How to Avoid Losing Money on Your Inventory: Best Practices for Effective Inventory Management

Effective inventory management is an essential part of any inventory-driven business's success. At the core of effective inventory management is avoiding stockouts while minimizing capital tied up in inventory. This requires a balancing act between purchasing and sales. In this guide, we'll cover some best practices for effective inventory management so you can optimize your stock levels and ensure you always have the necessary items on the shelves without tying up too much capital in your inventory.

By Rackbeat July 5, 2024

The Delicate Balance Between Purchasing and Sales

It is crucial to avoid falling between the two narrow stools that stand in the heart of any inventory-driven business, namely the relationship between purchasing and selling goods. 

Over-purchasing leads to high capital tied up in the inventory, occupying space, money, and time that could be better used elsewhere in your business. 

Conversely, under-purchasing results in stockouts, which means lost sales, delivery delays, and dissatisfied customers.

 Many have tried to find the right balance, and many have failed. 

The path to achieving and maintaining the right inventory level is paved with effective inventory management and a thorough analysis of your sales patterns. However, you don’t need to be a spreadsheet ballerina or an inventory management pole vaulter to implement these two cornerstones in practice. 

You simply need to follow the advice we have gathered for you in this guide to safely navigate between purchasing and selling goods. So let’s dive in


Solutions to Avoid Stockouts and High Capital Ties

One thing that can help you avoid stockouts is finding a minimum threshold for your inventory. This can ensure you always have enough stock to meet expected demand until the next delivery. 

There are various formulas that can help you calculate your minimum inventory level. One of the most commonly used is as follows:

 Minimum inventory = Lead time * average sales per week/month

Of course, allowances must be made for seasonal fluctuations and changes in consumer buying behavior, which can be difficult to predict, but this is a good starting point for finding your minimum inventory levels.

If we then look at two more holistic inventory management methods that you can implement in your daily operations, you’ll gain some tools to help you keep capital ties in inventory low. Let’s start with JIT.


Just-In-Time (JIT) Inventory Management

Just-In-Time (JIT) inventory management is a method that focuses on reducing inventory by receiving goods only when they are needed for the production process or for sale. This minimizes inventory costs and reduces the risk of excess stock. 

However, you should be aware of periods of increased demand to avoid needing to order a large number of goods at the last minute. To implement JIT effectively, you should:

  • Work closely with your suppliers: Ensure that your suppliers can deliver goods quickly and reliably.
  • Accurately forecast demand: Use data analysis to predict demand and plan your purchases accordingly.
  • Optimize delivery schedules: Plan deliveries so they arrive just before you need them to avoid tying up capital in inventory.

Lean Inventory Management 

Lean inventory management closely follows JIT principles of keeping inventory low. However, there is also a more specific focus on optimizing inventory processes by eliminating waste and improving efficiency in your order management.

 But fundamentally, it also involves having the right amount of stock to meet customer needs without having too much excess inventory. To implement lean inventory management, you should:

  • Continuously analyze inventory: Identify and remove slow-moving or unsellable items.
  • Improve warehouse layout and processes: Optimize the physical layout and processes in the warehouse to reduce downtime and improve efficiency.
  • Use technology solutions: Implement technology such as WMS to get real-time data and better decision-making.

The combination of calculating your minimum inventory, implementing JIT, and adding a touch of lean can help you streamline your inventory management, keep capital ties in inventory low, and avoid stockouts. 

However, if you want to take it a step further with automated inventory management, it’s a good idea to implement an inventory management system.


Warehouse Management System (WMS)

A dedicated Warehouse Management System (WMS) can be a significant help in optimizing your inventory levels, avoiding empty shelves, and preventing high capital ties in your inventory. With a WMS, you can:

  • Order goods immediately: Most inventory systems are equipped with purchasing management, allowing you to order directly from the system by adding your suppliers. Once the goods are registered, your inventory levels will automatically be adjusted.
  • Get live updates on your inventory: The system automatically updates inventory status every time you register a purchase, sale, or make an inventory adjustment, so you always have a clear overview of your stock levels. This way, you can always order new goods based on informed, accurate data.
  • Monitor inventory values: Your inventory value is also automatically updated, helping you keep track of how much money you have tied up in your stock.
  • Receive reorder reminders: Using the minimum inventory formula and the system’s purchasing and sales reports, you can set reasonable minimum thresholds for your goods. The inventory system can then give you a reminder when a product reaches this threshold, so you can restock in good time.

With a WMS, it becomes much easier to avoid situations where you sell out-of-stock items or tie up unnecessary capital in goods that simply take up space. 

The reports, real-time snapshot of inventory status, purchasing management, and ability to receive reorder reminders make it much easier to predict demand and order goods only when needed.


Avoid Stockouts and High Capital Ties with Rackbeat’s WMS

 If this sounds like something for you, read more about Rackbeat’s inventory system and see how it can help you optimize your inventory management. 

Rackbeat’s WMS offers features such as live updates of inventory levels, reorder reminders, purchasing management, and reports on purchases and sales. This means you can always stay updated on your inventory status, avoid running out of essential items, and ensure you don’t tie up unnecessary capital in excess stock.

Who Are We?