8 inventory management techniques for small businesses

Today’s supply chains are more forward-thinking than ever, leveraging data analysis to accurately forecast demand and optimize production. But there’s still a sizable amount of business owners who haven’t started using these time-saving tactics. 

Some may feel inventory management on a small scale is unimportant or not valuable enough for the effort. Let’s explore the benefits, including why inventory management is important, strategies to implement, and tactics to increase your supply chain efforts. 

Importance of inventory management efficiency

Inventory management is important to execute properly so you can fulfill clients' orders correctly and in a timely manner. Without proper inventory management, you risk losing business to a competitor that has maintained its supply successfully. 

What is inventory management?

Inventory management refers to a system that allows your supply chain to track, manage, and store inventory. This also includes:

• Projecting buyers’ needs and forecasting inventory to meet those needs 
• Planning for the unexpected and housing safety stock
• Increasing efficiency to maximize profits

How inventory management pertains to your small business

Inventory management can be a great asset to your small business by allowing you more control over your product and inventory to meet your customers' needs. Other benefits include:

1. Increasing your supply chain efficiency
2. Integrating effective technology
3. Maximizing your profits and returns

1. Increases supply chain efficiency 

As a small business, you likely use a supplier to manufacture your products. But the supply chain only runs smoothly if you’re prepared on the back end since you have little control over how efficiently your supplier can produce the inventory. For this reason, it can be helpful to implement an inventory management system to:

• Keep abreast of what's in stock
• Be in the know regarding stock shortages
• Have an idea of when you need to restock based on how long it takes your supplier to produce 

2. Integrates effective technology

Technology can turn complicated tasks into an efficient process with very little effort most of the time. This is especially true with inventory management. By integrating effective technology like QuickBooks Advanced Inventory, you have the tools to:

• Set accurate delivery dates
• Automate processes to reduce errors
• Manage your stock including tracking, what has been ordered, and its location

3. Maximizes your profits and returns

As a small business owner, your lifeblood is arguably your profitability and return on investment, and inventory management plays a role in those aspects of the business. You can also maximize profits and returns through:

• Efficient and accurate order fulfillment
• Decreased delivery times
• Less inventory surplus, so you have what you need and not too much of it

Importance of inventory management efficiency

Here’s why efficient inventory management is important for your business’s success:

• Optimal stock levels: Keeping the right amount of inventory ensures you meet customer demand without overstocking. Efficient inventory management helps you strike that perfect balance, avoiding excess stock that ties up your capital and preventing stockouts that can lead to lost sales.
• Cost savings: Better inventory management reduces storage costs and minimizes waste. By keeping inventory levels optimized, you can save on warehousing expenses and reduce the risk of obsolescence, where products become outdated or unsellable.
• Improved cash flow: Efficient inventory management frees up cash that would otherwise be tied up in unsold stock. This improved cash flow can be reinvested in other areas of your business, such as marketing, expansion, or new product development.
• Enhanced customer satisfaction: Having the right products available when your customers need them boosts satisfaction and loyalty. Efficient inventory management ensures timely restocking of popular items, helping you maintain a reputation for reliability and responsiveness.
• Data-driven decisions: Using inventory management software gives you access to real-time data and insights. This information helps you make informed decisions about purchasing, sales forecasting, and identifying trends, ultimately leading to smarter business strategies.
• Reduced administrative burden: Streamlined inventory processes mean less time spent on manual tracking and more time focused on growing your business. Automation and inventory management tools reduce human error and simplify your day-to-day operations.
• Better supplier relationships: Efficient inventory management helps you plan your orders better, leading to more predictable and consistent purchasing patterns. This reliability can strengthen your relationships with suppliers, potentially leading to better terms and discounts.

Key Features of Inventory Management

Effective business inventory management is essential for keeping your operations running smoothly and your customers happy. Here are some key features you should know about:

Real-time tracking

Tracking your inventory in real-time ensures you always know what you have in stock. This feature helps prevent stockouts and overstock situations, allowing you to respond quickly to changes in demand.

Automated reordering

Automated reordering systems streamline the replenishment process. When stock levels reach a predefined threshold, the system automatically generates purchase orders, ensuring you never run out of essential items.

Inventory forecasting

Accurate forecasting tools analyze historical sales data to predict future demand. This helps you make informed decisions about purchasing and production, optimizing your inventory management.

