10 Inventory Management Best Practices for Improving Your Business

Posted on November 11, 2017 by dearsyst

Are you managing your inventory as effectively as possible?

It’s OK if you’re not.

Most businesses have plenty of areas to improve, especially in their warehouses.

But if you don’t begin the process of upgrading and streamlining your business operations now, you’ll easily slip into bad habits, inefficient practices, and a high cost of inventory.

By following inventory management best practices, you’ll run and manage an efficient and effective business and warehouse year after year.

Inventory Management Best Practices

There are many industry-specific inventory management best practices you can follow, but there are also a few general practices that every business can benefit from.

Here are 10 inventory methods and practices that will help you optimize your warehouse processes.

1. Categorize Your Inventory Using ABC Analysis

ABC analysis is a technique for arranging your inventory into a hierarchy of most important to least important items.

Here’s what an ABC analysis would look like in practice:

– A-items are the best-selling, highest priority stock and require regular reordering and constant quality review

– B-items are valuable, medium-priority stock and usually require monthly reordering

– C-items are low-priority stock and are typically carried in high volumes with minimal reordering

Organizing your stock within your warehouse according to how they sell and how much value they bring your business will help you optimize storage space and streamline order fulfillment.

2. Optimize Your Pick and Pack Process

The pick and pack process is a set of procedures and tools that your employees use to fulfill customer orders quickly and efficiently.

Types of pick and pack processes:

– Discrete order picking

– Batch picking

– Wave picking

– Zone picking

Here are 5 ways to optimize the pick and pack process for effective inventory management:

1. Design your warehouse for efficiency by placing your top-selling items nearest the packing station

2. Keep your warehouse well-organized by cleaning every area and removing clutter

3. Implement and program a warehouse management system (WMS) so that the items picked are listed in the order the picker will find them.

4. Double check each order for accurate counting

5. Use barcodes or RFIDs on every piece of inventory for easy counting

3. Establish Your Inventory KPIs

Inventory KPIs measure your performance in a particular area over a specific amount of time toward a certain goal.

They help to eliminate guesswork by giving you clear milestones to hit every week, quarter, or year.

With them, you’ll have the data you need to make smart, strategic decisions for your business.

Here are 6 inventory KPIs you should focus on:

1. Inventory carrying costs

2. Inventory write-off and inventory write-down

3. Rate of inventory turnover

4. Cycle Time

5. Order Status and Tracking

6. Fill Rate

4. Use Batch Tracking

Batch tracking is sometimes referred to as lot tracking, and it’s a process for efficiently tracing goods along the distribution chain using batch numbers.

A “batch” refers to a particular set of goods that were produced together and which used the same materials.

Use an automatic batch tracking system in order to enter information about all the products within your batch – keeping that information at your fingertips if you need to access it quickly, as in the case of a product recall.

5. Use an Accurate Reorder Point Formula

A reorder point formula tells you approximately when you should order more stock – when you’ve reached the lowest amount of inventory you can sustain before you need more.

You can stop being a victim to market spikes and slumps by using a proven, mathematical equation to help you consistently order the right amount of stock each month.

This equation is called a reorder point formula.

Here’s a reorder point formula you can use today:

(Average Daily Unit Sales x Average Lead Time in Days) + Safety Stock = Reorder Point.

6. Carry Safety Stock Inventory

Safety stock inventory is a small, surplus amount of inventory you keep on hand to guard against variability in market demand and lead times.

Without safety stock inventory you could experience:

– Loss of revenue

– Lost customers

– And a loss in market share

What makes safety stock a critical inventory management best practice is that you’ll reap all these benefits by using it:

– Protection against unexpected spikes in demand

– Prevention of stockouts

– Compensation for inaccurate market forecasts

– A buffer for longer-than-expected lead times

7. Optimize Your Inventory Turnover Rates

The rate of inventory turnover is a measurement of the number of times your inventory is sold or used in a given time period, usually per year.

By calculating your rate of inventory turnover, you’ll have a better grasp on the market demand for your products, on the amount of obsolete stock you may be carrying, and what steps you need to take to sell or stock more inventory – depending on your turnover rate.

Here’s a simple formula for calculating your inventory turnover rate:

Cost of Goods Sold (COGS) divided by Average Inventory.

Here are 4 ways to increase your rate of inventory turnover:

1. Experiment with pricing

2. Liquidate obsolete stock

3. Forecast Customer Demand

4. Redistribute your inventory to other warehouses

8. Streamline Your Stocktake

Streamlining your stocktaking process – the steps you take to count inventory – will help you mitigate the possibility of your staff making costly mistakes.

A well-structured stocktaking process will include all the steps required to keep your staff working efficiently to uncover discrepancies and inaccuracies while keeping them engaged and focused.

Here are a couple of ways to streamline your stocktake:

– Schedule your stocktakes to reduce impact on business operations

– Clean and organize your stockroom before performing your stocktake

– Know what stock you’re counting and how you’re counting it

– Open and count absolutely everything – no guesswork allowed

9. Reduce Your Inventory

Most businesses have 20-40{cb377218d5687e54e8ee9149518f87201a393a7c1db5e8076e9d750029ec0dc3} of their working capital tied up in inventory – so if you’re closer to the 40{cb377218d5687e54e8ee9149518f87201a393a7c1db5e8076e9d750029ec0dc3} end, it’s probably time to create an inventory reduction strategy.

The goal is to find your inventory sweet spot – where you have the lowest possible inventory levels without being understocked – in order to maximize growth and profitability for your business.

Here are 3 inventory reduction methods you can follow:

1. Lower lead times by tracking your existing lead times, sharing sales data with your suppliers, and reducing minimum order quantities (MOQs)

2. Eliminate obsolete inventory by reworking or modifying your stock, offering a discount, or dating it for a tax write-off

3. Improve inventory forecasting through real-time tracking and reporting, integrated communication, and large volume inventory management tools

10. Use a Cloud-Based Inventory Management System

One of the best business-changing decisions you can make is to stop using Excel inventory management and start using cloud-based inventory management.

Unlike locally-installed applications, Cloud-based inventory management software allows you to pay for the features you need now and seamlessly upgrade when you need to in the future.

You’ll pay a single, predictable subscription fee for a “package” that best suits your particular feature needs and team size; then, upgrading is just a few clicks away when your business growth justifies a more powerful platform.

On top of stress-free upgrades, cloud software companies work in the background to make sure things continue to run smoothly, and should you need any questions answered or breaks fixed, they’ll have a support team standing by to assist you.

A Bonus Inventory Management Best Practice

Point #10 above is not just a best practice…

It’s the one tool that brings all the other best practices together.

