Inventory management can seem like a mystery to a new business owner. How do you guarantee you’ll have enough product on hand without swimming in overstock? Part of this knowledge comes with time, but e-commerce inventory management strategies can also help. Here’s what you need to know about inventory management in retail.
3 Inventory Management Strategies to Know
Plenty of tools, services, experts, and apps can help small business owners manage inventory, but you need to understand the concepts before searching for a solution. Here are three crucial inventory management terms for small businesses.
1. Economic Order Quantity (EOQ)
Suppose your holding costs, demand, and ordering numbers remain relatively consistent monthly. In that case, you can determine the amount of stock to order from your suppliers using the economic order quantity (EOQ) formula.
The formula for EOQ is as follows: the square root of 2*(annual demand in units multiplied by order cost per purchase order) divided by holding cost per unit per year.
Using EOQ for restock management will ensure you have the right amount of stock on hand while minimizing your ordering and holding costs. Instead of being reactive and only ordering when stock runs low, you can place regular orders while balancing the cash flow tied up in inventory.
2. Open-to-Buy (OTB)
For situations with less consistent monthly numbers, open-to-buy is another e-commerce inventory management strategy to know. This method examines your expected inventory at the beginning and end of the month, considering any planned sales or markdowns that may impact sales and profits.
To calculate your open-to-buy inventory budget, add your projected sales amount during a specific period (such as one month) to the total amount of discounts planned during that period. Then, add the dollar value of your estimated remaining inventory at the end of the period, and finally, subtract the dollar value of your inventory at the beginning of the period.
Open-to-buy is helpful for businesses with many SKUs, holiday seasons that see increased orders, companies rapidly expanding their product offerings, or supply chains with long lead times.
3. Safety Stock
It’s important to keep safety stock on hand to ensure lost sales are running out of product. Safety stock is a supply of products kept for times when you’re running low. Replenishing your stock will result in downtime for your business. Having safety stock on hand will protect your business from sudden spikes in demand and delays in the supply chain.
To calculate the amount of safety stock you need, multiply the highest number of units you’ve sold in a single day by the longest time it has ever taken for your stock to be delivered. Then, multiply the average number of units sold daily by the average time it takes to receive the stock. Subtract the second number from the first, leaving you with your safety stock.
These inventory management strategies can help your small business come out on top. Over time, you’ll better understand your sales numbers and when to order more stock.
Retail and e-commerce inventory management is just one element of running a successful small business. As an executive coach, I’ve helped countless clients improve their processes for continued financial success. For more leadership and organizational management tips, click here to sign up for my weekly business articles.
Coach Dave
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