At first blush, it’s hard to see exactly how inventory management contributes to the success of a business.
Sure, it’s important — but does it really have that significant of an effect on your bottom line?
Here’s a concrete example of how good (or poor) inventory management directly impacts revenue.
According to a 2019 study, 34 percent of businesses ship late because they sell products that they don’t actually have.
There’s nothing more frustrating to a customer than a stock-out scenario and nothing more detrimental to customer loyalty and lifetime value.
Furthermore, 46 percent of warehouses cite human error as the biggest problem in managing their on-hand product.
It’s 2023, and technology is more accessible and powerful than ever. Still, many organizations are making basic mistakes that unnecessarily comprise their resources.
Conversely, being aware and understanding these blunders — paired with the will to rectify them before they escalate into serious problems — can change and help the outcome.
In this post, we’ll talk about a handful of highly inefficient ways businesses handle their inventory and how to fix (and avoid) them.
Why Does Inventory Management Efficiency Matter?
An efficient inventory management system enables you to correctly estimate how much inventory you need based on your sales activity.
This way, you can take orders confidently, limiting stock-outs, overstocks, and inaccurate records.
Further, proper inventory management lets you fulfill incoming or open orders in time and, as a happy byproduct, boosts profits.
The following are a few more benefits of efficient inventory management.
Good inventory management saves money
Understanding your stock levels enables you to determine how much you have (and where you’re storing it). This way, you can keep enough stock to fulfill orders without wasting money on excess product.
In addition to saving money on your inventory itself, the real savings from good inventory management processes come from saving on payroll.
When you use an IMS like SkuVault to automate redundant tasks, you can eliminate motion and time waste from your team.
When your logistics run smoothly, your cash flow increases
Managing your inventory properly allows you to buy inventory that sells quickly, which improves the movement of money in and out of your business.
Inventory efficiency is directly tied to customer satisfaction
Customer satisfaction is essential to running a thriving business. According to a Salesforce study, 81 percent of satisfied customers say they’re more likely to interact with your business in the future after a positive customer experience.
One of the simplest and best strategies to keep customers returning is to make sure they get their orders on time.
I know, it’s not exactly a radical idea. But when you’re scaling a big eCommerce operation with dozens of moving parts, it’s much easier said than done.
Staying on top of how you manage your inventory goes a long way to improving your business’s overall efficiency — which segues nicely into our next point.
How Does Efficiency Benefit Your Business?
There are tons of benefits to business efficiency. For example, efficiency in your business will:
- Improve your productivity while improving labor-intensive admin tasks.
- Minimize your operational costs, allowing you to have more reserve cash for other business-critical needs.
- Enable you to fulfill bigger orders which means more revenue and a better profit bottom line.
- Allow you to fulfill customer orders quickly without hiring temporary staff or buying more equipment to meet the demand.
- Give you a better opportunity to scale your business and venture into new markets.
- Foster healthy competition as other businesses try to compete with you.
Inefficient Inventory Management Practices
Now that you know why having a sound inventory management system is crucial, let’s go over 11 mistakes businesses make when managing their inventory and how to avoid them.
Lack of Proper Planning
There’s more to inventory management than checking how much stock you have left. You also need to manage your supply chain, sourcing, storage, inflow, and reverse logistics (returns).
Inventory management is an interrelated process involving several bits and pieces that must move together seamlessly.
If one part falters, the entire process falls apart. Failure to have a solid inventory management strategy can result in lost sales, unnecessary delays, and damaged stock, especially in seasonal businesses.
For instance, a gift shop that fails to order merchandise in advance for the Christmas season may find itself without essential items during a crucial sales period.
Another planning mistake is failing to eliminate older or slow-moving products to create room for new merchandise.
(For more on the topic of segmenting your SKUs, check out our detailed guide on ABC Inventory Analysis.)
