Inventory management is one of the pillars of a successful retail operation. Retail inventory management techniques help stores and ecommerce sellers satisfy customers, reduce costs and increase profits.
What Is Retail Inventory Management?
Retail inventory management is the process of ensuring you carry merchandise that shoppers want, with neither too little nor too much on hand. By managing inventory, retailers meet customer demand without running out of stock or carrying excess supply.
In practice, effective retail inventory management results in lower costs and a better understanding of sales patterns. Retail inventory management tools and methods give retailers more information with which to run their businesses, including:
What Is the Importance of Inventory Management in Retail?
Inventory management is vital for retailers because the practice helps them increase profits. They are more likely to have enough inventory to capture every possible sale while avoiding overstock and minimizing expenses.
From a strategic point of view, retail inventory management increases efficiency. The practice:
How Does Retail Inventory Management Work?
Retail inventory management works by creating systems to log products, receive them into inventory, track changes when sales occur, manage the flow of goods from purchasing to final sale and check stock counts.
The information from these systems helps you achieve the benefits of retail inventory management, such as lower costs and higher profit margins.
10 Basic Steps in Retail Inventory Management
The 10 basic steps in retail inventory management verify the goods you have, their quantity, location and other specifics such as expiration date. This stock data is useful for maximizing profits by understanding demand, costs and other variables.
You can integrate these procedures into a retail inventory management system, which can be as simple as a paper ledger or a spreadsheet but typically involves an electronic solution.
The following is a breakdown of the steps in retail inventory management.
Inventory Management Methods for Retailers
Inventory management methods help retailers generate maximum profits by reducing costs, improving efficiency and understanding sales drivers. These methods optimize quantities purchased from suppliers, fine-tune fulfillment processes, strategically locate products, account for inventory and analyze demand and sales patterns.
The following are some of the key inventory management methods for retailers, organized by category. You can learn more about many of these in the “Essential Guide to Inventory Control.”
Inventory Ordering Techniques for Retailers
These methods will help you determine demand. Inventory management software can automate this planning.
Inventory Fulfillment Methods for Retailers:
These methods offer ways to reduce the cost of getting products to customers or holding inventory. They also increase handling efficiency.
Inventory Accounting Techniques for Retailers
Use one of these methods to determine the cost of your inventory and goods sold for accounting purposes. Both techniques impact profits, taxes and the usefulness of financial reports. They are strictly for the accounting of physical inventory. They do not require you to identify and track the age of each item sold.
To learn more about inventory costs, read “The Key to Using Inventory Cost Accounting Methods in Your Business.”
Inventory Analysis and Forecasting Methods for Retailers
Retailers use techniques in this category to understand their performance. For example, they identify products that sell best so they can prioritize them. Stores also use these to determine their return on inventory investment and estimate the value of their stock.
Inventory Audit Methods for Retailers
These techniques double-check inventory counts, helping retailers avoid stock outages and dead stock. Inventory errors, mistakes and miscounts are prevalent even when using RFID and barcode tagging. Inaccuracies cause inefficiencies, lost sales and budgeting and forecasting difficulties. A 2019 study for the ECR retailer-manufacturing working group found that about 60% of retailers’ inventory records were inaccurate.
Inventory audit methods include:
Best Practices and Expert Tips for Retail Inventory Management
Retailers that follow inventory management best practices lay the foundation for greater stock accuracy, lower costs, less shrinkage and higher profit margins. Strive to meet industry standards and follow the advice of inventory experts.
Why You Should Invest in a Retail Inventory Management Solution
A retail business will quickly outgrow using pen and paper or spreadsheets to track stock. Retail inventory management solutions automate your administration and documentation, raise accuracy, improve the customer experience, reduce costs and reveal valuable trends.
The benefits include:
If you operate an ecommerce, multichannel or omnichannel business, managing inventory is virtually impossible without an automated solution. See this article about the key features of inventory management systems to learn more about how this technology can transform your retail operations.
How POS Systems Can Help with Retail Inventory Management
Integrating a point-of-sale system with your inventory management process puts more information at your fingertips. You can use the data to improve many aspects of your retail business, such as purchasing, overhead costs and merchandise sell-through.
