Managing inventory well iscritical forbusinesses wanting tobalance supply anddemand. Optimizing inventory levels means you can ensure you have theright products foryour customers andavoid theheadaches ofhaving too much stock.
Inthis article, wewill explore some practical strategies formaintaining optimal inventory levels, avoiding common inventory mistakes, andboosting your business’s overall efficiency.
Understanding Inventory Management
Efficient inventory management isall about finding theright balance.
One popular strategy is
The main challenge isbalancing thelevels ofinventory. Ifyou hold too much, itcan eat into your profits with all those storage costs. But, ifyou run out, you might miss out onsales. So, byfiguring out theright strategies, you can keep your cash flow smooth, make customers happy, andboost your profits overall.
Consequences ofExcessive Inventory
Another common practice isfinding awarehouse andstoring asmuch inventory aspossible. This became much more popular after thepandemic when thesupply lines shut down. However, this mentality can have some drawbacks. Here are afew toknow.
Increased Holding Costs
Too much inventory can increase hefty holding costs, such asstorage, insurance, andmanagement expenses. These can eat into profits anddivert resources from other vital parts ofyour business.
The rising costs ofrenting warehousing space are making itincreasingly expensive tostore excess inventory.
The cost ofrenting warehouse space fordistribution intheUSisconstantly growing (Source: Bloomberg)
Plus, there are hidden costs like inflation andinventory taxes toconsider. And ifyou’re not careful, overstocking could wipe out ayear’s worth ofprofits.
Risk ofObsolescence andSpoilage
Inventory can expire andbecome unusable astime goes by. Take grocery stores— they deal with produce going bad byincluding apercentage ofwaste intheir pricing. When they hit max inventory, they often donate theextra tocharity andwrite itoff asaloss.
Don’t forget about environmental factors like humidity, mold, andtermites— they can really mess upyour stock andcould even lead toatotal inventory loss.
Tied-Up Capital
Excess inventory ties upcapital that could beinvested inother areas ofyour business, such asmarketing, product development, orexpansion efforts. Keeping theright amount ofinventory frees upmoney forthings like payroll orother expenses.
Importance ofMaintaining Optimal Inventory Levels
Let’s talk about why inventory optimization makes sense forbusinesses.
Enhances Cash Flow andReduces Holding Costs
Optimizing inventory levels isasmart way toboost cash flow bymaking sure your capital isn’t tied upinexcess stock. Plus, lower holding costs can further improve your financial health, giving you more flexibility inresource allocation.
Cash Flow Strategies foraProspering Online Business
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Prevents Stockouts andOverstocking
Optimizing inventory levels prevents stockouts, leading tolost sales andunhappy customers. Italso helps avoid having too much stock sitting around, which can add unnecessary costs andrisks.
Improves Customer Satisfaction andLoyalty
Having theright products available attheright time enhances customer satisfaction andbuilds loyalty. Customers are more likely toreturn toabusiness that consistently meets their needs andavoids thefrustration of
How toCalculate Minimum andMaximum Inventory Levels
Minimum andmaximum levels ofinventory are critical components ofinventory management.
The minimum level represents thelowest amount ofinventory you should hold toavoid stock shortages. Incontrast, themaximum level isthehighest amount you should keep toprevent excess stock.
Determine Average Daily Demand
Based onhistorical sales data, average daily demand istheaverage number ofunits sold per day. Tocalculate this, divide thetotal number ofunits sold inagiven time period (e.g., one month) bythenumber ofdays inthat period.
Asyou track theitems, you will find some have seasonal highs andlows that shift throughout theyear. For example, you may sell more snow shovels inJanuary than inAugust. So, keep note ofthose ups anddowns fornext year.
Bytheway, your ecommerce platform can help you manage your inventory better. For instance, Ecwid byLightspeed not only gives business owners arobust online store but also comes with handy sales reports.
The Orders report, forexample, shows you how many items customers usually buy, how many you’ve sold over acertain period, andother insights.
Ecwid also provides aProduct Sales andStock Overview report, which gives you aquick summary ofyour sales over acertain period andyour stock levels. You can easily compare these stats totheprevious period tosee ifsales forspecific items have increased ordecreased.
