5 best practices for retail inventory management

What’s in store?

The processes and styles of retail inventory management can vary from store to store, manager to manager and company to company. There are shops that operate on a basic spreadsheet, logging items in and out as they sell or receive more. There are small businesses that purchase a dedicated inventory software system. And larger companies use an electronic data interchange system that ties in with their warehouses, using their ERP software to drive the entire operation.

If you’re operating a retail store or chain of stores, you want to start practicing solid inventory management techniques.

And if you’re not, but you plan on growing, it’s important to establish some rules and practices up front and then stick with them. They’ll lay the path for all future growth, and it’s easier to grow into a solid system than to start over when you get too big for a spreadsheet-and-seat-of-the-pants process.

Related: 5 tips for effectively managing eCommerce inventory

5 best practices for retail inventory management

Wondering where to start when it comes to inventory management? Here are five best practices to get you started off right:

  1. Use an electronic data interchange (EDI) system.

  2. Automate your retail inventory management.

  3. Practice order-to-shelf inventory management.

  4. Pay attention to POS analytics.

  5. Share your analytics with your suppliers.

Read on for a detailed look at retail inventory management best practices.

1. Use an electronic data interchange (EDI) system

Are you still making purchase orders through email or fax? Do you have a staff of people whose sole job is to compare all the paperwork for a single transaction — purchase order, advanced shipping notification, packing list and invoice — and make sure they all match before you pay an invoice? Do you often run out of products before you’re aware there’s even a problem?

This is where an EDI system can make all the difference in your performance.

 

While it may not be necessary for the small store that gets a single caseload of a product every month, retail operations like grocery stores, clothing stores or any kind of store with more than one location can benefit from an EDI system to automate their ordering and inventory system.

With an EDI system, you can send a purchase order to a vendor, they’ll respond with a purchase order acknowledgement, followed by an “advanced shipping notification” telling you what they’re sending. The packing list will be automatically generated, barcode-scanned based on what they picked and packed. Your warehouse personnel can scan the list and confirm the contents as they unload. A few days later, the invoice will appear, and the EDI’s artificial intelligence system will be able to confirm that everything matches, and schedule your payment.

This will all happen automatically via the EDI software, without a single person getting involved unless there are problems.

While that manual process might require a department of 10 to 12 people, an EDI system can handle an entire retail chain’s purchasing functions with one or two people. This lets you reduce staffing costs, re-assign people to other areas and cut down on delays in ordering and payments.

2. Automate your retail inventory management

Retail Inventory Management Computer

One of the exciting things about an EDI system — in case you actually find retail supply chain software exciting — is that you can actually set it to monitor the inventory levels of your different products, so you can reorder things you’re about to run out of before you actually do.

For example, if you sell athletic equipment and you regularly sell out of women’s running shoes at varying times, it doesn’t make sense to reorder the same number of shoes every two weeks. Similarly, you don’t want to do a twice-daily check of your running shoes (and all your other popular items) to see if need to make any rush orders. And you certainly don’t want to find out that you ran out just as you sold your last pair right before the weekend. This is where automating your inventory can help.

You can set up your inventory management system to alert you when you’re down to 10 percent of your full inventory so you can place a refill order.

You can even make your life easier by setting up an automatic reorder of those most popular evergreen/non-seasonal products that you’ll always need. Then you never have to worry about accidentally running out and finding out when it’s too late.

Related: Inventory management 101 for small business owners

3. Practice order-to-shelf inventory management

Order-to-shelf (OTS) inventory management is a new trend that many grocery stores use as a way to reduce their storage, as well as their labor costs. Think of it as “just-in-time (JIT) inventory,” like automotive manufacturers practice as part of their Kaizen manufacturing processes.

In JIT inventory, there are no inventory stocks of products.

 

They arrive only on the day they are needed, and they’ll run out at the end of the day in time for a new truckload to arrive at 8 a.m. the next morning. In a grocery store, this could mean ordering only the number of eggs you’ll need for a single day and then having the new order come in the next day.

In an OTS system, warehouses pack items based on a store’s layout and their particular inventory requirements. They don’t send the exact same number of items to every store — some stores may not need another four cases of green beans, and they don’t know what to do with the three they already have.

OTS reduces spoilage, cuts down on storage costs and avoids tying up cash resources. Everything shows up just in time, rather than piling up in the back cold storage areas.

Instead, the warehouse packs pallets based on what a store actually needs, and builds a pallet for each aisle of the store. This way, you don’t have the canned vegetables and the frozen pizzas on the same pallet, even though they’re 10 aisles apart.

4. Pay close attention to POS analytics

What are your best-selling products? Do they have a seasonality? Do certain products perform better when they’re placed near other products? Do you have different stores that perform better in particular locations? These are all questions that can easily be answered with a point of sale (POS) analytics system.

You can keep track of your inventory levels and set ordering alarms, but you can also see which products are performing well and which ones are performing poorly.

POS analytics help you make smarter decisions on the inventory you’ll need for a period of time. If you have a top seller, you can see how many units are selling per day or per week. Similarly, if things are moving slowly, you can run the same counts and compare it to your normal sales rate.

Retail Inventory Management Analytics
Photo: NEC Corporation of America on Visual Hunt

POS analytics also can show what you should stock and which items aren’t performing. This helps you make decisions, such as cutting the bottom 10 percent of performers and bringing in new, better-selling products that will bring your store more profitability.

5. Share your analytics with your suppliers

It’s actually a good idea to practice some transparency with the vendors who are plugged into your EDI system. Let them see how their own products are performing throughout your different stores. Right now, they only know how many units they sold to you. They don’t know what happened beyond that.

If you’re willing to share, ask that they share their own sales trends with you as well.

 

This way, you can get an idea of how well your stores perform against your competitors in other regions. For example, if you see that your vendor’s summer swimwear products are performing well in Florida in February and March, but you don’t start stocking them until April, you can start stocking them in time for spring break.

Similarly, your smaller tier two vendors can keep an eye out on each of your stores for you.

This is especially important for stores that have thousands of products and SKUs on their shelves. You probably have enough trouble paying attention to the performance of the tier one vendors, so let your tier two vendors alert you when there are problems, like a single store that hasn’t moved a single unit when all the other stores are moving products at a normal rate.

Related: Manufacturers: Use the web to minimize your losses on excess inventory

Establish inventory management rules early

When you have clearly defined processes for how inventory will be updated and you stick to them, it’s easy to set up the rules and then ignore them because you think you can do it later. But your inventory is the lifeblood of your business.

If you run out of a product or something is expiring and you don’t know it, you’re going to have a big problem.

Establishing those processes and following them to the letter is important. As you grow, re-evaluate them every six months and make sure they still work. Find ways you can improve your retail inventory management processes so you can either reduce costs, improve fulfillment times or reduce out-of-stock occurrences. Adopt an EDI system that will let you easily find and connect to vendors and share critical data with them. And if you’re still fairly small, start establishing these practices now so you can grow into them.

Erik Deckers
Erik Deckers is the president of Pro Blog Service, a content marketing agency. He is also the co-author of Branding Yourself, and No Bullshit Social Media. Erik has been blogging since 1997, and has been a newspaper humor columnist for over 20 years. He has written several radio plays and stage plays, and numerous business articles. Erik was recently the Spring 2016 writer-in-residence at the Jack Kerouac House in Orlando, FL.