Vol. 127 - NO. 39

Blog Startup CPG

SINCE 2019

Inventory Management 101
The Who, What, When, Where, Why of Inventory Management

By Stephen Selgrade, Marketing Director of Cin7

What is inventory management?

Inventory management is the process of overseeing, controlling, and optimizing a company’s inventory. But what is considered inventory? If you produce a good, inventory includes raw materials, work in progress products, the final product, and even in transit goods (goods traveling between you and your customer or you and your suppliers). If you purchase the product from a supplier you won’t have raw materials (although you may have pieces to assemble), but you will have the rest of those items listed above. 

There are also many inventory management methods including:

  • First in First Out (FIFO): under FIFO, the oldest inventory items are assumed to be the first ones sold or used, while the more recently acquired items remain in inventory.
  • Last in Last Out (LIFO): this method assumes that the most recently acquired inventory items are the first ones sold or used, while older items remain in inventory.
  • Perpetual Inventory Method: when a company keeps a continuous and up-to-date record of its inventory levels.
  • Periodic Inventory Method: an approach where a company does not continuously track its inventory levels in real-time. Instead, inventory counts are conducted periodically at specific intervals. Intervals could be monthly, quarterly, or annually.
  • ABC Analysis: a method of categorizing items in inventory based on their importance or value. “A” items are the most important and valuable, “B” items are moderately important, and “C” items are the least valuable. C items often represent a large portion of total inventory but contribute minimally to the overall consumption value (annual demand × item cost per unit). 
  • Just-in-time Inventory: this is when materials and components are delivered to the production line or assembly point exactly when they are needed, neither too early nor too late. The goal is to streamline operations and reduce waste, and holding costs, by synchronizing production with customer demand.
  • Economic Order Quantity (EOQ) Formula: this method is used to determine the optimal order quantity that minimizes total inventory holding costs and ordering costs. 

Who is involved in inventory management?

There are many parties you need to consider in your inventory management process. Of course your company is involved, but you must also consider suppliers, end customers, retailers and/or ecommerce platforms you sell through, and the shipping companies you work with. That’s a lot of parties to juggle! When you add this much complexity you’re going to need help with inventory management. This can come in the form of a tool like Excel (good for when you are just getting started) or, even better, an Inventory Management Software that can help you manage and connect all these parties.

The When: planning and forecasting 

How do you know how much inventory to have on hand? Or when to expand your product line? Or even when to offer discounts on your product? 

Planning and forecasting answers all of these questions and is an important part of inventory management. Forecasting tells you how much inventory you need and when the right time is to take certain actions like purchasing more product or raw materials, discounting, and expanding SKUs. However, this requires good data. And good data comes not only from your knowledge of the market and your business, which is important, but also from a strong inventory management practice. An inventory management software tool will aid you considerably in this effort by aggregating data and providing automated reports on this data. 

Where is your inventory? 

This seems like an easy question but as you grow this becomes more complex. You may start off in a garage or storage closet, but most small CPG companies grow to need a warehouse or even several warehouses. Moreover, you again need to consider inventory in transit, your inventory on retailer shelves, and lead times to get more inventory from your suppliers. You can also work with 3rd Party Logistic (3PL) companies that can take some of the shortage and fulfillment tasks off your hands.

Why Inventory Management is important for CPGs

A good inventory management process is vital for growing CPG companies. As you grow, it is easy for costs to get out of control. A good inventory management process will help you not only understand your costs but also avoid inventory inefficiencies by controlling and minimizing them. This is made easier when you use inventory management tools with connected inventory performance.

Inventory management also enables growth. When you have a handle on your inventory, your business has the ability to add SKUs, and expand markets and sales channels. As you do these things inventory management becomes more complex, but with good processes in place you can fuel this growth and beat your competition.

Inventory management doesn’t just encourage growth, it also increases customer satisfaction. Wondering how? Here are a couple of ways:

  • Fulfilling their orders quickly – with good inventory management you’ll avoid going out of stock and having to backorder customers. 
  • Selling where they buy – the growth stated above not only helps you but it helps your customers by showing up where they buy, whether that is a big box store or online.
  • Returns and refunds – some returns are inevitable and with food and beverage products some spoilage as well. But when you use the right tools you’ll be able to handle this and get the customer the replacement product or refund they need quickly.

What tools are there to help?

Once you have selected and implemented an inventory management method, we recommend you use a software tool to help you. When you are first starting out, Excel or Google Sheets is a good option and certainly beats pen and paper. Google Sheets also has the advantage of being free. However, as you grow spreadsheets will no longer meet your needs. When you reach this point you need an Inventory Management Software (IMS) solution. This is because spreadsheets don’t connect systems or provide automation or reporting, and they require too much manual work which leads to human error. 

What to look for when choosing an Inventory Management Software solution

When your business grows beyond simple spreadsheets, it’s important that you choose an IMS that meets your company’s unique needs. Here are some of the things to consider when looking for an IMS:

  • Inventory Tracking:  At a basic level the solution should track all your inventory but you may want to look for an IMS solution that has built in barcode scanning to help automate the process
  • Supplier Management and Purchasing: See what features the IMS tool has to help you manage the purchasing process and your suppliers
  • Production: BOMs, assembly, and disassembly are all things a good IMS should help  CPGs with. Make sure the tools you are considering include all the features you need to streamline your production process
  • Automation: The more an IMS can automate, the less redundant tasks you have to do, and the more you can focus on strategic initiatives to grow your business. Most IMS solutions have some automation but compare each solution to see which one has the best automations for your business
  • Integrations: Does the solution integrate with all the 3rd parties and software you already work with or want to work with? The best solutions will offer integrations with accounting tools like Quickbooks and Xero, ecommerce solutions like Shopify and Amazon, shipping companies, payment solutions, and more. Even native EDI and 3PL connections are an option with some solutions. 
  • Reporting: Reporting is a big advantage IMS solutions have over simple spreadsheets. Reports help you make the crucial decisions that help your business control costs and grow. See what reports each IMS has and what custom reports you can create.
  • Cost: There is a wide range of costs when it comes to IMS solutions. Especially if you include traditional ERP solutions. We recommend steering away from ERPs because of the higher cost, time to implement, and complexity of use.
  • Ease of Use: As a small CPG you need something that implements quickly and is easy to use. See what onboarding and training IMS solutions provide before you sign up. They need to help you get up and running and good IMS solutions can be used by anyone (they don’t require a PhD).

While there are many IMS solutions, we recommend Cin7 Core for Startup CPG members. As a partner of Startup CPG, Cin7 is committed to helping members succeed. With that, Cin7 is offering a discount of 50% off for the first three months for Startup CPG members to help them get started. But don’t take our word for it, start out with a free trial and test out Cin7 Core for yourself. Sign up for a trial today!

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