Barcode scanning and RFID 

Barcode scanners and RFID technology simplify inventory tracking, increase accuracy, and speed up tasks like receiving, picking, and shipping products.

Centralized inventory control 

Centralized systems provide a single view of inventory across multiple locations. This is especially useful for businesses with multiple warehouses or retail outlets, ensuring you can manage stock levels efficiently.

Reporting and analytics

Detailed reports and analytics give you insights into your inventory performance. Metrics such as turnover rates, carrying costs, and gross margins help you understand how well your inventory is being managed.

Integration with other systems

Seamless integration with other business systems like accounting, sales, and procurement enhances overall efficiency. This interconnectedness ensures that your inventory data is always up-to-date and accurate.

Inventory classification 

Classifying your inventory using methods like ABC analysis helps prioritize management efforts. By focusing on the most valuable items, you can optimize stock levels and improve cash flow.

Benefits of Inventory Management

Inventory management is more than just keeping track of your stock. It’s a powerful tool that can drive your business forward. Here are some key benefits of effective inventory management:

• Better decision-making: Access to accurate, real-time inventory data allows you to make informed decisions. Whether you're planning your next order or launching a new product, having reliable data at your fingertips supports smarter, more strategic choices.
• Competitive advantage: Businesses that manage their inventory efficiently can respond quickly to market changes and customer demands. This agility gives you a competitive edge, enabling you to capitalize on new opportunities faster than your competitors.
• Increased efficiency: Streamlined inventory processes save time and reduce the administrative burden. Automation and inventory management tools reduce manual work and errors, allowing you to focus on growing your business.
• Accurate financial reporting: Proper inventory management ensures that your financial statements reflect the true value of your inventory. This accuracy is crucial for financial planning, securing loans, and meeting regulatory requirements.
• Scalability: As your business grows, efficient inventory management systems can scale with you. Whether you’re expanding your product line or entering new markets, robust inventory management techniques support seamless growth.
• Reduced stockouts and overstock: By closely monitoring your inventory levels, you can avoid the pitfalls of having too little or too much stock. This balance helps maintain steady sales and reduces the risk of lost revenue.

Inventory management challenges

Managing inventory can come with its fair share of difficulties, but understanding these obstacles can help you address them proactively and keep your business running smoothly. Here are some challenges to consider:

• Demand forecasting: Accurately predicting customer demand is a constant challenge. Overestimating demand can lead to overstocking, while underestimating it can result in stockouts. Both scenarios can hurt your bottom line.
• Inventory tracking: Tracking inventory across multiple locations and sales channels can be complex and can lead to discrepancies, making it difficult to know what you have in stock at any given time.
• Supplier reliability: Dependence on suppliers means that any delays or issues on their end can disrupt your inventory levels.
• Inventory turnover: Balancing inventory turnover is tricky. High turnover rates can strain your supply chain, while low turnover rates can result in obsolete stock. Striking the right balance is key to maintaining efficient operations.
• Storage costs: As your inventory grows, so do your storage costs. It can be a tough balancing act to manage these costs without compromising product availability.
• Technology integration: Implementing and integrating inventory management software with other business systems (like accounting, sales, and procurement) can be complex and time-consuming.
• Stock audits: Regular stock audits are necessary to maintain accurate inventory records, but they can be time-consuming and disruptive to daily operations.
• Inventory shrinkage: Losses due to theft, damage, or errors can impact your inventory levels and profitability. Implementing effective security measures and employee training can help reduce shrinkage.
• Seasonal variations: Adjusting inventory levels to match seasonal demand without overcommitting resources is a constant challenge that requires careful planning and flexibility.

Regulatory compliance: Ensuring that your inventory management practices comply with industry regulations and standards can be complex. Staying updated on relevant laws and maintaining compliance can be resource-intensive.

8 inventory management techniques and strategies

The best inventory management strategies all contain some sort of efficiency aspect that allows business owners to streamline processes and essentially make life easier for them. For instance: 

1. Inventory forecasting: allows owners to create a plan based on historical company data and trends 
2. Safety stock: allows for a small surplus that can accommodate a random influx of orders or supplier strain
3. Batch tracking: allows you to track your goods to and from the supplier to optimize stock efficiency

Better analytics and control are at the core of developing a more agile supply chain model. It’s likely not a change you’ll be able to implement overnight, but the following strategies are a good place to start.

