8 Small Business Inventory Management Mistakes to Avoid
November 17, 2021
46% of small to medium-sized businesses either don’t track inventory or use a manual method. So, if you are a growing small business, you may not have formalized your inventory management strategy yet. What problems are caused by the lack of inventory management strategy and processes?
A recent poll of 101 startup owners by CBInsights reveals that 29% of owners believe lack of cash to be one of the biggest issues causing small businesses to fail. According to US Small Business Administration, only 44% of small businesses survive for over 4 years. This should come as no surprise when you consider all the cash required for fixed costs, stock and inventory when starting and operating a small business.
This is where inventory management comes in. Without an accurate understanding of the quantity of the different products needed you are likely to end up with too little or too much stock. Plus, without a solid stock management plan, small businesses may not be able to commit to large orders and receive significant savings from suppliers. Maintaining business growth may get a bit more challenging.
To help small businesses stay on top of profitability, cash flow and inventory management, we have created a list of the common inventory management mistakes to avoid.
Manual inventory management
Too often, small businesses rely on a gut feeling or a quick count to check on their available inventory. This is convenient but increases the chance of human error. According to the 2017 National Retail Security Survey, administrative and paperwork errors accounted for 21.3% of inventory loss for retailers. When completed without verification steps, human data entry has an error rate of up to 4%. Relying too heavily on a manual inventory management process means you have to expect plenty of errors.
When staff make mistakes, your business could easily miscalculate and waste money on ordering the wrong types of stock. Small businesses must be prepared to handle larger and more complex inventory orders efficiently and accurately to stay on the growth curve. But this is often unachievable through the manual approach, which usually requires constant updates to the spreadsheets used for recording inventory. With this in mind, the less manual and the less subject to human error your inventory management process is, the better.
Inaccurate new stock orders
When ordering new stock and inventory it is important to make an informed decision on how much you need of what stock and when you need it. Without analysis, you are likely to end up with too much or too little stock, meaning you may miss sales opportunities or increase storage costs to house the excess stock.
New product orders can represent less than half the eventual annual order, and for limited edition products, these first orders could equate to 80-100% of the annual order. Therefore, you must get this order correct and to do so you will need to consider the following:
- Sales history of a similar product/model: Including the amount of sales and how long they took to sell. This information can also be used to work out an estimate of the stock coverage, that is the amount of time you can continue to sell items based on history and the amount of inventory.
- Supplier lead time: The time it takes from the moment the customer places an order for the goods to be delivered
- Minimum Order Quantity (MOQ): The minimum quantity of items that you can order from a supplier.
- The win/lose or risk/reward ratio: The risk of losing opportunities based on competing businesses and the profit margin of individual items.
- Inventory carrying cost: The total expenses related to storing unsold goods.
Without an inventory management process and without strong analytics, it can be a challenging task to get these orders right.
Lack of training
A CBInsights research study found that 23% of startup owners believe their businesses failed because they didn’t have the right team in place. As inventory management touches different parts of a business, chances are high that more than one member of your team has a role to play. Ensuring you have some staff skilled and experienced in business inventory management is often crucial for successful outcomes.
Here are three tips to consider regarding your staffing:
- Train: Minimize mistakes by ensuring your employees and contractors are well-trained and up-to-date with your business’s inventory management procedures. Make training an essential part of onboarding part-time and full-time staff.
- Set goals: Motivate staff to reduce human errors by setting targets around a few measurement metrics.
- Designate an Inventory Manager: Empower a member with the tools and resources around training, reporting and inventory optimization. For many small businesses, this is often the owner or a manager taking on additional duties.
Inventory management systems often have automated elements that increase accuracy, but some elements are always subject to human error. However, training and motivating staff can help reduce these mistakes as much as possible.
The 2017 e-Commerce Fulfilment Report found that 34% of businesses have to ship late due to underordering and selling out-of-stock products. Missed sales opportunities due to underordering can quickly lead to negative perceptions about your business. In addition, running to overpriced shops for last-minute supplies will mean an increasing need for petty cash to cover these essentials. Improved inventory management will mean you can avoid this common mistake and give your business a huge competitive advantage.
One of the most common causes of underordering is unreliable suppliers who fail to fulfill your orders on time. So, if this is your business’s problem, take note of the following tips to counter this:
- Negotiate faster delivery times with your supplier, if possible.
- Discuss product quality issues if any and check whether they are related to variability in delivery times.
- If poor quality control turns out to be a factor with a supplier, consider diversifying your supply chain to manage lead times better for your small business.