From streamlining your stocktake to optimizing your inventory turnover rates to batch tracking – a cloud-based inventory management software will help you improve every area of your business operations.

At least, that’s what our software will do for your business.

If you’re looking for a robust inventory management solution to upgrade and optimize your inventory processes, you just found it.

Start your free 14-day trial today

Receiving Inventory Made Easy: 6 Best Practices

Posted on November 4, 2017 by

Successfully receiving inventory requires a well defined system and organized environment

Receiving inventory effectively is the first step towards successful warehouse management. If you screw it up, everything else will be screwed up with it.

This is true in any warehouse or industry, from food inventory management to retail inventory management and even online wholesale – receiving sets the tone for the rest of your operations.

By optimizing your inventory receiving processes, you’ll make it easier to meet your inventory KPIs, reduce your cost of inventory, and streamline your stocktake.

We’ll show you 6 ways you can make receiving inventory efficient, fast, and reliable.

6 Tips for Effectively Receiving Inventory

Optimize Your Receiving Space

Many inventory errors – like miscounts – will usually occur first during receiving.

One of the best ways to reduce inventory receiving errors is by appropriately preparing your dock for receiving inventory.

This sounds obvious, but many companies still force their employees to work in cramped, small spaces without the proper tools or organizational processes for successful inventory receiving.

Your dock should be designed for sorting received inventory and preparing them for storage in their designated warehouse location.

Keep Your Receiving Space Clean and Organized

In addition to having enough room for receiving inventory, the dock space should be well-organized and clean for easy access to the received goods.

Make sure clutter is removed, and all previously received inventory has been placed in storage.

Implement Real-Time Inventory Tracking Technology

Tracking your inventory in real-time will help you catch mistakes before they cause damage further down your supply chain – such as miscounts, missing inventory, or incorrect inventory being stocked or shipped.

Upgrading your Excel inventory management system to something more cutting-edge and combining it with barcode scanners and RFID scanners will allow managers and workers to accurately track inventory, check for mistakes, and quickly correct them.

Monitor Quality Control

A quality control manager is an important fail-safe to negligent employees or faulty technology.

Their job is to guarantee receiving and putaway accuracy. They can watch for mistakes, point out problematic procedures, and reduce the instances of inventory damage.

Unload Quickly and Safely

Your objective should always be to unload received inventory safely while also doing it quickly.

If you’re using forklifts, make sure the machines are receiving proper maintenance. The same goes for power pallet trucks.

Be careful when handling heavy loads by hand. You don’t want to risk employee injury or damaged goods.

You should also consider using conveyor belts to make the process of putting received goods away more efficient.

Verify the Goods Received

To avoid the costly mistake of shipping the wrong items or not having enough to satisfy customer demand, you should always check that the inventory received is exactly what you ordered.

Depending on your cargo, these are the things you should verify:

Quantity received
Description of goods
Product code
Condition of goods
Weight of goods
Temperature (for perishable items)
Batch tracking number
Serial code

Making sure everything is right the moment you receive inventory will save you from a lot of headaches later on.

One Tool for Effectively Receiving Inventory

Receiving inventory effectively means 2 things:

Creating a safe, fast, and organized process for handling received inventory
Accurately tracking your goods from the moment they arrive in your warehouse to the time they are shipped to your customer

What you need to accomplish #1 are the right procedures set forth by management and a few standard pieces of equipment.

What you need to accomplish #2 is something many companies still don’t have – a cloud-based inventory management system.

With this kind of system, you’ll be able to automate reordering to avoid stockouts, improve your stocktaking process to avoid counting errors, and easily operate multiple warehouses with various types of goods.

If you want to test this system in your business, we can help.

Make Receiving Inventory and Other Warehouse Processes Uncomplicated

Our cloud-based inventory management system will allow you to know your stock levels in real-time, generate reports for future forecasting, and integrate with the rest of your business apps for painless accounting. From purchasing to receiving to sales, DEAR Inventory will help your business run smoothly.

Start your free 14-day trial of DEAR Inventory today!

Try DEAR for Free

No Credit Card Required

Cross Docking: What It Is, How It Works, and If It’s Right for You

Posted on October 28, 2017 by

Cross docking eliminates the need to hold inventory – improving speed and efficiency.

See if you can answer this question:

What does the U.S. military and Walmart have in common?

Here’s a hint:

They both value efficiency and expediency.

Still don’t know?

Alright, we’ll tell you.

The military and WalMart both used cross docking to improve the effectiveness of their organizations.

They both run operations on a massive scale, and they both look for any tools they can use to streamline their logistics.

Cross docking handles all of that for them.

And it can do the same for your business.

We’ll show you what cross docking is, how it works, and its pros and cons.

By the end, you’ll have a much better grasp on whether or not cross docking is right for your business.

What is Cross Docking?

Cross docking is a system that virtually eliminates the need to hold inventory.

Products are delivered to a warehouse where they are sorted and prepared for shipment immediately – usually being reloaded onto other trucks stationed at the same warehouse.

While cross docking does expedite the shipment process, you shouldn’t skip critical steps like quality control and inventory tracking. It still requires a lot of careful planning and handling.

Which brings us to the next question…

How Does Cross Docking Work?

Cross docking isn’t complicated, but it’s not easy.

It requires military-like precision and perfect organization (it’s no wonder the U.S. military started using it back in the 50’s).

Here’s how it work:

Truckloads arrive at the entrance docks to the warehouse
The goods are unloaded and sorted and loaded into trucks waiting on-site
The newly loaded trucks deliver the goods to the customers

That’s pretty much it.

You can pick and choose what products you want to cross dock and what products you want to handle traditionally.

If you own your warehouse, you’re in complete control.

If you outsource your warehouse and shipping, you can talk to your 3PL provider about implementing cross docking in your business.

Now let’s take a look at the pros and cons so you can decide if cross docking is the best solution for your business.

Pros of Cross Docking

Greater Efficiency

Cross docking is made to be a quick and speedy process for distributing your goods.

The only way to make cross docking work is by simplifying and streamlining your loading and unloading systems to swiftly move goods from one truck to another, which results in faster shipments to your customers – a powerful edge over your competition.

Reduced Warehouse Cost

Cross docking provides a dramatic reduction in your cost of inventory.

There’s virtually no stock that you’re storing for any length of time – everything is transferred from one truck to another, almost immediately.

You might hold a few items while waiting for a truck, but if it’s in your cross docking warehouse, that means it will be leaving just as soon as it arrived.

When you cross dock, you simply receive the products, scan them into your OMS, and then ship them off.

No inventory to worry about becoming obsolete. No reordering. No stockouts. No shrinkage.

Reduced Labor Cost

With cross docking, you no longer have to pick and put away stock.

