Maintaining optimum inventory levels for your online retail business is often easier said than done. Customer demand can be sporadic and unpredictable at the best of times.
Stock too much and you risk increasing your costs, but stock too little and you risk running out of a product entirely. Striking the perfect balance is by no means an easy feat.
Below, we share how to reduce stock levels and avoid stock outs so that you can continue to manage your inventory and grow your business.
Your lead time is the delay between your purchase order and the actual delivery date by the supplier and is of critical importance.
The sole purpose of your inventory is to cover the lead times of your suppliers.
After all, if they were capable of teleporting goods into your warehouse – zero days of lead times – then your business wouldn’t even need to hold inventory in the first place.
Your aim is to make your lead times as short as possible, so that you can meet customer demand and minimize the time between paying for stock and receiving the revenue.
This way, you maintain accurate stock levels within your inventory and avoid stock outs.
Trying to maintain the balance between overstocking and understocking can be challenging.
If you stock too little, then you might experience stock outs, and this can lead to unhappy customers and a potential loss of sales.
On the other hand, if you stock too much then you’ll be taking up valuable warehouse space and will likely incur additional charges.
Fortunately, inventory management software can help prevent this from happening.
You can track low inventory levels and quickly identify the reorder points for each of your products, in turn avoiding the occurrence of stock outs.
A reorder point is the level of stock that you don’t want to go below.
An ideal inventory reorder point also includes the time it takes to make a new order before your stock reaches the threshold.
In other words, when the stock level for one of your products is about to reach the reorder point, a replenishment order should be placed immediately.
The benefit of using reorder points is that you never experience stock outs.
There are three steps involved in calculating your inventory reorder point:
The formula is as follows:
(Average daily usage rate x Lead time) + Safety stock=Reorder point
It’s likely that your reorder points will be different for every individual product that you sell – items are likely to have different demand rates and vary in how long it takes to receive the replenishment delivery.
Another way in which you can reduce stock levels and avoid stock outs is through using accurate demand forecasting.
Forecasting demand from reports and historical sales data allows you to order just enough stock to satisfy demand throughout the year and reduces your cost of inventory as you won’t be overstocking or understocking your warehouse.
In addition, predictive data analysis better equips you to make business decisions based on previous months – helping you to estimate the correct size of your inventory.
This way you don’t order too much stock and you don’t risk being too low on inventory.
Closely monitoring your sales trends helps your business to reduce the likelihood of carrying excess stock that you’re unable to sell.
Vendor managed inventory (VMI) is when a retailer shares specific data with their supplier, and it is agreed that the supplier maintains an agreed inventory level of a product.
As a retailer, this removes the burden of daily inventory management and product reordering and means that you can focus your efforts on growing your business.
A VMI system ensures that you always have a steady stream of inventory and that your products are always in stock – removing the risk of stock outs.
You no longer need to reorder products at the last minute nor do you need to worry about whether your suppliers have the ability to restock without interrupting your operations.
A vendor managed inventory also goes some way in helping you to reduce stock levels.
As your supplier now manages the resupply lead times, you don’t necessarily need to maintain a large amount of safety stock, leading to cost savings for your business.
Just in Time (JIT) inventory management is a method for maintaining almost no inventory in your warehouse – ordering everything you need at the moment you need it.
In other words, JIT means having the right products, at the right time and in the right place along with any other materials needed.
It reduces your stock levels as items and materials are only ordered when they are required, rather than months or weeks in advance. This also reduces your cost of inventory.
Ordering inventory on an as-needed basis also means that you don’t need to hold any safety stock and your warehouse operates with continuously low stock levels.
However, while JIT reduces your inventory significantly, it can result in stock-outs.
For example, if there was a sudden and unexpected spike in customer demand for a particular product then you may not be able to fulfill the orders as expected.
You can minimize this risk by developing strong relationships with your suppliers.
Consignment inventory is different from traditional inventory practices in the sense that the supplier retains ownership of the stock until it has been sold to the customer.
In other words, the retailer doesn’t pay for the product until it has been sold.
In turn, this reduces your stock levels and shifts inventory carrying costs from your business to your supplier or manufacturer. It’s a fairly common practice for big-ticket inventory in retail, such as furniture or other large items.
Use of consignment inventory practices can be particularly beneficial to online retailers when customer demand for certain products is uncertain.
On top of this, the retailer takes a much smaller financial risk with consignment inventory as he or she does not pay for the product unless it has been sold.
Stock outs stem from many different factors, including fluctuating customer demand, inaccurate forecasts and variability in lead times.
One way in which you can mitigate the risk of stock outs happening for your business is through maintaining a safety stock level of your inventory.
Safety stock is simply extra inventory that is carried to prevent stock outs.
The correct levels to set depend entirely on your business. Some operations managers will base it off a portion of cycle stock level (e.g. 10% or 20%) while others use hunches.
Find out how to calculate your safety stock.
In a sense, safety stock acts as a buffer in the event of a stock out – but may not prevent all stock outs from happening.
Striking the balance and maintaining just the right amount of inventory for your business is by no means an easy task. In fact, it can take a long time to perfect your stock levels.
By keeping an eye on your inventory and using the above tactics to reduce stock levels and avoid stock outs, you can gain a much better understanding of how much you need to stock.
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