AProduct Sales andStock Overview report inEcwid admin
Determine Lead Time
Lead time isthetime ittakes foranorder tobefulfilled anddelivered from thesupplier toyour warehouse. Incorporating lead time into your inventory management helps ensure you always have enough stock onhand.
For example, ifittakes two weeks forasupplier todeliver anitem toyour warehouse, you should maintain atleast two weeks’ worth ofstock incase there are anydelays orunexpected changes indemand.
Again, each item might have its seasonal highs andlows. For example, snow shovels will take longer tostock inJanuary than inAugust.
How toCalculate theMinimum Inventory Level
Multiply average daily usage bythedaily lead time todetermine theminimum inventory level.
Minimum inventory level =Average daily demand xLead time
This calculation helps you monitor your inventory levels effectively. Ifanitem nears its minimum inventory level, you can adjust your next order with thesupplier accordingly.
For example, ifyou sell coffee mugs andyour store sells one mug per day, andittakes 7days fornew mugs toarrive after ordering, you should always have atleast 7mugs instock toavoid running out.
How toCalculate theMaximum Inventory Level
While tracking your inventory data, you’ll likely tweak your maximum inventory level. Asimple place tostart isbymultiplying your minimum inventory level by2.5, which allows you tocover amissed cycle with your supplier.
The maximum inventory you want inthecoffee mug example above is
You can use this number todecide ifit’s time forasale. Since theaverage daily usage ofsnow shovels tends todrop inspring, why not consider asale tohelp reduce your inventory below themaximum level?
How toCalculate theAverage Inventory Level
The average inventory level represents theamount ofaproduct you expect tosell during thenext period. This level can vary depending onseasonal fluctuations, lead time, andanticipated sales.
The goal here istolook ahead anddetermine what you should have inyour inventory.
Todetermine agood starting point, calculate your average daily sales, multiply that bythelead time, andthen add asafety buffer.
Asafety buffer istypically apercentage that accounts forunexpected changes ordelays. Depending onyour industry andbusiness, itcould beanywhere from 10% to20%.
Given that, theformula fortheaverage inventory level is:
Average inventory level =(Average daily sales xlead time) +Safety buffer
Adjust this based onyour warehouse capacity, available cash, andtheproduct’s sales velocity.
This approach can beused asyour optimal inventory level formula. The key issetting aninitial safety buffer andmonitoring your inventory. Continuously adjust andreassess this buffer toensure itremains effective.
More Tips forInventory Optimization
Let’s talk about other inventory optimization techniques that can improve your overall efficiency.
Real-Time Inventory Tracking
Tracking inventory in
Your ecommerce platform can also help with inventory tracking. For instance, ifyou’re using Ecwid byLightspeed, you can easily set thestock quantity foryour products. When customers make purchases, our system automatically updates your stock levels.
Automated Reorder Alerts
Many inventory software systems help you manage your current stock byalerting you when you’re nearing minimum inventory levels. This prevents stockouts andhelps maintain optimal inventory levels.
For instance, ifyou’re using Ecwid byLightspeed foryour online store, you can set uplow-stock alerts. You’ll receive a
Ecwid sends you
Demand Forecasting
Along with managing current stock levels, demand forecasting isanother important aspect ofinventory management. This involves predicting how much inventory will need tobestocked inthefuture based onpast trends andcustomer habits.
Your most valuable tool fordemand forecasting isyour own inventory data, which reflects your seasonal trends andcustomer habits. You can dothis manually using spreadsheets orsoftware toanalyze your data andgenerate accurate forecasts.
Ifyou’re using Ecwid byLightspeed foryour online store, you can check out theOrders report tosee how many items people typically buy, how many you’ve sold during aspecific period, andmore. This can help with demand forecasting.
Forecasting Demands: Strategies toAvoid Stockouts andOverstocking
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Multi-Echelon Inventory Optimization
This approach could bepricey, effortful, and
Wrap Up
Keeping anoptimal level ofinventory iscritical tomaintaining consistent sales. Finding this optimal level requires balancing demand forecasting, supply chain management, andinventory optimization strategies.
When picking anecommerce platform foryour business, goforone with inventory management tools andorder reports totrack your stock levels easily. For example, Ecwid byLightspeed. Ithelps you streamline your inventory, prep forseasonal spikes, andmanage your online store more efficiently.