This equals a major reduction in labor costs. Less work required means fewer workers needed.

Decreased Lead Time

Lead time reduction is a significant benefit to cross docking.

Your products are being moved faster and more efficiently, which means they’re reaching your customers more quickly.

This improves your customer service and reputation for fast delivery times.

Cons of Cross Docking

High-Cost of Precise Organization

Precise organization demands high-quality technology, efficient work processes, and fast workers.

You may be saving money on inventory and warehouse costs, but you’ll have to buy forklifts, pallet trucks, conveyor belts, and anything else required for smooth and speedy operations.

You may also need electronic data interchange (EDI) to streamline the purchasing process and SCM software to track your goods from suppliers to your docks and onto your customers.

And, because multiple deliveries happen throughout a single day, every product has to be unloaded and reloaded within precise time slots. Otherwise, the dock will become congested, leading to potential damage or loss of goods.

Increased Cost of Trucks and Docks

Cross docking relies on a fleet of trucks and other transport carriers.

You’ll need space outside the warehouse to house the trucks if you plan on owning them and not outsourcing them.

Similarly, you’ll still need to purchase docks to implement this system.

Suppliers May Not Be Able to Do Cross Docking

Some suppliers may not be able to handle the tight deadlines that cross docking demands.

There’s very little room for error in both quality of goods and lead time. If you want to make cross docking work, you should have trustworthy and reliable suppliers.

Inefficient for Low-Turnover Businesses

If you’re selling office supplies, for example, and your rate of inventory turnover is relatively low, then you don’t need to invest in cross docking and the tracking technology, transportation carriers, and warehouse space that comes with it.

Cross docking is best used by high turnover businesses in industries like food, medical, and retail fashion.

How to Know if Cross Docking Is Right For You

Cross docking requires efficient organization, streamlined transportation processes, up-to-date technology, high turnover, and low lead time.

If you can handle that, or find a 3PL that can provide it, then cross docking is right for you.

If you can’t handle those things, then perhaps you should stick with a more traditional warehouse approach.

Of course, if you do choose a more traditional approach, you’ll probably need a cloud-based inventory management system along with a few other tools for effectively running your business – in which case, you’ll need DEAR Inventory.

What You Need if You’re Not Cross Docking

If you’re running a traditional warehouse, you’ll need software that can easily manage growing product volumes, streamline your stocktaking process, integrate with critical business apps such as Xero and WooCommerce. Our cloud-based inventory management system will give you real-time insight into your inventory levels, automate reorders, and generate reports for accurate forecasting.

Start your free 14-day trial of DEAR Inventory today!

Try DEAR for Free

No Credit Card Required

9 Tips for Better Retail Inventory Management

Posted on October 14, 2017 by

Effective retail inventory management can save you loss revenue and even your business

Retail inventory management isn’t fun.

You don’t get the thrill of interacting with your customers or the excitement of setting up marketing materials for the new brand you just rolled out.

Instead, you get late nights performing your stocktaking process and sorting piles of purchase orders and sales reports.

Although retail inventory management is the last thing you ever want to do, it can make or break your business…

Walmart lost $3 billion in 2013 because they were constantly out of stock.

If they were anyone but Walmart, they wouldn’t be in business anymore.

If you can’t effectively manage your inventory, then you’ll certainly lose revenue and may actually go out of business.

To help you keep your business and grow your revenue, here are 12 tips you can use to improve your retail inventory management.

9 Tips on Retail Inventory Management

Reduce Your Lead Time

You can prevent the kind of stockouts Walmart suffered from by implementing lead time reduction strategies.

The faster your stock arrives, the less you need to worry about not having enough inventory to fulfill your customers’ orders. Making your customers happier, and giving you a competitive edge in the market.

Decrease Product Range

If you’re carrying too many items that aren’t selling, it’s time to narrow your focus.

An overabundance of inventory dramatically increases the cost of inventory because it leads to holding obsolete products that you’ll have to discount, bundle, or donate later. And all that extra stock takes up valuable storage space for products that people do want to buy.

In contrast, a smaller inventory will dramatically decrease your inventory costs, which will help you avoid holding excess inventory. And, you can now enjoy the flexibility to test a few new products if you want, all while saving the majority of your space for your best-sellers.

Automate Inventory Receiving

Efficient retail inventory management begins the moment your stock arrives.

Your warehouse managers and employees shouldn’t have to think about what to do once they receive a shipment.

Either delegate this process to a small group of people who always handle incoming shipments, or if your business is fairly small, make sure your whole team understands the procedures to follow.

Increase Your Rate of Inventory Turnover

Increasing your rate of inventory turnover will make retail inventory management much easier.

First, the more inventory that leaves your warehouse, the less inventory that you need to manage inside your warehouse.

Second, a high inventory turnover rate means you have a clearer idea of what’s selling and what’s not. With this data, you can focus on only stocking items that you know will sell.

Third, a high rate of inventory turnover helps you prevent holding on to obsolete stock, thereby reducing your total cost of inventory.

Loss Prevention Tags

It doesn’t matter how big or small your store is…

Some people will steal from you.

To prevent significant revenue losses like this, it’s helpful to install theft prevention devices like loss prevention tags.

Using these tags on high-end items or in-demand items can help you stop theft before it happens.

Forecast Future Demand

The better you are at anticipating future demand, the higher your sales will be – making retail inventory management much easier.

Instead of worrying about what will sell, you can look at past sales during different times of year and forecast what will sell, and order more of those items and less of others.

But sales reports are only one way to forecast customer demand.

Here are a few other things you can do:

Conduct customer research
Survey customers
Listen to experts in your industry
Listen to your sales staff or other key people in your company
Pay attention to seasonal trends

Hire the Right Employees

Retailers lost $60 billion in shrinkage in 2015.

What was the biggest cause of their losses?

Their employees.

This statistic comes from the US Retail Fraud Survey. Of all the reasons for shrinkage, 38{cb377218d5687e54e8ee9149518f87201a393a7c1db5e8076e9d750029ec0dc3} was cited as “employee theft.”

Any kind of shrinkage will disrupt your retail inventory management, and theft is no exception.

When hiring employees, make sure to check their background, check their references, speak with their previous employers, and foster good relationships with them to avoid creating disgruntled employees.

Set a Consistent Stocktaking Process

Creating a consistent stocktaking process is a huge part of managing your inventory.

It helps you identify problems before they get out of hand, informs your ordering and stocking decisions, and helps you forecast demand.

Unfortunately, many businesses are still using the outdated method of Excel inventory management, which brings us to our final tip…

Use Inventory Management Software

A cloud-based inventory management system will streamline your stocktaking process, automatically update your inventory information based on your purchase orders and sales, and will generate real-time reports you can use for forecasting.

