A start-up’s guide to inventory management

Inventory management is a crucial process for any start-up that sells physical goods.

It could make a big difference to your start-up’s bottom line.

Purchase too little stock, and you’ll risk selling out and disappointing customers, but purchase too much, and you could incur extra costs and might have to throw away unused goods.

The objective is to hold enough inventory to meet customer demand without overstocking goods, which can take up valuable space.

Worse still, overstocking might mean throwing items away, particularly if they are perishable or could otherwise be spoiled if not correctly stored.

But how do you know the right amount of inventory to have – and when you should restock?

That is where inventory management comes into play.

What is inventory management?

Inventory management identifies what products you need, how much to purchase, and when to do so.

But there’s more to it than simply buying items when they’re needed.

It’s about overseeing your stock levels across all stages of the inventory cycle – from procurement and storage to sales and distribution.

Effective inventory management optimises the flow of goods within your supply chain.

This could help support your goal of having products readily available for customers on demand while minimising excess stock that can take up capital and storage space.

You might also monitor product demand trends, anticipate seasonal variations, and make data-driven decisions to accurately predict your inventory needs.

Why inventory management is important

Inventory management is essential for several reasons:

• cost reduction– it minimises expenditure associated with carrying excess inventory
• cash flow improvement – it ensures that you invest in stock when needed and don’t spend resources on products that won’t sell
• customer satisfaction – it helps anticipate customer demand, so you always have items in stock when needed.

How to manage your inventory

There are many ways you could plan and manage your inventory, and the best methods for your start-up will depend on the types of products you sell.

Here are nine ways you might consider managing your inventory.

1. Audit your stock

One way to determine when to purchase new supplies is to audit your existing stock regularly.

You could identify how many of a particular product you’ve sold and over what period to help you identify when you need to purchase new goods and how much to order, and it can also address issues such as spoilage, theft, and errors in data entry.

Organisations often perform audits weekly or monthly, but in some businesses – particularly those dealing with fresh produce – it might be a good idea to audit stocks daily or at the end of each shift.

2. Track sales

You should consider tracking your start-up’s sales so that you can get a better understanding of your customers’ purchasing habits.

This process can help you identify trends such as peak sales times, seasonality, and popular combinations of products that sell well together.

With this information, you can predict what products you’ll need in the future and purchase stock accordingly.

3. Use the 80/20 rule

The 80/20 rule, also known as the Pareto Principle, states that 20% of your products account for 80% of your profits.

Identifying these top-performing products could help you optimise inventory management for volume and profitability.

4. Organise storage areas

You might find it easier to manage your inventory if you set up defined places to keep stock.

This will help you find items quicker, plus you’ll be able to see from a quick glance when supplies are running low.

You could assign particular shelves, racks, or storage facilities with specific items and then label each one.

5. Use the FIFO approach

FIFO stands for ‘first in, first out’, and it refers to a method of inventory management in which you focus on selling the products you’ve had for the longest.

For example, when selling food or other perishable goods, your existing products will go bad before the freshest items.

It’s why retailers often place them at the front of shelves, encouraging customers to buy them before they spoil.

This principle can also be used for non-perishable goods because it stops businesses from overstocking items that don’t sell or holding on to goods that become damaged or obsolete.

6. Find the right purchasing strategy

There are two main strategies for purchasing inventory.

The first is the ‘push strategy’, in which goods are purchased based on expected demand, and the second is the ‘pull strategy’, which is based on existing demand, and items are purchased in small quantities when needed.

There’s also a variant of the pull strategy known as JIT (just-in-time), in which goods are ordered to arrive just as you need them.

An example of JIT inventory management would be a car serving garage, where car parts are ordered and arrive the same day to repair a vehicle booked for servicing.

JIT can be valuable, as a smaller business such as a garage might not have the space to stock costly items for specific cars that might not be required for some time.

7. Forecast your demand

You might be able to save money by forecasting future demand for inventory.

You can do this by considering factors such as historical sales figures, real-time data analysis, and seasonality.

Accurate forecasting helps maintain optimal inventory levels and cash flow.

Read more about business forecasting with our guide.

8. Identify market trends

Another way to predict the demand for goods is to look at overall market trends.

You might compare the products you stock to your competitors or consider broader economic trends.

For example, if people spend less due to the cost of living, you might cut back on your purchases.

Alternatively, you might look at more cost-effective products to help customers meet essential needs at a more affordable price.

9. Embrace technology

Inventory management software and systems can provide real-time tracking information and predict customer demand forecasting.

You might even be able to use this technology to automate tasks, such as order processing, restocking, and data analysis.

This may save your team time and reduce the risk of human error.