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How much Inventory should you have on hand?

When it comes to retail, the objective is to meet the consumer demand. The trouble arises when the demand isn’t consistent. Market fluctuations and even your audience’s interest, in general, can impact inventory requirement predictions. Without a good grasp on your business sales, the balance between managing your inventory shipments and your customer demands can prove tricky. The key to figuring out how much inventory you should have on hand comes down to how much you know your customers, suppliers and the inventory itself.      

How to Manage Customer Demand

Most people believe that it’s better to sell out of inventory, rather than have old inventory stack up in your storage space. However, this would mean turning away potential customers and revenue just because of a lack of management. Orders and forecasts are two ways a customer will let you know of their purchasing intentions. 

Orders factor in some level of financial obligation, so they are considered more reliable than forecasts. Unfortunately, some people don’t always honor these financial obligations and may change their orders according to their own needs. Forecasts have zero financial obligations and are vague future orders. You shouldn’t depend on them for any sort of customer planning. Besides these, there are other factors to consider:       

  • History of purchases: Who are your customers and what have their transactions in the past been like? What factors have affected their purchasing decisions?
  • Competitive Landscape: Who are your market competitors? What products are they selling that compete with your own? Do your customers choose them over you?
  • Marketing Promotions: Can you increase the demand to your store with any discounts or special promotions? What other marketing channels can you use to improve brand awareness?

How to Manage Shipment

The other aspect of inventory depends on the shipments coming in, and the orders you place with the suppliers. Although inventory-management software can auto-place your orders for you, you will need to consider the cost of goods and how to hold the goods (in case you’re running out of storage space), the supplier time, and the internal lead time.

  • Cost of Goods and Carrying: The actual cost of goods is only a part of your costs associated with inventory. You’ll also need to consider the costs to carry inventory such as warehouse space and insurance.  Choosing between bulk orders vs. batch orders can also impact your inventory costs. In case you’re in urgent need of inventory, you’ll have to pay extra for fast shipping.
  • Supplier Lead Time: The supplier lead time is the time it takes for the product to reach from the supplier to your store. Delays in supply should be accounted for in the supplier lead time. Place blanket orders so as to reduce the supplier lead time.
  • Internal Lead Time: The internal lead time is the time it takes to convert the products into an item ready to be sold at your store. Consider the following factors when you try to figure this out – receiving time, inspection time, put-away time, production cycle time (if you convert some materials into a product), and shipment processing time.

Inventory Management

Finally, the actual inventory to carry can be calculated using the following formulas. These will help you determine exactly how much inventory is required for your business and allow you to make financial changes accordingly. 

The cost of goods sold is simply the sum of the beginning inventory and the inventory purchases minus the end inventory. The average inventory on hand is the total cost of all inventory your business currently holds.

  • Inventory Turnover Days= Period of Time / Inventory Turnover Rate

The period of time is the duration you use for business calculations. For most businesses, this is taken as 360 (for the number of days) for a year.

  • Industry Averages = Cost of Goods Sold / Industry Average Turnover Rate

The industry average cost of goods sold can help your business approximate as to how it fares in comparison with other businesses in the industry. For retail, the industry average turnover ratio can be between 13-15.

There’s no easy way to know exactly how much inventory you should have on hand. However, vigilant stock monitoring, and optimizing inventory movement to and from your store, will help you make more accurate predictions. An inventory financing option will help you get immediate funding to take fast decisions on any inventory you need to purchase or warehouse space you’ll need to rent.

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