Everything you used to do by hand will be done more efficiently for you.

How can you get this software?

Through our free trial offer below…

Retail Inventory Management Made Easy

From stock levels to order status, you’ll know exactly how much inventory you have and when it’s leaving or arriving your warehouse. All sales will be tracked from your physical store and your ecommerce stores, across all of your locations. We’ll automate your retail inventory management so you can focus more on growing your business and less on maintaining it.

Start your free 14-day trial of DEAR Inventory today!

Try DEAR for Free

No Credit Card Required

10 Practical Ways to Reduce the Cost of Inventory

Posted on October 7, 2017 by dearsyst

In a competitive market, cutting costs is a smart way to stay one step ahead of everyone else.

So what costs should you cut?

Well, you could hire a 3PL provider to reduce overhead costs, or replace Excel inventory management with a more efficient system to increase your productivity – thereby reducing labor expenses.

The best cuts to make are in areas that already cost you a lot of money.

There’s one area of your business that costs 20-30{cb377218d5687e54e8ee9149518f87201a393a7c1db5e8076e9d750029ec0dc3} of your total inventory, and you should do everything possible to reduce its impact on your bottom line.

What is it?

Your cost of inventory.

There are many ways to cut the costs of inventory, and we’ll show you 10 ways that you can use today.

Before we do that, let’s define the cost of inventory.

What is the Cost of Inventory?

The cost of inventory is the “carrying cost” of holding and storing inventory over a certain period of time. It’s calculated to determine the amount of profit a business stands to gain. It also helps you determine how much more or less inventory you need to satisfy demand.

Types of inventory costs include:

– Purchasing costs

– Taxes

– Labor costs

– Obsolescence

– Insurance

– Security

– Transportation and handling

If you need help calculating your cost of inventory, you can use this formula.

If your cost of inventory is already higher than it should be, or you know it could be lower, then let’s check out a handful of ways to reduce those costs.

How Do You Reduce the Cost of Inventory?

The cost of inventory can quickly add up, leaving you with little profit and overblown expenses. You can reclaim your cash flow and grow your revenue by applying only 1 or 2 strategies for reducing the cost of inventory.

Here are 10 strategies to choose from, any one of which could help you reach your desired amount of inventory costs.

Avoid Minimum Order Quantities

A minimum order quantity (MOQ) is defined as the smallest amount or number of a product that a company will supply.

MOQs are very common, and they’re used by suppliers and manufacturers to unload more of their inventory on retailers and wholesalers – reducing their cost of inventory but increasing yours.

They might offer you deals to sweeten their MOQ, like “buy 50 widgets and receive 10 free widgets,” but this only adds extra widgets to your inventory you may not be able to sell.

There are a few ways to avoid the burden of MOQs.

If you’re friends with a fellow business owner who needs the same stock as you, pool your cash and buy it together and then split it between yourselves. This can go a long way in reducing your inventory costs.

You could also offer to pay your supplier a little more money for less inventory, enticing them to forego their MOQ policy – which could save you more money in the long run.

Of course, if you can negotiate a deal with your supplier to dismiss MOQs altogether without paying extra, that would be ideal.

Know Your Reorder Point

A reorder point formula will help you determine when you need to order your next shipment of stock.

Knowing your reorder point can ensure you never order too much and risk obsolescence, but never order too little and risk stockouts.

Organize Your Warehouse

An organized warehouse will help you efficiently sort your inventory and quickly pick it later. An unorganized warehouse will increase travel expenses along with the likelihood of misplaced or damaged inventory.

This is especially true in major warehouses where workers are traveling thousands of square feet for a single piece of inventory.

The key to laying out your warehouse is putting your fast-moving items up-front in the staging area. This optimizes your pick, pack, and ship process.

An added bonus is that a well-designed warehouse optimizes your stocktaking process, too.

Get Rid of Obsolete Stock

Holding too much inventory increases the chance that the stock you thought would sell is now taking up valuable space in your warehouse and costing you more money than you paid for it.

The essence of reducing the cost of inventory is inventory reduction.

The less you have, the less your costs will be. And obsolete stock is the most costly inventory you can have.

If you already have a lot of obsolete stock, you can try product bundling to sell more of it, or try discounting them individually.

If you can’t sell them, you may be able to donate your obsolete stock for a tax write-off.

Once you clear away the obsolete stock, you’ll have more room for fast-selling inventory.

Implement a Just-in-Time Inventory System

Just-in-time inventory (JIT) management is a method for keeping almost no inventory in your warehouse at all, but instead, ordering everything you need the moment you need it.

It’s a form of lean manufacturing that would mostly eliminate the cost of inventory.

It requires you to:

– Develop a strong relationship with your supplier

– Find a long-term supplier for each purchased part

– Shorten your production cycle

– Separate your repetitive orders from you one-stop business

– Institute or improve your quality control program

While JIT isn’t for everybody, it’s a proven way to dramatically reduce your inventory costs.

Use Consignment Inventory

Consignment inventory allows you to offload a portion of your inventory to the retailer carrying your inventory.

The catch to this arrangement is that the retailer doesn’t pay for the inventory upfront. Instead, they pay you when they make a sale.

If you’re OK with that, selling on consignment can be an easy way to reduce your cost of inventory.

Reduce Your Lead Time

Lead time reduction is the process of shortening the time it takes to receive a purchase order.

The shorter, the better.

Lead time reduction works to lower your cost of inventory in 2 ways:

1. It allows you to keep less safety stock inventory – which means less obsolete stock in the future

2. It allows you to order less stock more frequently – making it possible to reduce the size and cost of your warehouse

Monitor KPIs

Tracking your inventory KPIs is an essential part of reducing costs in all aspects of your business, not just inventory costs.

The cost of inventory is certainly one major metric to track closely.

But you should also be measuring your write-offs and write-downs, your rate of inventory turnover, your cycle time and fill rate.

By comparing your numbers against your industry’s averages, you can assess how well you’re managing your business and warehouse, and how you can reduce your cost of inventory among many other costs.

Use a Perpetual Inventory System

The debate between periodic vs perpetual inventory is mostly coming to a close as more and more businesses recognize the cost-cutting power of a perpetual inventory system.

Perpetual inventory allows you to track your purchases and sales in real-time, allowing you to automatically order stock when necessary and maintain a healthy level of inventory.

Use Accurate Forecasts

Monitoring your business in real-time not only lets you know when you’re low on stock, it also helps you know your best-selling items, your worst-selling items, and trends in demand.

Forecasting demand through accurate reports allows you to order just enough to satisfy demand throughout the year, for every season.

