stock than you need and tying up unnecessary capital.
Tracking fluctuations in stock turn for key inventory items enables you to fine-tune your purchasing decisions, helping to reduce costs and increase profits. To calculate your stock turn rate for a specific period of time, divide the cost of items sold by the average inventory.
3. How is your inventory aging?
Even if items aren’t perishable, understanding how much inventory you have on hand that’s past its prime selling point is a critical part of overall inventory management. Just as you run best-selling item reports to understand what’s moving quickly, make it a practice to also run low-selling reports to show you under-performing items.
By monitoring low-selling items, you’ll be able to make timely decisions about products that may be stacking up in the warehouse, including when to sell them at a discount or bundle them with another item. Plus, you’ll free up capital that’s just sitting unsold for purchasing and replenishing other items.
4. What’s the difference between your physical inventory and your inventory reports?
While the reports produced through your integrated POS system are the linchpin of your inventory management, you also need to keep tabs on how your physical inventory lines up with your inventory report totals. By taking a regular physical inventory count, you’re able to identify your shrinkage, aka differences caused by shipment errors, shoplifting, or damaged items.
If taking inventory while keeping the business up and running feels daunting, take a cycle count approach. Inventory specific product categories or sections of your store and warehouse on set days. To determine your shrinkage loss, conduct a physical inventory, and calculate the total cost of items. Subtract the cost from the total cost of goods in your accounting records.
5. Do you have the right safety stock on hand?
Effective inventory management is a powerful tool in running a successful retail business. However, even when you know exactly what you have on hand, how long it takes to sell, and how long it takes to order and replenish your stock, you can’t fully account for unexpected events like purchasing surges or supply chain glitches. This is where safety stock can save the day, avoiding backorders, customer dissatisfaction, and lost sales.
Determining the appropriate safety stock amount is a balancing act informed by your inventory management insights. You want to have enough stock on hand to help you weather the unexpected, but not so much that the extra investment strains your finances.
Here’s a good formula to calculate the right amount of safety stock. First, think about the most extreme scenario. Multiply the product’s maximum daily usage by the maximum number of days of lead time for re-ordering. Then, think about the typical scenario. Multiply the average daily usage by the average re-order lead time. Use the difference between the two results as a guide to determining the safety stock amount. Your inventory management reports hold an important key to retail success. POSIM can help by integrating your inventory data across multiple locations, e-commerce, and mobile. Our extensive inventory management features provide a range of built-in reports along with the ability to build custom reports through an easy-to-use interface. To learn more about harnessing the power of data, download our guide, Data-driven Decisions: The Definitive Guide for Retailers. Then, contact us for a demo to explore what’s possible with POSIM.