How to fix it
Develop a robust inventory management strategy that works for your business, and invest in a software platform to help you manage it and eliminate human error. When you’re ready, check out our guides on the topic below:
- 10 Effective Inventory Management Practices for Ecommerce
- Top 8 Efficient Inventory Management Strategies To Reduce Costs
- 15 Top Techniques and Best Practices for eCommerce Inventory Management
Miscommunication and Poor Coordination
Proper inventory management should be a collective responsibility. A well-oiled logistics machine is a truly symbiotic organism. If one piece fails, the entire foundation of your business is subject to the bullwhip effect.
You must coordinate between suppliers, warehouse managers, vendors, transporters, and pretty much everyone who handles inventory in your organization.
Good communication among all parties is absolutely essential to making this work.
Still, many inventory management teams are plagued with miscommunication and poor coordination caused by vendors and suppliers.
How to fix it
Work with reliable suppliers and vendors. Vet everyone in the supply chain to avoid inventory management conflicts in the future. You can, for instance, research a supplier or vendor’s background to see if they’re a good fit or even ask for references.
Then, visually map out your logistics pipeline, all the way from your suppliers to your end-users. This diagram will help you recognize any bottlenecks that are weighing your business down.
Failure to Monitor Inventory
Another mistake businesses make with their inventory management is failing to monitor stock levels.
As a business owner, you expect every stakeholder in your inventory operations to do their part to ensure sustainable stock levels.
Still, that doesn’t guarantee problems won’t occur. And when they do, you may not have the time to salvage the situation before it worsens.
How to fix it
Implement a reliable inventory tracking and monitoring process. This way, you detect and resolve any process promptly.
Investing in inventory management software is the best way to track and monitor your stock levels.
Don’t rely on spreadsheets or paper charts for this — remember the above stat about human error?
A good solution will ensure you always have a comprehensive overview of your inventory, from the time merchandise arrives all the way to the point of sale.
Inaccurate Forecasting
The ability to run efficient inventory management operations also depends on how well you can forecast your stock trends.
Using inaccurate data and forecasts makes your plan ineffective.
Let’s stay with the gift shop example. The business knows the Christmas season is the busy season. But this information doesn’t help the shop determine how much product it’ll need to order to meet demand.
Inversely, if the shop has historical data based on previous Christmas sales, it can make an intelligent guess on how much inventory will be enough for the season.
How to fix it
Invest in a reliable data and analytics solution to help you collect accurate information for accurate forecasting.
For example, SkuVault’s Replenishment Report generates a detailed look at inventory levels across a wide variety of dimensions. Whether you’re selling online or off, your sales history from each channel is funneled into one single report.
Not Baking in Margin for Unforeseen Errors or Setbacks
We all have that friend. They enter a destination into their GPS and start their commute in order to arrive right when an appointment starts, leaving no time for traffic, accidents, or roadblocks.
Of course, we know life rarely works that way. Even with the best-laid plans, stuff goes wrong (and stuff goes wrong quite often in the world of inventory management).
Accidents, natural disasters, and severe weather conditions can interrupt your inventory operations.
All you have to do is turn on the news to see a real-life example. The semiconductor shortage that began around the COVID-19 lockdowns is still having seismic ripple effects on the marketplace.
Worse still, you cannot predict these interruptions, even with the most advanced forecasting and analytics solutions.
How to fix it
Your best defense against unforeseen and uncontrollable elements is to implement extra precautionary measures and margin into all your processes.
This may mean insurance against natural disasters, extra product for redundancies, or multiple manufacturers and suppliers that can act as redundancies in the case of a logistics failure.
Not Staying on Top of Inventory Checks
Few businesses check their inventory every day. Haphazard or infrequent inventory checks can lead to substantial profit losses if you’re running a large organization with a lot of merchandise.
It doesn’t have to be this way, though.
How to fix it
Schedule frequent inventory audits to minimize losses and increase efficiency in your operations. Regular stock-taking allows you to identify a discrepancy before it gets out of hand.
Besides reducing losses, regular inventory checks increase visibility and clarity on your stock levels.
Inventory audits get a bad rap, but they don’t need to be the stuff of nightmares. Check out our guide on inventory auditing to go deeper.