You can also determine what products you need to discard, what you need more of, and give yourself the opportunity to test new products in the market.

But what SCM software will you need to acquire these in-depth reports?

A Must-Have Tool for Reducing Your Cost of Inventory

A cloud-based inventory management system is the tool you need to lower the cost of inventory.

It will help you know your reorder point, streamline your stocktake, lower your lead time, and deliver accurate metrics for tracking KPIs and forecasting demand.

The better you manage your inventory, the easier it will be to cut its costs.

If you want the tool that lets you manage your inventory from one intuitive interface, from anywhere in the world, whether you have 1 warehouse or 10, we can give it to you.

Start your free 14-day trial today

Inventory KPI: What It Is and the Most Important KPIs to Measure

Posted on September 16, 2017 by

Inventory KPIs help you understand your business performance so you can make better decisions.

Do you want to know how to grow your business efficiently?

Develop inventory KPIs.

With them, you’ll have the data you need to make smart, strategic decisions for your business.

There are many KPIs you can use to measure your performance, and we’ll cover a few that can help you keep costs low and profits high.

But first, let’s define an inventory KPI.

What is an Inventory KPI?

A Key Performance Indicator (KPI) is a measurement of your performance within a particular area toward a specific goal.

KPIs help to eliminate guesswork by giving you clear milestones to hit every week, quarter, or year.

KPIs can be static:

No new accidents within the last 30 days!

Or, KPIs can be milestones toward a larger goal:

Increase revenue by 25{cb377218d5687e54e8ee9149518f87201a393a7c1db5e8076e9d750029ec0dc3} every quarter.

Inventory KPIs can help you maintain your current level of growth, or it can help you scale up your business to the next level.

4 Essential Inventory KPIs

It can be tough deciding on what needs to be measured or what goals need to be met, especially if you’re just beginning to gather this data or you’ve started a new business.

Here are 4 essential inventory KPIs to focus on, whether you’re a new business or not.

Inventory Carrying Costs

Any warehouse that holds inventory has a variety of holding costs, or carrying costs:

Labor
Rent
Utilities
Storage
Security
Theft
Equipment
Etc.

A warehouse manager needs to quantify all of the specific costs in their facility into concrete dollar amounts in order to create an accurate inventory KPI for carrying costs.

Once that inventory KPI is created, you can develop strategies for optimizing your carrying costs:

Work on inventory reduction
Test out Just-in-time inventory (JTI)
Consider using consignment inventory
Calculate an appropriate amount of safety stock inventory
Use an accurate reorder point formula

Inventory Write-Offs and Write-Downs

An inventory write-off describes goods that are no longer valuable and can’t be sold. This could happen if your goods become damaged, stolen, or obsolete in the market.

An inventory write-down describes goods that have diminished in value, but can still be sold for a marginal profit, at cost, or at a minimal loss.

If you have large, recurring write-downs and write-offs, you’re probably suffering from poor inventory management.

Purchasing duplicate inventory, mishandling stock, incorrect calculations can all lead to excessive write-downs and write-offs.

Your KPI in this area will vary depending on your industry, holiday seasons, and size of your company, but you should do everything to keep these numbers as low as possible.

Rate of Inventory Turnover

Your rate of inventory turnover is a key metric to understand if you want to optimize your cash flow, working capital, and inventory costs.

Here is the calculation for rate of inventory turnover:

Cost of Goods Sold (COGS) divided by Average Inventory.

Compare your number to the industry average to know if your inventory turnover KPI is in the correct range.

Pick, Pack, and Ship

Customer satisfaction is the ultimate measure of your business’s performance.

The faster and more efficiently you can deliver what your customer wants, the happier they’ll be, and the more your business will grow.

There are 3 major ways to measure your pick, pack, and ship effectiveness:

Cycle Time
Order Status and Tracking
Fill Rate

Let’s look at each one in more detail.

Cycle Time

Cycle time is the time it takes for you prepare and deliver the goods bought by your customer.

The formula for measuring cycle time is:

The delivery date minus the date the order was placed.

You should measure the cycle time of every order, from retail to wholesale customers.

The smaller your cycle time – meaning the faster you prepare and deliver goods – the better your reputation as a reliable and quick company, which could give you a substantial competitive advantage in your market.

Order Status and Tracking

Order status and tracking is a measurement of the state and place of your goods.

Tracking how your employees handle orders, handle goods, and deliver goods can help you cut down on mistakes, catch thieves, prevent damaged goods from reaching customers, and improve customer service.

Providing customers with tracking information will make your company seem transparent and honest, increasing trust and customer loyalty.

Fill Rate

The item fill rate, also known as the demand satisfaction rate, is how much of the customer’s order you could fulfill using the stock you currently have.

If your customer orders 40 widgets, and you only have 20 on hand, your item fill rate is 50{cb377218d5687e54e8ee9149518f87201a393a7c1db5e8076e9d750029ec0dc3}.

You can increase your item fill rate by improving your customer demand forecasting, and ordering the right amount of stock to fulfill future orders.

The Tool You Need to Achieve Any Inventory KPI

Achieving any inventory KPI requires an accurate stocktaking process, real-time inventory reports, and the ability to manage multiple warehouses simultaneously.

You’re going to have a hard time reaching your goals without a system that delivers reliable data, tracks and records all of your inventory coming and going, and can scale alongside your growing business.

If you’re looking for a tool that can do all of this for you and help you meet your inventory KPIs with ease, then we have the cloud-based inventory management software you need.

Reaching Your Inventory KPIs Just Got a Little Easier

Reduce your carrying costs with up-to-the-minute inventory reports for smarter inventory strategies, reduce your write-offs and write-downs with precise forecasts for stock needs, improve your inventory turnover with ecommerce integration for increased sales, and optimize your pick, pack, and ship through real-time inventory tracking.

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4 Reasons Why Batch Tracking Is Crucial for Quality Control

Posted on September 2, 2017 by

Batch tracking will help you maintain high-quality goods

Do you have a traceability system in place that minimizes accounting errors?

Can you verify the history and location of a set of goods in case of a product recall?

Are you aware of which of your products are close to expiring and which aren’t?

If you don’t have a system that can deliver the answers to these questions immediately, or worse, if you don’t have a system that can answer these questions at all, then you need a batch tracking system.

To help you streamline your supply chain and improve your relationships with your customers and suppliers, we’ll help you understand what batch tracking is, why it’s so beneficial, and how you can implement it in your business today.

What is Batch Tracking?

Batch tracking is sometimes referred to as lot tracking, and it’s a process for efficiently tracing goods along the distribution chain using batch numbers.

A “batch” refers to a particular set of goods that were produced together and which used the same materials.

