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5 Things Business Owners Need to Know About Inventory

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Inventory management is the tracking and organizing of a company’s inventory, everything from the raw materials to the work-in-progress goods to the final product that sits on retail shelves or gets delivered to a customer’s home. Traditionally, business owners used manual processes such as filling out Excel spreadsheets and completing audits with pen and paper to satisfy management requirements; today, utilization of software and automated systems is more common.

Related Article: Inventory Management Best Practices And How to Implement Them

Most business owners understand that inventory management, which includes ordering new products, storing them, ensuring their safety and more, is crucial for staying afloat. The money tied up in an inventory item can’t be returned and reinvested until that item is sold, which means that businesses that don’t recoup their investments in a timely manner may find their profits wasting away in warehouses and on assembly lines.

What owners may not know is how their manual processes, once standard for their industries, are actively hurting the bottom line. How else to explain that 46 percent of small business owners don’t track inventory or use a manual process to do so? Inventory management software does more than just keep track of counts, costs and part numbers: It adds security, increases efficiency and can revolutionize the very way your business turns a profit.

Thus, the importance of quality inventory management can’t be overstated. Here are five things business owners likely don’t know about this crucial aspect of running a successful company:

1) Employee theft is more common, and harmful, than you think.

Employers may not want to admit it, but employee theft is all-too-common and devastating for the bottom line. According to a loss-prevention consulting firm, the practice has actually been on the rise in recent years, with tens of thousands of cases discovered in a study of 23 large retail companies.

While the occasional small-scale theft may just be shrugged off, the truth is that nearly one-third of all bankruptcies is caused by employee theft, because if an employee steals something once, they’re likely to do it again, and they’re likely not the only ones doing so. Automating inventory audits prevents inventory from going unaccounted for, especially while under the watch of your employees.

2) Inventory records can be shockingly inaccurate.

Even the most careful employees make mistakes when it comes to manual input during inventory counts and audits, it’s just human nature. Proficient data entry operators make a mistake approximately every 300 characters, which can mean serious inventory confusion when that number is extrapolated out over thousands of barcodes on thousands of items. Not only will the errors be an issue for day-to-day operations (expecting to have a certain item in stock, only to find you are out just as demand is surging), but end-of-year audits will be nearly impossible to conduct correctly, resulting in everything from higher tax bills to legal issues resulting from false inventory write-offs.

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3) Automated software knows what your business needs before you do.

Inventory management software does more than just keep count of how many of each item you have. It can alter the way a business produces, holds and delivers its inventory.

For example, automated inventory management helps balance a company’s inventory turnover ratio. A key small business metric, inventory turnover ratio, is the cost of goods sold divided by average inventory. Businesses that have a low cost of goods but high average inventory are likely spending too much on holding costs; conversely, a high cost of goods with low inventory means that stock-outs, which damage both the bottom line and your reputation, are likely. Inventory management balances this ratio so the business can efficiently re-order needed goods when necessary, and not before.

By moving to a “pull, not push” inventory methodology, businesses find ways to reduce costs that weren’t possible when doing inventory by hand and memory. A system that knows when inventory should automatically increase (in response to historic surges of demand, such as around holiday time) practically pays for itself.

4) Automated systems cut costs in unexpected places.

It’s possible that some business owners don’t think an automated system for managing inventory is worth the money. If a manual process has “worked” (however poorly) for years, why fix it? The truth is that management software has a massive return on investment, and the areas in which companies recoup their money aren’t obvious from the outset. They include:

  • Inventory carrying costs: As discussed above, having too much inventory on hand isn’t cost effective. The real cost of inventory goes beyond simply purchasing it: there are capital costs (meaning the cost of having your money tied up in inventory and not being able to invest it elsewhere), storage space costs (such as warehousing fees) and service costs (the amount it takes to repair and safeguard inventory already on hand). Inventory management software helps organize your warehouse to keep things running efficiently and cost-effectively.
  • Labor costs: Tasking employees with doing manual audits of inventory is needlessly time consuming and takes them away from applying their skills to other needed tasks. Maximizing labor value can help you get a jump on competitors who resist doing the same.
  • Asset wear and tear: Inventory management can in turn aid in asset management. Fixed assets are the long-term pieces of property used to create income, such as laptops and vehicles. Assets that are involved in transporting inventory, such as pallet jacks and trucks, benefit from a more organized warehouse that doesn’t require unnecessary movement. The less a company needs to spend on asset maintenance and replacement, the better.

5) Automated systems provide a “comparative advantage” to help business owners to outlast competitors.

If your company provides a product or service that no other business can, you have a “differential advantage.” In the era of massive retailers like Amazon and an increasingly global economy, that’s a difficult edge to maintain. What your company can instead cultivate is a “comparative advantage,” or cost advantage. This is the ability to produce, and thus sell, your goods at a lower cost than your rivals, generating a larger sales margin. Amazon has a comparative advantage over many of its competitors thanks in part to its barcode-based inventory management system, allowing it to ship out millions of items at a lower price point than other online sales sites, as well as carry the inventory of its third-party sellers without confusion or slowdown.

The benefits of automated inventory management aren’t obvious to everyone, especially those that have used manual processes long enough to feel comfortable in their system, or are new enough to their industry that they don’t feel an investment is necessary at such an early stage. In 2016, there is no room for making manual input errors, or a bloated supply chain that creates a backlog of withering inventory. Knowing is half the battle, so know that inventory management is about as crucial to turning a profit as the procurement and sale of the inventory itself.

How would a dedicated inventory management system help you to track inventory accurately?

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Jay Schofield

Jay Schofield’s passion is numbers. For more than 10 years, he has been turning facts and figures into actionable business intelligence for System ID. When he’s not researching, analyzing, and planning for the “next big thing,” Jay can be spotted on the lake with family and friends.

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