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3 Classic Pitfalls of Retail Inventory Management

Aug 22, 2016

#1 Fuzzy priorities

Analyzing all the details of every inventory item can be an impossible burden on your internal resources. Many small business owners simply can’t afford to devote the regular time for inventory analysis at this granular level. If this is the case, some merciless prioritizing is in order.

The solution: inventory triage

Some inventory items require your attention more than others. A good rule of thumb is based on the Pareto principle, also known as “the law of the vital few,” an observation that for many different kinds of events, 80% of the effects come from 20% of the causes. You made have heard this as a maxim in business—80% of your sales comes from 20% of your clients.

The same is true of your inventory: for most retailers, 20% of your items will generate 80% of your demand. Focus on these top-tier items first, and then bracket your next-best selling items into lower tiers that require less review and only occasional reordering.

#2 Diffusion of responsibility

Many small businesses let whoever is standing near the door at the time accept inventory shipments, which can lead to confusion. If a discrepancy arises, with which employee does the fault lie?

The solution: a dedicated inventory receiver

Most small businesses don’t have the luxury of hiring an inventory control manager. Even if you do your own inventory management, try to assign one of your staff to be an inventory “gatekeeper” (or take on this task yourself). This role should include auditing stock shelves regularly; this creates a mechanism that will raise a red flag in case of theft, miscalculation or clerical error.

Fun fact: U.S. retailers lose about 1.3% in sales every year to shrinkage (translating to over $50 billion). Administrative or bookkeeping errors account for 23% of this while internal, employee-related causes (theft of inventory, 37%; theft of cash, 20%) are an even bigger problem.

#3 Inventory overkill

If you’ve ever felt the burn of lost sales, or even customers, by running out of your best-selling items, it’s easy to make the mistake of trying to compensate by spending too much on inventory afterward. This is an easy way to burn through your working capital without seeing an adequate return.

Overstocking can also stunt your profits. Old stock can be hard to move, and once it’s in the warehouse it’s vulnerable to damage and depreciation. Stale or unmovable inventory accounts for billions of lost U.S. retail dollars every year.

The solution: put more emphasis on forecasting

Good inventory management is the key to making wise decisions that prevent overstocking, overselling, bad pricing, and tied-up cash flow. While larger retailers have the luxury of using complex distribution systems and large warehouse systems that let them accommodate more inventory for longer periods of time, smaller businesses with financial and space limitations have to keep an eagle eye on inventory. It’s essential that you or your inventory manager has an intimate understanding of your sales trends.

Curb the temptation to overspend on inventory by spending some time creating projections for your demand. Start by analyzing what you’ve sold in the past, and then look at seasonal trends. If you’ve already got a strong cash flow forecast and budget, you are already well on your way to being able to detect less obvious trends, like sales spikes at the end of the month.

Stale inventory should be regularly eliminated. There are the traditional special offers like the half-off or 2-for-1, which will keep your customers happy. Consider other unusual types of discounting, too, as well as charitable donations and barter exchanges with other businesses.


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