Relying on Manual Data Collection
There’s no easy way to say this — you’re losing money if you’re still using Excel spreadsheets or pen and paper to track inventory.
Manual documentation is labor-intensive, slow, and incredibly prone to error. On top of that, it wastes your organization’s resources and keeps your staff from focusing on other areas that can help grow your business.
Not to mention that reconciling inventory data into a single repository is serious pain and requires a lot of manual work — work that you probably don’t want to waste your time doing (or paying for).
How to fix it
Automation and technology are your friends here.
You can save significant amounts of money by investing in cloud-based inventory management software that automates barcode scanning, inventory amounts, and sales information.
Single points of failure and knowledge silos
Most organizations using automation to manage their inventory face one common problem — a lack of knowledge on how to actually leverage those automation tools.
This translates to delayed orders and late shipments when only one or two people know how to operate the system.
In systems theory, this is called a “single point of failure.” In other words, if one of those employees leave, all the knowledge leaves with them.
You’ll be left picking up the pieces and hustling to get orders out on time. Which, of course, directly affects revenue, customer acquisition, and lifetime value.
According to one survey, 69 percent of customers are less likely to buy from you in the future if you delay their order by two days of the promised delivery date.
And if you think replacing these customers is easy, you may want to know that the cost of acquiring a new customer is 25x more than retaining an existing one.
How to fix it
Train your entire team on your inventory management processes early and often. And do yourself a favor — choose a solution with an easy learning curve.
Inefficient Warehouse Procedures
Inventory management is one of those disciplines that’s equal parts cerebral and physical. So much planning goes into proper inventory management, and yet the rubber really hits the road out on the warehouse floor.
It’s not unusual to find warehouse managers who don’t know how to manage inventory efficiently.
This may manifest itself in an inefficient warehouse layout, impractical picking and packing procedures, or unsafe working conditions.
How to fix it
Strive to make small, incremental improvements to efficiency in your warehouse. For instance, you can identify fast-moving goods and place them near the shipping area.
Further, you can store high-value products in high-visibility storage areas in your warehouse to reduce theft.
We know that every second counts in the warehouse. That’s why we’ve built intelligent picking paths into SkuVault that show warehouse workers the most efficient way to pick product (and exactly where to find it).
Overstocking your warehouse
The more merchandise you have, the more space you need. This might not be good for business, especially if your warehouse is leased (or you’ve got perishable products).
Further, it costs more to conduct comprehensive inventory audits and controls when you have a large inventory, potentially forcing you to hire support staff to work at your warehouse.
What’s more, by overstocking, you run the risk of holding dead stock, either because you can’t sell it or because it spoils (in the case of some consumables).
Remember fidget spinners? That trend died just as fast as it came, and it no doubt left several ambitious eCommerce businesses saddled with an unsellable inventory.
Finally, when you have excess inventory, you’re tying up capital, which can compromise your business decisions, especially if you’re working with tight budgets or small margins.
How to fix it
While having enough inventory is essential for creating a positive customer experience, decide whether carrying excess merchandise makes sense. If it’s not, determine what’s “too much” or “too little” and find a balance.
To determine your ideal inventory amounts, start by checking out our guide on calculating average inventory formula.
Then, you can read this post on the value of intelligent inventory reduction.
The Bottom Line
Good inventory management involves a wide range of interconnected disciplines and directly impacts revenue and customer satisfaction.
Trying to manage inventory with manual processes is a recipe for wasted money and unhappy customers.
Leveraging an inventory management system (IMS) like SkuVault to help you manage your inventory will help you:
- Monitor and consolidate inventory and sales metrics across all channels
- Forecast order trends
- Generate paperless picklists that improve warehouse traffic and eliminate waste
But most importantly, SkuVault — in concert with a good inventory management strategy — will help you avoid the mistakes highlighted in this post.
SkuVault helps you work on your business as opposed to in your business. We’d love to show you how to level up to eCommerce or inventory-based business — click the button on this page to schedule a live demo.