Here are some example benefits:
Retail Inventory Management FAQs
Some retail inventory management topics crop up frequently:
What Are Retail Inventory Costs?
This retail inventory method, also known as cost-to-retail, estimates the ending inventory value by using the ratio of inventory cost to the retail price. This accounting technique shows how much the cost of the good represents of the merchandise’s retail price.
So, if you are selling dresses for $100 and your wholesale cost is $25, your cost to retail ratio is 25%.
From another perspective, retail inventory costs consist of more than the wholesale price of the merchandise. You have to factor in costs such as storage, insurance, transportation, shrinkage, handling and more.
How Are Inventory Levels Monitored in Retail Stores?
Keeping track of inventory in stores can be challenging, so most retailers use multiple techniques to monitor inventory levels. First, they integrate a POS system with an inventory management system, so the stock reflects every sale or return.
Retailers also put RFID tags and bar codes on merchandise to gather information on stock quickly, keep track of inventory location and update inventory records. They also make sure to record shrinkage. Store staff or managers update the POS system when products are damaged and stolen, which adjusts inventory counts. Implementing loss prevention measures, such as visible security guards, helps keep inventory counts accurate by deterring theft.
In addition, stores conduct physical inventory counts periodically and check these findings against inventory records. Any mismatch requires an adjustment. Finally, training staff on procedures such as exchanges and returns and stressing the importance of putting them into the system helps retailers maintain oversight of inventory levels.
What Is a Good Inventory Turnover Rate for Retail?
Inventory turnover rate measures how many times inventory sells in a year. Generally, a higher number is better. The average U.S. retail inventory turnover rate was about eight in 2019, according to CSIMarket, so a number above that qualifies as good.
For example, in 2019, Walmart’s inventory turnover ratio was 8.48 turns. This means that Walmart sold and restocked their inventory about 8.48 times in 2019, or every one to two months, to meet customer demand. This rate is most useful for comparing companies.
But turnover varies widely by store type, so retailers should compare their rate to their peers’.
For example, the Retail Owners Institute found RV dealers had an average inventory turnover of 2.4 in 2019, while bakeries averaged 52. Typically, CPG products will have higher turnover, while higher ticket items generally have a lower turnover rate. You can learn more about turnover by reading “Inventory Turnover Primer: Calculations, Rates and Analyses.”
Remember that the turnover rate does not tell the whole story. A store that has a much higher turnover rate than its counterparts may not be purchasing enough. The retailer may not be optimizing order size, incurring higher shipping costs or missing quantity discounts.
Moreover, turnover does not show how many sales a store missed because an item was out of stock. So, a seemingly positive turnover rate could mask underlying problems. Similarly, a store with a lower turnover number may be over-ordering or have too many slow-selling products and spending too much on inventory storage.
Low-margin, high-volume stores depend on rapid turnover to make a profit. Grocery stores had turnover rates around 17 in 2019, according to CSIMarket. Yet retailers that sell expensive products, especially those that take a long time to manufacture, can thrive on low turnover rates.
What Is Retail Inventory Control?
Retail inventory control is the process of managing retail goods from order to final sale. The goal is to ensure a retailer has the ideal amount of product available when customers want it while keeping costs at a minimum.
The retail inventory management methods described earlier, along with technology and other systems, work together to achieve retail inventory control. Learn more in the “Essential Guide to Inventory Control.”
Transform Your Retail Inventory Management With NetSuite
The right technology is crucial to achieving maximum efficiency in retail inventory management. You need to be able to see all products, across all channels, in a single view and apply intelligent order management to your purchasing to provide customers with an exceptional shopping experience. The right solution scales with your business and supports unlimited expansion.
NetSuite offers a suite of native tools for tracking inventory in multiple locations, determining reorder points and managing safety stock and cycle counts. Find the right balance between demand and supply across your entire organization with the demand planning and distribution requirements planning features. Learn more about how you can use NetSuite to help plan and manage retail inventory automatically, reduce handling costs and increase cash flow.