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Small Business Inventory Management and Optimization Tips

Nov 6, 2018

One common reason companies go out of business is the lack of adequate funding to meet a surging demand of customers. However, smart businesses take advantage of options such as reducing inventory to meet demand or seeking funding to scale operations.

These tips can help you properly manage inventory to provide an opportunity to prevent your company from going under.

Setup par levels

Par levels are the minimum amount of product that must be kept on hand in order to meet estimated demand. This task will provide the backbone of all operations. But for new businesses, determining the precise par level or amount of inventory can feel like a guessing game.

Factors to consider when setting up initial par levels include your supplier speed and the time it takes to restock products, the estimated demand based on industry average or historical data, and the purchase cost of your goods.

Maintain strong supplier relationships

Interpersonal skills are crucial even in logistics, as developing a good supplier relationship can mean the difference between make or break for your business. The strength and duration of such a relationship can help lead to more favorable negotiations, if not on price then on other benefits such as a minimum purchase quantity.

One intangible benefit to consider is the responsiveness of your supplier’s customer service team. For example, the willingness and speed to process the return of a defective product could decide whether your current inventory is sufficient or if another costly order will be needed.

FIFO rule

One of the golden rules of inventory management is the “first-in, first-out” policy or FIFO, meaning that older inventory gets sold before newer inventory. It is an intuitive concept to clear out the warehouse as soon as possible because there is a cost to hanging on to products for too long even if they have a long shelf life.

While perishable goods are prime candidates for implementing FIFO, even the most durable products are prone to being worn out, susceptible to damaged packing, or lack features that make them harder to sell down the road. All organizations should strive to reduce unnecessary “spoilage” of inventory by following the FIFO rule.

Contingency plan

Logistical nightmares can plague even the most efficient operations, from a demand spike to running out of storage space to a supplier not delivering an order on time. Whether a disruption is caused by technological failure, employee error or another external factor, the impacts can be immediately addressed and mitigated with a proper contingency plan.

To create a contingency plan, you should have an idea of some of the most common inventory emergencies and also analyze which scenarios would be the most detrimental to your business. For example, an industry with a competitive supply chain would be impacted less than an industry with a monopoly on supplies inventory.

Forecast demand

Modeling the future expected inventory demand would improve business efficiency and ensure that your business is overstocking or understocking. Some effective strategies to forecast demand include analyzing sales from prior periods, counting guaranteed sales and orders for subscription-based businesses, and using market trends or economic factors to determine which types of products consumers are more likely to purchase.

The wealth of available customer data and the rise of analytics trends can make it easier to predict future purchases and therefore required inventory. However, a study from PWC also concluded that the trend of digital purchases had created a potential disruption in the logistics industry due to the increase of customer expectations for customizable products.

Therefore, modern organizations must optimize their inventory management to be able to respond to customer demand quickly.

Use inventory management software

There are far too many moving pieces to effectively operate your business without the use of an inventory management software tool. The most useful features to help manage inventory include direct integration with your point-of-sale (POS) system, multi-location management across different operations or facilities, and real-time inventory tracking.

From purchasing a reliable inventory management software to securing a crucial purchase order, Reliant Funding can provide the capital needed to bring control into the hands of your business operations.


$3,098,641,569 dollars funded