Understanding Supply Chain & Inventory Management
Knowing how to keep proper management of your inventory will allow you to minimize waste and maximize your profit. When it comes to inventory, the two issues you will come across are either having an overstock or understock of parts.
Overstocks (Having too much of a product in inventory you can’t sell) and Understocks (running out of stock) cost the retail industry alone 1.1 trillion dollars in annual losses. This problem is not endemic to the retail industry alone, every industry that deals with physical products runs the risk of these issues.
Overstocking is often the result of panic buying a product in high demand or ordering too large an order off incomplete or incorrect data.
Some of the side effects of having too many of a part on hand include:
Storage Costs – This might not affect you too much if it’s a small part, but once you order too much of a large part, you’ll need to rent space in warehouse. This can be an unnecessary drain on your finances, and the costs can add up in the long run, depending on how much space you’ll need.
Depreciation – In most situations, the longer you hold onto a part, the more it will decrease in value. Through natural forms of decay such as rust, rot, mold, etc, your parts might lose value. The longer you hold onto them, the larger the chances of them getting damaged, either through transport, a clumsy warehouse worker, or other elements.
Or they might simply become outdated over time as newer, more state of the art parts replace them.
Understocking can result in running out of inventory on a product. Companies that consistently run into understocked or out of stock parts are either not paying to their inventory numbers or are trying to control their inventory too tightly because they are afraid of running into a surplus of parts and thus wasted money.
What you can expect to see with an understock of parts is:
- Loss of Sales – Obviously you can’t sell what you don’t have, and that leaves your customers little option but to go elsewhere
- Missed Discounts – Most companies that run into understocked inventories generally place several orders of small quantities, trying to keep a tight control on the amount of wasted product. However, ordering in large bulk quantities allows you to get cheaper unit prices than several smaller order quantities. Additionally, shipping prices are cheaper when a few large orders are placed compared to several smaller ones.
- Lost Customer Base – Unless you have an extremely popular and unique product that people are willing to wait for until stock becomes available such as the PlayStation 5, whose demand is through the roof but is constantly out of stock, your customers are going to be forced to choose alternative products – which means your competition. If you are consistently out of stock, you’ll very likely alienate your customer base.
Tracking Your Inventory
Keeping track of how much you are selling a product will provide invaluable information. Try to have at least a monthly record of the amount of the item you are keeping record for. Over time, this will allow you to establish and recognize new patterns.
For example, if I was selling swimming pool equipment, I’d probably notice that most of my sales came in the summer. If I sold 800 swimming vests in June, 1000 in July, 1100 in August, and 900 in September, then over the course of the summer I sold 3800 swim vests. If I had years recorded of the amount of swimming vests I sold, then I could look back and get some prediction on whether I could expect to sell more or less the next year, which would dictate how many swimming vests I’d want to have on stock for the next summer.
How many parts you order will become something of a balancing act based on your inventory numbers. You don’t want to waste money on a huge surplus of unneeded parts, but you really don’t want to go out of stock either. Over time, you’ll develop a feel for how many parts you need and when based on the information you keep.
Another reason you want to keep track of your inventory, and this is especially important with international trade, you need to order far enough ahead to make sure you receive your product in time. Production time in China could be 2 months for your product, then sea shipping could be another month, and you also need to account for delays too. You really don’t want to reach an understock of inventory and then have to wait 3 months for your stock to replenish.
Some industries have requirements that will force you to track your inventory. Sometimes parts that came from certain batches of material have to be logged and tracked. In the case there is a problem with a part, the rest of the parts made from that material batch may have to be recalled.
How to Track Your Inventory
You don’t have keep track of what you have manually. Technology has the inventory process. You can use a POS (Point of Sale) system such as Square, Lightspeed, or Revel to track your inventory. Every time a customer orders a specific product from you it would be automatically logged and recorded. It would be wise to do an inventory audit every so often just to confirm the amount you have on stock matches what your sales should be.
Or you could have a company handle inventory management by using a distributor. They will handle warehousing, inventory management, and shipping to customers. This will allow you to order when they let you know they’ll be needing replacements and focus on marketing and selling your product, rather than be heavily involved with the logistics.
We’ve partnered with a distributor company that can handle inventory management and logistics for you if needed, so all you have to do is order through us and focus on reaching your customer base. We want to make sourcing and importing as easy as possible for you, and will guide you through every step of the way.