1. Invest in the proper inventory management system

Collecting better analytics requires companies to adopt the right solutions. A sound inventory management system is the beating heart of any enterprise, offering real-time access to data that enables business leaders to forecast trends and shifts in buyer needs, as well as gain full transparency into demand and inventory levels.

Inventory management systems output powerful analytics and provide much-needed visibility into operations. For example, monitoring run rate to gain visibility into how much of an item you are selling at a given time helps accurately predict future demand.

2. Prepare for system faults 

When operations are running smoothly, vulnerabilities can fly under the radar. Unexpected events, like COVID-19, can hit supply chains hard, quickly revealing operational deficiencies. Understanding where weaknesses lie requires a lot of digging that extends beyond first- and second-tier suppliers to distribution facilities and transportation hubs.

Supply chain mapping is an exercise worthy of a business’s time and cost investment. This method allows a business owner to pinpoint potential vulnerabilities and reduce risk by identifying:

• Alternative suppliers
• Different distributors
• Multiple transportation providers 

3. Control your inventory 

Don’t rely on suppliers and providers to accurately report on inventory levels. Take the lead role by regularly monitoring, auditing, and managing inventory in your system to maintain an accurate picture of goods. Some tips include:

• Keep an eye on what’s coming into your supply chain
• Regularly check the quality as well as the quantity you receive
• Conduct inventory checks periodically throughout the month or quarter

4. Identify alternate sales channels 

During the COVID-19 pandemic, supply chains broke down and storefronts were forced to close, with business owners frantically moving online to continue operations. However, many failed to properly analyze costs. For example, moving sales to an online marketplace allowed owners to stay in front of their target audience, but at a lower rate of profitability.

While the transition from brick-and-mortar to online seemed like a sound alternative for many businesses, the percentage of profit lost to marketplace vendor fees took a big bite out of the bottom line. Shifting to online platforms from brick-and-mortar needs to be calculated and done at the right place to ensure success. This means that identifying alternative and profitable sales channels is required as the market becomes more digitalized.

5. Be transparent about your offerings 

Being transparent about your offerings helps clear the air for your customers and gives them a better understanding of your product offering. There are several ways to help accomplish transparency, including:

• Make sure that your website is up to date 
• Creating a marketing message that resonates with target audiences 
• Having clear and concise product descriptions

Now is the time for message unity across departments and roles to ensure consumers are aware of what you sell and why the shift occurred.

6. Automate when possible 

Business process automation is the task of implementing technology to automate repeatable and sometimes mundane business tasks. These could include email responses, recurring invoices, or payroll, for example. Automation can also ease the burden of business ownership by creating a more efficient inventory management system through:

• Simplifying processes with a hands-off approach
• Eliminating human error
• Creating a streamlined effort that utilizes software to automate the inventory system 
• Plan for the unexpected

Unforeseen demand and economic shifts can happen, and as a small business owner, it can only benefit you and your business to be prepared. Preparedness can look different for different industries, but for those that offer products and need inventory on hand, it would be wise to:

• Maintain a safety stock 
• Have backup suppliers and know their wait times
• Understand the market and historical data to predict potential difficulties

While it’s not always fun to think about something negative affecting your business, the reality is that preparing for the unexpected can help you weather hard times and be confident in your ability to sustain the business.

8. Take advantage of data analytics for optimization

Data analytics can also benefit your inventory management by eliminating the guesswork pertaining to what you have in stock, what's needed, and where it’s coming from. Data is an extremely valuable tool for a small business owner. It can tell you things like:

• Company cost history
• Projected shortages and surpluses
• Customer buying trends 
• Product successes and failures

Using Advanced Inventory management can give you the data and insight to make informed decisions and optimize your business efforts. 

Incorporating inventory management for a successful business

Success in an ever-changing world requires planning, forecasting, and strategizing. This requires companies to leverage business intelligence to properly forecast buyer behavior to ensure supply and demand are in sync. It means developing a strategy to reduce the risk of disruption and ensure inventory control via alternative sources. And, finally, it means adopting a new mindset as we continue to learn the best strategies for inventory management.

Learn how QuickBooks Enterprise can help you take control of inventory management with Advanced Inventory.