Just like underordering, overordering too much stock is also a common mistake for small businesses and comes with a new set of problems. Supply Chain Digest reports that the amount of inventory on-hand based on average daily sales has increased by 8.3% over the past five years. You may be thinking ‘better to be safe and have too much stock than too little,’ but research from the Owen Graduate School of Management tells a different story.
The study of 20 years of data from large retailers found that companies with low levels of stock and high stock turnover consistently outperformed those with high levels of stock and low stock turnover. Although these insights are from larger retailers, small businesses should still note these findings and consider if any of the stock items they are storing have a turnover too low to be worth reordering.
Here are the four main issues overordering can cause for your small business:
Reduced cash flow
The more stock you have lying around unsold, the less cash you have available for other opportunities such as new projects, more advanced tools and technology, and expanding your business.
Increased storage space
The more you overorder the more you will have to pay for storage. Efficient organizations require less storage space and as real estate is often one of the biggest fixed costs for small businesses, decreasing this need can make all the difference.
Increased stock loss
The longer you have to keep hold of stock, the more likely you are to experience stock loss. The losses could stem from perishable items or changes in consumer demand because of seasonality and market trends.
The time, energy, and resources you invest in ordering and storing unused stock and supplies should not be underestimated. If you want to get the most out of your employees you should do everything possible to reduce time wasted.
To identify which items are overordered, you need to complete regular stock audits. Then, for businesses who have records of historic sales data on the same or similar products, this info can be used to inform decisions on how many items you are likely to need.
Inaccurate safety stock
Too often, small businesses will run out of one type of product while having a surplus of another. This is due to issues with their safety stock: the backup inventory kept as a failsafe against demand fluctuations and supply chain uncertainty.
Writing for Fit Small Business, Meaghan Brophy explains how safety stock is particularly important for small businesses describing how it ‘informs your reorder point’ i.e. the stock level at which you need to start reordering products to avoid falling victim to increased ‘rush fees’ when ordering and overall ‘operational mayhem’ in your organization.
Take a t-shirt as an example of a product. It should be common sense to hold a larger supply of safety stock for t-shirts in the most common sizes (small, medium, and large). However, I am sure you can remember a time when a shop has run out of at least one of these most popular sizes and the only options remaining were uncommon ones like XXL. This is often because the same level of safety stock is set for all the products which is inefficient and not recommended.
To counter this, carefully consider your expected demand for different product variants, like size, color, design, etc. Then, set your safety stock at appropriate levels to match expected demand.
Lack of a digital product catalog
In 2017, Frost & Sullivan reported that 69% of B2B businesses said they were planning on digitizing their catalogs: the record of all commercial product info that enables marketers to define and map new product offerings. Digital product catalogs offer greater accuracy, efficient updating and editing, and easy access for all stakeholders from a centralized digital location. This final point is particularly important, as the catalog affects the decisions of many stakeholders in your business, from your distributors, retailers, marketers, purchasers, and sales teams to the Depository Trust Company (DTC), and your clients/customers. Getting your catalog ready should be a priority as it will increase your business’s efficiency and reduce the risk of missing sales opportunities in the future.
The digital catalog should record every product your business has, including obsolete, active, and new products. The following information is the minimum your business needs to work efficiently:
- Product names, statuses, photos, and reference numbers
- Product trees, categorizations, and notes on similar products
- Product end dates and expiry dates
- Minimum Order Quantities (MOQs) and supplier lead times
- Prices: Actual, purchase, and catalog prices
- Past sales (in quantity and value), broken down into different timescale views (annual, monthly, quarterly, etc.)
- Current stock quantities, values, and margins
- Average stock coverage.
Not considering the total cost of ownership
The cost of purchasing the products you stock and the prices set by your competitors are not the only things you need to consider when it comes to setting your sale prices. To ensure profitability, businesses need to consider the total cost of purchasing products, which includes costs such as:
- Ordering costs: Including the purchase price and minimum order quantity.
- Supplier costs: All costs associated with the flexibility, reliability, communication, how dependent on your orders a supplier is, and the time it takes the supplier to satisfy your order.
- Forecasting costs: All costs associated with the certainty/accuracy of your sales forecast.
- Product costs: Including the quality, percentage of defective products, and lifespan.
- Storage costs: Including any maintenance, warehousing and operational costs.
This total cost of purchasing products, sometimes referred to as the Total Cost of Ownership (TCO), is a metric borne out of tracking as many of these different types of costs as possible. Using TCO data instead of just ordering related costs better informs your pricing and margin decisions.
Strong inventory management means better operational efficiency, higher customer satisfaction and much improved cash flow. Carefully evaluating and refining inventory operations will not just put your business on a higher growth trajectory now but prepare it to scale up in the future.
Have more questions? GET IN TOUCH