Managing inventory is a feat for any business, which explains why many small businesses overlook it entirely. While it does take time to manage inventory, failing to manage it properly can leave a business without enough supplies to meet demand, driving customers away to competitors–potentially for good.

The fact is, good inventory management is the basis of any stable business, especially if you have plans to grow. So, if you’re looking to revamp your inventory management system for 2022 or you’re trying to implement one for the first time, here’s what you need to know. 

1. Define Your Inventory

You can’t manage your inventory until you’ve defined all the components that make up your inventory. Inventory varies depending on whether you’re a manufacturer, retailer, eCommerce site, service-based business, or another type of company. The most common forms of inventory you might need to track include:

  • Raw materials, like those used to manufacture a product. For example, a business that sells homemade leather key chains would list leather, metal rings, and fasteners. 
  • Unfinished products, like those you’re currently manufacturing. For example, a handmade furniture store would need to include an unfinished bedroom set.
  • Finished products, like those being stored in your warehouse, stockroom, or store-front until they’re purchased.
  • Goods in transit, which are on their way to the final destination. For example, this would include a shipment going from the warehouse to a retail store for display.

As part of your inventory management, you may also need to track some less common forms of inventory.

For instance, “cycle inventory” represents any products that a manufacturer or supplier has shipped to a business that will sell them to customers right away. “Anticipation inventory” is excess or overstock product that has been made or purchased because a business expects a sales surge, like before the holiday season.

You may also need to track “decoupling inventory,” which includes parts and supplies that you have set aside in case production stops or slows down. This has become more common amidst supply chain interruptions due to the pandemic. For instance, if it’s possible that a leather goods manufacturer may not be able to get the necessary fasteners (or is experiencing long delays), they may stock a decoupling inventory to avoid running out.

A “buffer inventory” is similar to a decoupling inventory and it’s a set of items you keep in the stockroom in case an issue or sudden surge would otherwise cause you to run out. Lastly, you have “MRO goods,” which include supplies necessary for maintaining, repairing, and operating machinery or equipment for your business. 

2. Organize Your Inventory Items

Once you know the various types of inventory items you may be dealing with, it’s time to organize and categorize your inventory–particularly the finished products that you’re actually ready to sell. Most often, businesses follow an A, B, C prioritization system, which works like so:

  • Put high-ticket items that you need fewer of into Category A.
  • Put low-ticket items that you need a lot of into Category C. 
  • Put everything in between into Category B.

Using this system, a furniture store might put large bedroom sets and dining tables into Category A, as these items are expensive and don’t sell too frequently. Meanwhile, they might put lamps, side tables, throw pillows, and decor items into Category C, because these items are relatively low-priced and move very quickly. What’s leftover–like sofas and mattresses–will go into Category B. These items tend to be less expensive than Category A items and don’t move as quickly as Category C items, so they’re somewhere in between. 

Once you’ve prioritized your inventory, you need to finish organizing it by making sure that you have the appropriate tags in place to categorize and track it. For instance, you’ll want to use SKUs, lot numbers, barcode data, or other information so that you can consistently track how many of each item you have in store along with information like color and size. 

3. Define Management Procedures

As part of good inventory management, you’ll likely end up subscribing to a tool to help automate the process to some degree. These tools can connect with your supply chain, for instance, and automatically “restock” items when they arrive on the shipping truck. However, you need additional procedures to keep your inventory up-to-date and manage it effectively.

Usually, businesses start by defining how often they’re going to physically count inventory items. You might do this daily, focusing mostly on Category C items, or you might do this weekly or monthly in a more thorough manner. You’ll most likely come up with a combination where you check Category C items daily and other items every so often.

Checking inventory allows you to ensure that your inventory system aligns with the real numbers and supports purchases and budgeting. For instance, it gives you a chance to review the numbers to make sure you’re stocking the right items.

It’s a rule of thumb that 80% of your profit tends to come from 20% of your inventory. The items that make up that 20% should be managed best, kept in stock, and analyzed throughout the sales lifecycle to help you maximize profit. Tracking inventory can also help you analyze the best placement of products, like how moving small-ticket items closer to the checkout counter will impact purchases and even customer experience. 

Other areas where you’ll want to define appropriate procedures include how employees should receive stock; how and when restocks should be ordered; and how sales, missing inventory, and other discrepancies should be tracked within the system. Failing to do those things consistently can lead to a completely ineffective inventory management system. 

Find The Right Inventory Solution

Ultimately, inventory management begins as a process, but in modern times, it’s greatly helped with a tool that can automate some of the steps. By taking the time to design effective inventory management procedures and then investing in a robust, integrated tool, your business will be able to make the most of inventory management in 2022.

About NMA

NMA is a merchant advocacy group dedicated to reducing or eliminating the unnecessary fees associated with accepting credit card payments. Since 2004, NMA’s payment processing solutions have been delivering tailored solutions, best-in-class customer service, and high-quality service offerings for businesses across multiple industries. Whether it’s high-risk or low-risk, brick-and-mortar or e-commerce, NMA will create the best processing experience for your company.

For more information, visit us at legacy.nationalmerchants.com or call (866) 509-7199.