For example, a batch of milk is a set of individual containers of milk that used the same ingredients and has the same expiration date because they were produced together, at the same time.

From raw materials to finished goods, batch tracking allows you to see where your goods came from, where they went, how much was shipped, and when they expire if they have an expiration date.

What are the Benefits of Batch Tracking?

Almost every business uses batch tracking because it offers numerous benefits.

Here are just a few:

Easy and Fast Recall

iSeeCars analyzed new vehicle sales data and recall data from the National Highway Transportation Safety Administration (NHTSA) from January 1985 through September 2016.

They found that the industry average of car recalls was 1,115 per every 1,000 cars sold.

Almost every car manufacturer had recalls, but here’s why being able to recall your products quickly is so important:

In a study conducted by The Relational Capital Group and reported on by The Motley Fool, 87{cb377218d5687e54e8ee9149518f87201a393a7c1db5e8076e9d750029ec0dc3} of survey respondents said they’d be “more likely to purchase and remain loyal to a company or brand that handles a product recall honorably and responsibly, even though they clearly made mistakes that led to a safety or quality problem.”

Which means, consumers understand that recalls happen, but if you do a poor job recalling the product, then you’ll be chastised by your customers.

So, if you’re a car manufacturer, you would want to make sure that you proactively recall any defective vehicle and publicly or privately apologize and do everything possible to appease your customers.

Regardless of what business you’re in, if you want to be able to recall defective products quickly and easily, then you’ll need a batch tracking system that can give you the detailed information you need to identify every defective product within the batch so you can easily trace them down and retrieve them.

Streamlined Expiry Tracking

Quality control is critical if you’re a food wholesaler.

One of the most important factors for maintaining a high-quality food product is knowing the expiration date for every product you sell, and making sure your customers know this information as well.

Batch tracking allows you to automatically know the expiration date of each product and gives you the power to develop a stronger quality control system in the case of any issues like a product recall.

Improved Relationships with Suppliers

Batch tracking software allows you insight into the quality of your finished goods by tracking the raw materials your suppliers are providing you.

This gives you the ability to identify your best and worst suppliers, which gives you greater control over who you’ll purchase your material from.

Fewer Accounting Errors from Manual Tracking

A manual batch tracking system is extremely time-consuming and error-prone.

It’s very easy to enter incorrect data, omit data, misinterpret data, or misplace your data.

An automatic batch tracking system allows you to enter information that is generated across all products within your batch and puts that information at your fingertips if you need to access it quickly, as in the case of a product recall.

How Can You Start Batch Tracking Today?

The best way to start batch tracking is with a cloud-based inventory management system.

This will allow you to assign batch numbers, expiration dates, and serial numbers to your finished products.

But it will also allow you to track the purchase orders and sales of your batches for easy accounting.

And, because this inventory management system is cloud-based, you can track your batches from anywhere in the world.

If you want to do batch tracking efficiently, then consider using DEAR’s cloud-based inventory management system.

The Inventory Management System that Makes Batch Tracking Easy

Effective batch tracking is just one of the many features of our cloud-based inventory management system. You’ll also be able to create product categories, export product data across all your ecommerce stores automatically, operate multiple locations, streamline your stocktake, and generate real-time inventory reports. Everything you need to optimize your inventory management and batch tracking is right at your fingertips with our system.

Start your free 14-day trial of DEAR Inventory today!

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Just-In-Time Inventory: How to Reap Big Rewards with Lean Production

Posted on July 8, 2017 by

Save time and costs with a just-in-time inventory management system

Just-in-time (JIT) inventory was developed in post-world war II Japan when the country had few resources, little money, and high unemployment.

It helped Toyota become one of the dominant car manufacturers in the world by making every step of the production process as “lean” as possible by eliminating overproduction, obsolete stock, and wasted time.

By the mid 80’s, the concept of just in time inventory was being tested by American companies with excellent results.

In 1983, Omark Industries – which produced chainsaws, ammunition, and log loaders – saved itself an estimated $7 million in inventory carrying costs with its own version of JIT called ZIPS (Zero Inventory Production System).

Use of just-in-time inventory continued to grow through to the 90’s…

In 1999, Daman Products reported in a case study a 97{cb377218d5687e54e8ee9149518f87201a393a7c1db5e8076e9d750029ec0dc3} reduction in cycle times, 50{cb377218d5687e54e8ee9149518f87201a393a7c1db5e8076e9d750029ec0dc3} reduction in setup times, lead times dropped from 4-8 weeks to 5-10 days, and their flow distance was reduced by 90{cb377218d5687e54e8ee9149518f87201a393a7c1db5e8076e9d750029ec0dc3}.

Today, just-in-time inventory can be observed in places like fast food restaurants, where all the ingredients for a burger are kept ready – but a burger is only made the moment it’s ordered, or on-demand publishing, where a master manuscript is kept ready – but a book isn’t printed until a customer order comes through.

To help you fully understand the power and potential of just-in-time inventory, we’re going to concretely define it, look at some of its benefits and drawbacks, and give you some principles and practices on how to implement it into your own production process.

What is Just-In-Time Inventory and How Does It Work?

Just-in-time inventory is simply making what is needed, when it’s needed, in the amount needed.

Many companies operate on a “just-in-case” basis – holding a small amount of stock in case of an unexpected peak in demand.

JIT attempts to establish a “zero inventory” system by manufacturing goods to order; it operates on a “pull” system whereby an order comes through and initiates a cascade response throughout the entire supply chain – signaling to the staff they need to order inventory or begin producing the required item.

While a just-in-time inventory system is not easy to create, the benefits are worth the extra effort.

Benefits of Just-In-Time Inventory

When first trying to implement just-in-time inventory, you’ll notice that you’ll find mistakes throughout the production process which are made more obvious when you try to make your system more efficient.

After some initial trial and error, you’ll begin reaping at least a few of the benefits listed below.

Minimize costs such as rent and insurance by reducing your inventory
Less obsolete, out-dated, and spoiled inventory
Reduce waste and increase efficiency by minimizing or eliminating warehousing and stockpiling, while maximizing inventory turnover
Maintain healthy cashflow by ordering stock only when necessary
Production errors can be identified and fixed faster since production happens on a smaller, more focused level, allowing easier adjustments or maintenance on capital equipment

Even though just-in-time inventory offers high rewards, it also brings with it high risks. If you want the benefits, you’re should know what the potential drawbacks could be.

Drawbacks of Just-In-Time Inventory

The risks associated with just-in-time inventory should be seriously considered before implementing a JIT inventory plan for your company.

Below is a list of problems you may run into when you adopt this policy of lean manufacturing and production.

