Poor Inventory Management | Managing Optimal Stock For Businesses (2024)

Poor Inventory Management

Poor inventory management is among the top reasons why small businesses fail. Managing inventory is essentially a balancing act between having too little or too much. How much inventory is “just right” is often a moving target. This is because demand for different SKUs can change throughout the year because of seasonality or over the course of several years because of changing trends in demand.

What is Inventory Management?

Inventory management is more than just simply keeping track of what you have in your storeroom or warehouse. It is also sometimes known as stock control. Inventory management includes, but not limited to, keeping track of specific parts to build your products and/or services, managing your supply vendors, ensuring a steady flow of inventory availability in the event of a surge in demand, and keeping an optimal stock level at all times to ensure business continuity.

What is Inventory Management Software?

Typically, inventory software stores all vital information on your inventory, warehouse, supply vendors, acquisition of stock, costing, movements of stock, and more. Usually, your inventory management system integrates with your accounting or Enterprise Resource Planning (ERP) software for a seamless process across different functions and departments. The core function of inventory management software is to track the acquisition of the items, the location of your inventory across warehouses or locations, the price and cost of inventory, movements, and more. Solutions like SAP Business One also tie inventory management with Point-of-Sale (POS) software for complete integration with front-end retail operations. These software solution provides you with automation, full visibility, and powerful inventory control.

The effects of too little inventory

Missed Sales

This happens when you cannot immediately fulfill an order because of a stock-out of the ordered item. Not keeping track of inventory levels can lead to stock out of popular items during a sudden surge in demand. This can happen due to peak season or other external factors. Having sufficient stock is crucial. A business that has a reputation for running out of stock frequently will struggle to reach its full potential. These common inventory management challenges can be solved by utilising Enterprise Resource Planning software that can improve the understanding of customer demand, sales forecast, and supply chain lead times.Having an inventory tracking system streamlines and automates the process of replenishing fast-moving items.

Lost Customers

Customers rarely look back after they find a company that can promptly fulfill their orders at a competitive price. They will continue to give the company their business until they have a reason to do otherwise. If these customers were turned away because of a stock-out problem in your inventory, you have lost their repeat business. Every one of these lost customers is a lost source of recurring profit for your company. As with the previous point, having a stock-out and losing many customers during a peak buying season will have a long-term impact on your business.

The effects of too much inventory

Tied Up Money

Conversely, inventory that doesn’t move is tied up money that could have been put to better use. It is money that could have been used to pay wages, pay off debts, purchase more fast-moving inventory, pay the rent, or expand your business. Inventory often has a limited shelf life because of spoilage, obsolescence, material degradation, or changing consumer trends. If your inventory exceeds its shelf life, this tied-up money is lost.

Illiquidity

Inventory and stock are less liquid compared to cash. Tying up too much cash in raw materials, work-in-progress items and finished products is detrimental to your company’s cash flow. In times of need, you will find that inventory will not be able to convert to cash swiftly to meet your business needs.

Excessive Warehousing Costs

The process of storing inventory also costs money. It means paying rent on oversized warehouses. Excess inventory gets in the way of warehouse operations or it uses up space that could be better used for faster-moving items. Management of the excess inventory also has a labor cost.

Inventory Management Solution To Easily Manage Inventory Across Multiple Locations

Beyond having too little or too much inventory, poor inventory management causes inefficiencies because you don’t have accurate real-time information on how much inventory you have. This increases the risk of mistakes in reordering inventory from suppliers or of selling nonexistent inventory. These mistakes can also result in lost sales and lost repeat customers or in an over-sized inventory of the wrong SKUs.

An ideal scenario is to keep an optimal inventory level by effectively forecasting demand based on historical information plus an outlook of external trends. Effective inventory management helps businesses cope with variations in demand and also balance warehousing cost versus ordering cost.

To learn more about improving your inventory management through the use of the right management system, please contact us.