While warehouses may use different systems to manage their goods, they often base their practices on standard industry principles. Common inventory rules include ordering buffer stock to cater to demand fluctuations and analyzing historical data to predict ideal order quantities. Warehouses that understand and implement these rules can increase their profits and overall efficiency. In this article, we discuss why inventory rules are important and share the nine best practices for warehouses.
Why are inventory rules important?
Inventory rules are important because they help warehouses track and reorder products to meet demand. By having enough goods to fulfill orders, warehouses can build trust among their customers as a reliable brand. Inventory rules also prevent warehouses from accumulating excess inventory, allowing them to allocate their budget to other parts of their operations. By using inventory rules, managers can use tactics that have helped other warehouses succeed while creating a system that’s unique to their facilities.
9 best practices for inventory
Here are nine key rules for managing inventory:
1. Handle reorders internally
When vendors try to establish relationships with warehouses, they might offer to handle reorders. While this gesture can help you allocate employees to other tasks, consider placing reorders internally. You can handle this process yourself by evaluating the company’s needs and only ordering what’s necessary. You could also train employees to reorder products, ensuring they complete orders based on relevant supply and demand data.
2. Analyze supplier performance
Analyzing supplier performance can help ensure the company receives products reliably. For instance, you might consider whether the time it takes for a supplier to deliver an order is sufficient. You can also confirm whether their proposed delivery dates match the dates the shipments arrive. Another way to analyze supplier performance is by auditing the shipments delivered. If you discover missing goods, you can contact the supplier to ensure you receive all paid products.
3. Order buffer inventory
Butter inventory, or safety stock, is a collection of excess goods. Warehouses purchase them to mitigate potential demand increases and ensure customer satisfaction. For instance, consider a warehouse that expects to sell 1,000 units over three months. As part of its inventory management strategy, it orders 200 extra units to prepare for a demand increase. The company sells all original 1,000 units two weeks before the three-month period is over. Instead of waiting for its vendor to deliver another shipment, the company can use its buffer inventory of 200 units to satisfy demand.
While it’s often better to have too much than too little, try to order as little buffer inventory as possible. This practice can reduce high storage costs and ensure you have enough products to please customers. It can also increase your company’s reputation as a reliable brand, which is essential for competing with today’s responsive e-commerce stores.
4. Analyze historical data
When determining how much inventory to order, consider analyzing historical data. Past trends are often good indicators of how many products the warehouse can sell. You can evaluate the performance of products during particular seasons or observe how demand changes based on world events.
Internal data is often the most useful because it applies to the warehouse’s customers. If the company is newer or doesn’t have thorough records, try to analyze industry data or trends from competitors. You can apply this information to the company’s operations and determine the amount of inventory to order. By relying on data, you can meet demand while maximizing the warehouse’s storage space.
5. Conduct regular audits
An audit is when you count every item in the warehouse’s inventory. This process helps ensure that you have as many goods as the company’s records show. If there’s a discrepancy, you can determine what might have caused it and resolve it before it further skews the company’s records. Consider using these tips for conducting successful audits:
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Determine how frequently to audit. Frequent audits can help you ensure an inventory is accurate, but they require many resources to conduct. Consider the warehouse’s size and budget to determine if yearly, monthly, weekly, or daily audits are appropriate.
Prioritize high-value goods. Missing high-value goods can significantly affect a company’s products, so consider being more thorough in your audits.
Audit direct labor. If the company considers direct labor in its inventory costs, consider verifying that employee time cards match the payroll records.
6. Practice the 80/20 rule
The 80/20 rule suggests that 20% of a warehouse’s inventory generates around 80% of its profits. You can implement this rule by determining which 20% of the warehouse’s products are most profitable. Tools that can help you do these calculations include key performance indicators (KPIs) and supply chain metrics. Then you can focus the bulk of your inventory management efforts on these profitable products. For instance, you might prioritize reorders for these products over reorders for less-profitable products.
While the 80/20 rule mainly focuses on the most profitable products, you can also use it to identify areas of improvement. For instance, you might discover that a product you thought was profitable is underperforming. You can relay this information to the advertising department, which can create a campaign to make it more appealing to customers. The department might also conduct market research and conclude that the product is no longer profitable to order.
7. Manage goods in transit
Many inventory managers focus on goods in warehouses, but you can also manage goods in transit. Auditing these products ensures the company’s financial records accurately account for all paid goods. The practice also helps the warehouse prepare space for new shipments, allowing them to reorganize products or dispose of nonsalable inventory if necessary.
8. Use inventory management technology
Notebooks and spreadsheets may be sufficient for smaller operations, but large warehouses often benefit from inventory management technology. The software tracks the amount of inventory currently in stock and how quickly it sells. It can also alert you when to reorder, with some software capable of automatically reordering products. When choosing inventory management technology, find software relevant to the warehouse’s size and industry. You may also benefit from software that integrates with the business’s other technology, such as point-of-sale systems. These integration features make it easy to quickly compile and analyze your data.
9. Manage nonsalable inventory
It’s normal for warehouses to accumulate nonsalable inventory. For instance, goods might expire or become obsolete to consumers before they can sell. Some businesses choose to keep obsolete goods, believing that customers might become interested in them again. Keeping expired goods can also be beneficial because it allows warehouses to list them as assets on their financial records.
Consider the ideal time to dispose of these goods. Disposal creates room in warehouses for more profitable products. If you can sell the damaged or obsolete goods at a discounted price, you may generate a little extra revenue instead of taking a complete loss. Try consulting with your sales and operations planning manager to determine if it’s time for disposal. When making this decision, consider whether the loss is worth the extra room for new inventory. Usually, it’s ideal to make these calculations based on whether disposal would increase the entire company’s profits rather than a single department’s.
I hope you find this article helpful.