Inventory management can be a complex concept with innumerable moving parts. For retailers building a plan from scratch or overhauling an old one, creating an inventory management system is crucial. Even if you start with a manual system, it’s important to put one in place.

The day-to-day of inventory management and planning can be different for each retailer. But the components you need to build a scalable inventory management system are generally the same.

Part of an inventory management system is tracking what comes into your warehouse or store, as well as what leaves through sales. Here’s a look at five components to consider which can make inventory management and planning easier for your retail business.

 

1. Forecast Demand

Part of creating a business plan is figuring how much money your business will make over the next quarter, year, and five years. To do this, you’ll need to forecast demand or create sales projections. Projections help you determine how much inventory you should buy or make to fulfill your forecast.

Creating sales projections becomes easier once you’ve started selling. Your sales history can also help you forecast how many units you’ll sell in the future. Looking at bestsellers and accounting for business growth can help you determine how many units to produce in the future. It’s also a good idea to look at retail industry forecasts as a whole to better understand the market you’re in. POS systems generally also contain sales information and Oscar’s POS system is an innovative way to find out what products your customers have been frequently purchasing. You can use this type of information to create demand and increase sales overtime. 

 

2. Inventory Turnover

Inventory turnover measures how fast a retailer sells through its inventory and needs to replace it. The faster you “turn” your inventory, the more inventory you will need in a year.

The turnover rate formula gets used during a specific period of time:

Number of Units Sold / Average Number of Units = Turnover Rate

Example: 1,000 (units sold in one month) / 500 (average number of units produced in one month) = 2 (Turnover Rate)

With a healthy turnover rate, you can prevent inventory from sitting in your warehouse or stockroom for too long. And you can avoid disrupting your cash flow.

 

3. Open To Buy (or OTB)

Inventory planning can help you manage the cash flow of your business. One way to do this is by using an open-to-buy system for your inventory plan.

Open-to-buy is a purchasing budget created by a retail store during a certain time period for future orders. Direct-to-consumer brands can also use an OTB plan to determine how much inventory to manufacture during a specific timeframe. Creating an OTB budget will help you decide how much inventory you can buy or manufacture without hurting your cash flow.

OTB is also the process of planning product sales, purchases, and inventory turns. You don’t have to set the turns at the same level for every product or category in your store. Some products sell slower and some sell faster. With an open-to-buy system in place, you can manage your product categories and classifications and plan turns for each.

 

4. Cycle Counts

The most controllable expense in retail is inventory. Poor management of your inventory can result in false metrics and can cause inventory shrinkage.

Inventory shrinkage refers to the amount of inventory lost in the course of doing business. There are many ways to “lose” inventory, including:

 

• Theft
• Receiving errors
• Entering the wrong SKU in the POS
• Improper handling of a refund or exchange

Avoiding shrinkage is an important component of running a retail business.

One way to check your inventory for loss is to manually count your inventory. But a complete physical inventory count might cost you time and money. Instead, you can do cycle counts. Count a part of your inventory each month. In this case, instead of manually counting each product, Roll App is the ideal application for your store to check and manage your inventory in order to avoid losses. Import thousands of products quickly and let the app optimize inventory management. Roll will also simplify processes like tracking stock levels and analysing goods to ensure profitable sales. 

Thorough check ups of your inventory will ensure that your stock levels are where they need to be and your POS is correct.

 

5. Build Strong Vendor Relationships

Finding a vendor or manufacturer that wants to be your partner is difficult. But building strong relationships can directly affect your financial success as a retailer. Being open with your manufacturers about your data, like margins and turn rates, can help you build stronger relationships.

A manufacturer or vendor who is a partner can be a huge asset for retailers. Focus on vendors who have open stock inventory and can fill-in your orders as needed. On-demand manufacturing is also a great way for direct-to-consumer brands to manage inventory. With on-demand manufacturing, you can react to your customer demands instead of warehousing inventory.

Too much inventory in your warehouse and in-store costs you money. A true partner will help you manage your inventory in a way that benefits your cash flow.

When it comes to inventory management, planning is key. Getting stuck with stale inventory is a retailer’s worst nightmare. Old inventory is like cash in jail. Start with a plan that feels manageable for you. It will most likely change as you scale, but having a good foundation will set you up for inventory management success.