Stockouts due to sudden changes in market demand when you don’t have excess inventory
Vulnerability to alterations in your supply chain which could disrupt your business operations if you don’t have backup options
More stockouts could occur if there is a breakdown in communication within the business, or between the business and the rest of the supply chain
Lack of control over order fulfillment due to a dependency on your supplier’s timeline – potentially delaying how quickly your customer receives their order
Increased need for planning and precise processes – which, if you don’t setup correctly, could cause a major loss in revenue after only a few errors.

Some of these risks will depend on your industry and the volatility of whatever market you’re serving. But, all of these risks pose serious threats to the longevity and profitability of your business.

However, they’re only risks.

If you think the benefits outweigh them, then let’s take a look at how you can start implementing a just-in-time inventory management system.

How do you Implement Just-In-Time Inventory

Creating and implementing a just-in-time inventory management system will depend in large part on the size and complexity of your business and industry.

Below, we’ve listed some common principles and practices which will give you a better idea of what’s required for a high-functioning JIT inventory system.

Develop a strong relationship with your suppliers – and possibly an exclusive agreement regarding stock quantity and delivery time period – to ensure consistency in your supply chain
Find a long-term supplier for each purchased part who delivers small batches according to your long-term purchasing forecast
Work on shortening the production cycle first to make room for shortening the materials cycle (this helps mitigate the problem of late deliveries when first implementing just-in-time inventory)
Separate your repetitive business from your one-stop orders and develop a special production method for your repetitive orders – using particular machines for particular tasks and processes, separated by order frequency
Institute or improve your quality-control program to manage and solve manufacturing problems that inevitably reveal themselves when implementing just-in-time inventory

These action steps are just some of the things you should consider doing when making the switch from just-in-case to just-in-time inventory.

The actual steps you’ll take will once again depend heavily on your unique business and its needs.

However, if you haven’t already, there’s a crucial first step you will want to take before officially implementing a JIT strategy.

Do This Before Implementing Just-In-Time Inventory

Just-in-time inventory requires a great level of planning and insight.

You need to be able to understand and track customer demands, market trends, and sales numbers.

Essentially, you should know everything possible about your inventory – how much you need to buy, when it will arrive, how often it sells, etc.

Excel spreadsheets aren’t going to cut it if you want to optimize your business processes for lean performance.

To operate an efficient, effective, and profitable just-in-time inventory system, you’re going to need to…

Upgrade Your Inventory Management System to Reap the Benefits of JIT

Our cloud-based inventory management system can deliver up-to-the-minute reports, automate your tracking, and integrate with all your sales channels. You’ll know when you need to order more inventory, what times of year you experience spikes in demand, and how to organize and coordinate the rest of your supply chain.

Start your free 14-day trial of DEAR Inventory today!

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Rate of Inventory Turnover: What It Is, What it Means, and How to Improve It

Posted on July 1, 2017 by

Calculate your rate of inventory turnover to maximize cash flow

Your rate of inventory turnover is a key metric to understand if you want to optimize your cash flow, working capital, and inventory costs.

In this article, we’ll explore what inventory turnover is and how to calculate it before discussing a few ways to improve it. By the end, you’ll know what your rate of inventory turnover means and how to use that knowledge to increase the efficiency and profitability of your business.

What is the Rate of Inventory Turnover?

The rate of inventory turnover is a measurement of the number of times your inventory is sold or used in a given time period, usually per year.

It signals to your company’s managers and executives – along with your company’s investors – how well you’ve been converting your inventory into sales. It can also tell you how well your inventory is being managed, and whether or not it’s being mismanaged.

Here’s how to calculate your inventory turnover rate:

How do You Calculate the Rate of Inventory Turnover?

There are usually 2 ways you can calculate the rate of your inventory turnover:

Sales divided by Inventory
Cost of Goods Sold (COGS) divided by Average Inventory

Most analysts don’t use the first method of calculation because it can yield inaccurate results. Sales include a markup over costs, which could inflate your inventory turnover rate.

COGS divided by average inventory can give you a more accurate rate of inventory turnover. To calculate your inventory rate, you first need to calculate your average inventory.

Calculating Average Inventory

If you want to calculate your average inventory for a single fiscal year (12 months), you’ll first want to find the inventory counts from the end of each month (in dollar value) and add them all together.

Then, divide your total amount of inventory by the number of months you’re calculating (12 in this example) to get your average inventory for that period.

For example, let’s assume that the past 12 months you had varying inventory costs that added up to $168,000.

Divide $168,000 by 12 months and you get an average inventory of $14,000.

Calculating Rate of Inventory Turnover

Calculating your Cost of Goods Sold is a bit complicated and depends greatly on your products and business. Check out this post to learn more about the general methods for going about this.

For our example, let’s assume your COGS for the past 12 months is $130,000.

To calculate your inventory turnover rate, divide your COGS by your average inventory, which in this case gets us a rate of 9.29. That means 9.29 times out of the year, your inventory completely turned over.

What’s a Good Rate of Inventory Turnover?

Once you know your rate of inventory turnover, you can assess how to improve it.

To know whether your inventory turnover rate is high or low, you’ll want to compare it to your industry’s average.

Here are a few industry averages that might apply to you, as found on market research and analysis website CSIMarket:

Internet, Mail Order, & Online Shops: 9.54
Wholesale: 9.39
Food Processing: 8.23
Miscellaneous Manufacturing: 5.07

For the rest of this post, we’re going to assume you’re struggling with low inventory turnover since high inventory turnover typically just means you need more stock to cover consumer demand. Low inventory turnover, however, can lead to a host of problems.

What’s the Problem with a Low Rate of Inventory Turnover?

A low rate of inventory turnover could mean a lot of bad things for your business:

You’re spending too much on holding costs like rent, insurance, etc.
Goods that aren’t turning over are becoming obsolete in the market
You’re ordering too much stock, too frequently
You may have cash flow problems because you’re tying up too much capital in inventory

In order to prevent these problems from occurring, here are several ways you can raise your turnover rate.

5 Ways to Increase Your Rate of Inventory Turnover

There are many strategies you can use to sell and manage your inventory effectively.

Not all strategies will be applicable or work for you, but try a few and use those that work best for you.

Change your Pricing and Marketing Campaigns

The first thing to try is finding a way to sell more products – since this will not only improve your rate of turnover but also generate cash.

Brainstorm a few new marketing campaigns to find creative and clever ways to engage your target market and differentiate yourself from your competitors.

You might try playing around with your pricing strategies. Don’t just lower your prices – this can obviously cost you quite a bit.

Instead, test various tactics like:

Seasonal sales
Rush delivery service
Flash sales
Different pricing for different customers
Product bundles
Bonuses
Pricing structure ($47 vs. $50, or $49.50 vs. $49.99)

Keep testing until you find something that works, and then replicating and expand on the winning strategies.

