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What are retail inventory costs?Best practices for retail inventory management
Retail inventory management relies on your employees, your processes, and the technologies at your store. Poor retail inventory management is a common reason new businesses fail, likely because the cost of inventory — whether you’re ordering the right amount or storing things too long — can have a significant impact on your profit margins.
What are retail inventory costs?
Inventory costs can be broken down into these categories:
- Ordering costs are the costs associated with purchasing inventory. This can include your vendor costs, inspections, and shipping costs.
- Shortage costs are the various costs that come up when a product is out of stock. These can be monetary costs, like expedited shipping, as well as nonmonetary costs, like customer satisfaction.
- Carrying costs are the combined costs of holding your inventory and are usually compared to the actual value of the product being held. Ideally you should carry 20 to 30 percent of your inventory value, but the average rate varies by industry.
Retail inventory management can be key to driving costs down. You need to strategize tactics to control your stock so you can maintain the appropriate amount of inventory to meet customer demand without holding excess materials at your store (which costs you money).
Best practices for retail inventory management
So how can you manage inventory at your retail store? Here are five best practices for retail inventory management.
Invest in an inventory management system
You can do inventory management manually, but it can be tedious and inaccuracies often arise due to miscounting. Inventory management software allows you to automate the tracking process and saves you a substantial amount of time. Look for software that integrates with your retail POS, so your inventory count is displayed in real time.
Set up stock alerts
Stock alerts can help you prevent product shortages at your retail store. When you set up stock alerts, you can select a minimum inventory for each of your products and get alerts when items are near or below the threshold.
Select suppliers strategically
Your vendors are key players in your retail inventory management strategy, so you need to select them carefully. With each supplier, consider the price, product quality, reputation, and efficiency.
To best manage your vendors, be sure to set expectations early and form a strong relationship. Your success is dependent on their efficiency and effectiveness, so make it clear that you and your vendors are partners.
Implement SKU management practices
Businesses continue to increase the range of products they sell in order to meet the demands of consumers. But that doesn’t mean you should carry an overwhelming amount of products at your retail store — it can actually hurt your profitability. SKU management is the process of analyzing the carrying cost for each SKU item to determine which products are best serving your business. If certain SKUs aren’t performing financially, consider discontinuing them in your retail store.
Optimize your order size
When you strategically plan a bulk order of materials from a vendor, you minimize purchasing and shipping costs. Analyzing retail metrics, which you can easily do with data analytics tools in your POS, gives you insight into how you should create purchase orders.
Consider drop shipping
If you’re starting an online store, you may want to consider drop shipping, a retail fulfillment method where the store doesn’t hold inventory. Instead products are shipped from the manufacturer to the consumer.