Liquidate Obsolete Stock

If you suffer from a low rate of inventory turnover, you may have obsolete stock sitting in your warehouse. This could be due to a couple reasons, such as:

Ineffective forecasting of customer demand
Too much excess stock ordered

Either way, you need to focus on reducing your inventory as quickly as possible, and developing stronger inventory tracking systems so you know in real-time what is selling and what isn’t.

Forecast Customer Demand Better

Analyze every product’s past performance and level of demand in order to predict future sales trends. Pay attention to market changes, product innovations, and new competitors to stay on top of your market.

Redistribute Your Inventory

If you have multiple warehouses, then consider redistributing your excess inventory to a location with greater demand for those items.

This can reduce the need to order inventory in some locations while lowering your stock levels in those that consistently carry too much.

Track Your Inventory to Stay in Control

Through better tracking, you’ll able to know exactly how much inventory you have in real-time, what customer demand has been in the past, and eliminate inaccuracies in your stock count.

And if you’re tracking inventory in multiple locations with multiple warehouses, you need a system that can pull all that data together under one central dashboard so you can generate up-to-the-minute reports on the state of your business.

Tracking your inventory helps you use the other 4 strategies listed here more effectively, and allows you to accurately calculate your rate of inventory turnover.

Ready to Increase Your Inventory Turnover Rate?

Cloud-based inventory management software can automate your sales tracking, let you monitor every item as it moves through your business with RFID barcode technology, and integrate your inventory data into the rest of your business systems such as your ecommerce store or accounting software.

Get started with your free 14-day trial of DEAR Inventory today!

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What is Working Capital and Why Does it Matter?

Posted on June 17, 2017 by Alla

Find the right level of working capital to grow a healthy business

Working Capital is an important financial metric for understanding your company’s operating liquidity (the ability to convert your assets into cash for the purpose of paying the bills). Knowing your amount of working capital can also guide your inventory strategies, leading to smarter buying decisions.

By the book, the definition of working capital is:

Working Capital = Current Assets – Current Liabilities

In other words, it’s the cash you have left over once all payments due to you are collected and your bills are paid.

If your company maintains an inventory of goods that you sell to your customers, the formula can be expanded to:

Inventory Value (value of items for sale and items used to make goods for sale)

+ Receivables from Customers (cash owed to company for sales)

+ Rebates from Suppliers (Discounts for buying a certain value, quantity, or within a certain timeframe)

– Payables to Suppliers (cost of inventory)

= Working Capital.

What’s considered a healthy working capital varies from industry to industry – but in theory it should be as low as possible.

A low working capital is a strong indicator that your company is finding the right balance between what you have on your shelves, the revenue you are generating, the investments you are making in your future, and the debts you owe.

A high working capital can be a sign your business is booming, but it can also mean you’re missing investment and growth opportunities.

Another Insightful Approach

In the business world, working capital is usually measured not by the cash figure of assets minus liabilaties, but by what’s known as your current ratio, which is:

Current Ratio = Current Assets / Current Liabilities

According to Investopedia, your business should aim for a current ratio between 2.0 to 1.2, but this varies by industry; here are some average current ratios for industries you’re likely in, according to CSIMarket:

Internet, Mail Order, & Online Shops: 1.12
Wholesale: 1.29
Food Processing: 1.26
Miscellaneous Manufacturing: 1.55

A ratio higher than 2 is a sign that you’re not properly using your funds – either in the form of carrying too much inventory or not capitalizing on extra cash by investing in growing your business, while a ratio lower than 2 may make it difficult to find the cash you’ll need to pay your suppliers and other debts.

The metric changes as quickly as you make sales, pay suppliers, or increase your inventory – but by understanding how the decisions you make affect it, you can take control of your working capital instead of letting it control you.

Here are some aspects of your operations to consider as you create your working capital management strategy:

Turn Down Supplier Discounts

Just say no (sometimes)! Avoid the temptation to take advantage of supplier discounts when they mean ordering more inventory than you need right now.

Sure, you could buy three times the materials to reduce your per item cost by 75{cb377218d5687e54e8ee9149518f87201a393a7c1db5e8076e9d750029ec0dc3}. But unless you can actually sell that inventory, you risk filling your shelves with stuff that can quickly become obsolete, broken, or buried.

By collecting data to understand your what your customers want and when, you can better decide when it’s the right time to take advantage of these discounts.

Achieve Negative Working Capital

There are two ways to look at negative working capital – one way is a signal of financial distress for a company indicating you have spent more money than you have.

A more positive definition involves a strategy that requires careful thought and planning.

By setting terms of payment with your suppliers that give you enough time to collect from your customers before you pay for the raw materials of the items you sold – you are in essence borrowing cash from your suppliers to free up more money for your day to day operations.

This strategy requires an in-depth understanding of your customer demand cycles to ensure its possible to sell all your inventory and collect from your customers prior to your invoice due dates.

Negotiate your payment terms with your own billing cycle in mind. Be sure to give yourself an overlap period where you have cash payments in the bank, but no invoices due for the products and materials you just sold.

For example, let’s say you made $100 in sales for product X and have collected all payments due from your customers.

You owe your suppliers $50 for the raw goods you used to make product X, but the invoice isn’t due for another two weeks.

Because working capital only factors in supplier payments that are currently due, your working capital is a $100 ahead instead of only $50 – which is what it would be if you had to pay your supplier at the same time you collected payment.

Maintaining a negative working capital balance frees up cash to take advantage of opportunities to spend money on growing your business and reducing debts.

Control Inventory Levels

Inventory reduction plays a major role in achieving an ideal working capital – the less inventory on hand, the less you owe to suppliers, tipping your working capital in your favor.

Take control of your inventory levels by putting your sales and purchasing history data to work helping you predict the optimal levels of inventory necessary to operate.

The goal is to use that data to find the right balance between demand, production, and ordering raw materials or stock.

Order too much and you’ve tied up cash resources in product or materials that aren’t making you money. Purchase too little and now you run the risk of losing sales to your competitors who do have the product available for sale.

If this all seems like an elaborate guessing game, you’re not alone. Learn more about inventory reduction in our earlier post. From “lead times” to “just-in-time,” it covers the basics you need to know to get started.

Find the Balance, Achieve Results

Businesses of any size can find a healthy balance of inventory, taking advantage of supplier discounts, and payment cycles by leveraging inventory management software thanks to cloud-based tools like DEAR Inventory.

Want Better Data to Make Better Decisions?

Experience the tracking and reporting power of modern cloud-based inventory management software by starting your free 14-day trial of DEAR Inventory today!

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