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Effective Inventory Management for Small Business is Crucial

By Samuel Greengard

Inventory management can be crucial to successfully operating many types of small businesses. In fact, the ability to develop a robust digital inventory management system could determine whether many organizations’ sales translate into profits robust enough to create long-term business success. For businesses trading internationally, the inventory challenge is even greater.

Yet improving inventory management in a small or midsize enterprise (SME) can be a formidable challenge—and something that touches every corner of a business. Not only is it necessary to track pricing for raw materials and components and understand supply and demand variables, there’s also a need to address constantly changing global availability and pricing—along with market conditions and sales demand.

 

Developing an optimal digital inventory management system typically requires a focus on several key factors: understanding market conditions, establishing a trusted group of suppliers and vendors, and negotiating pricing. It also calls for the creation of internal systems, technologies, and tools that deliver insights to help shape global inventory management.

 

Global Supply Chains Can Stress SMEs

 

In recent years, global supply chains have introduced both opportunities and challenges to inventory management for small businesses. The World Trade Organization (WTO) reports that trade volumes have grown at an annual rate of 4.8 percent since 1990.1 However, there also are fluctuations in currencies, markets, and pricing, and trade disruptions and quality-control issues that can create disruption.

 

Macro-economic factors represent only part of the challenge, however. In order to improve international inventory management, a company often must gain visibility into real-time trends and events within its entire enterprise. The task typically includes procurement, manufacturing, operations, marketing, and sales. Further, it might require new enterprise resource planning (ERP), supply chain management (SCM), and other enterprise software and tools.

 

Ultimately, most businesses must fully link departments, enterprise systems, and various outside data sources in order to construct a best-practice view into digital inventory management. However, a 2017 survey found that 43 percent of small businesses do not track their inventory or use a manual process to do so. What’s more, nearly one-quarter (24 percent) do not have a software system in place for managing processes.2

 

Inventory Management for Small Business Goes to the Next Level

 

Global inventory management starts with a more robust and resilient framework for managing conditions and inventory. There are four primary factors that a business must address in order to adopt a best-practice framework.

 

  • Understand and categorize inventory.3 Improved visibility into inventory levels can be crucial. This typically means identifying high-value and low-value items, often through an approach referred to as selective inventory control, or ABC analysis.4 It recognizes that all stock and inventory isn’t equal. This method allows organizations to focus on the investments and inventory resources that matter most. It helps an organization optimize warehouse space, recognize better pricing strategies, and identify the right suppliers for the right materials or components. Numerous software programs support ABC analysis.
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  • Develop a strategy.5 Numerous models exist for constructing a robust digital inventory management system. This might include supplier- or vendor-managed inventory, third-party fulfillment, and partnering with several companies. Experts say it’s important to adopt a cross-functional approach that spans marketing, sales, procurement, and operations. An organization can also benefit by appointing managers to specifically oversee inventory management and purchasing functions.
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  • Understand market and internal conditions. It’s critical for SMEs to understand commodity and component availability, current market pricing (both downstream and upstream), and tap sales forecasts to achieve a best-practice digital inventory management system. ERP and SCM software typically deliver real-time visibility into point-of-sale and supplier data. Various accounting software systems and data analytics tools can deliver deeper reporting into real-time trends. An organization might also benefit by using third-party data that delivers insights into market conditions, including seasonal demand fluctuations.
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  • Build a better inventory management framework. The ability to gain visibility into internal and external factors—and automate processes—can be key to establishing a more agile and flexible international inventory management framework. Internally, this can require barcoding or the use of RFID, smartphones, and other handheld devices. It might also call for upgrades to a network and use of cloud resources in order to deliver real-time data to decision makers. All of this could point to the need for new partners—or the need to establish a more flexible global trading network.

Achieving Inventory Management for Small Business

 

Several benefits can accrue from a best-practice international inventory management approach. These include lower costs, higher profit margins, and the ability to take advantage of changing conditions and market disruptions.6 In addition, an agile and flexible just-in-time (JIT) framework promotes lean inventory, which can generate additional gains.7 A Bain & Company study found that companies can wring out gains of 20 to 50 percent in inventory levels through a more advanced analytical approach.8

 

Bain & Company noted that a key to success is using statistical formulas that incorporate the accuracy of sales forecasts, required production lead times, manufacturing schedule adherence, and service-level data for each SKU. Other best practices include updating calculations at least every three to six months to ensure that decisions are based on the most accurate information available. This best practice approach to inventory management for small businesses, the consulting firm noted, is best achieved with cross-functional teams and a focus on continuous process improvement.

The
Takeaway:

It’s clear that SMEs face unique and sometimes daunting challenges surrounding international inventory management and developing a robust digital inventory management system. Yet, with the right combination of strategic oversight and software, it’s possible to trim costs, improve delivery windows, and react faster—as conditions change in a marketplace or a supply chain. Organizations that address global inventory management effectively can establish a competitive advantage. And the right digital inventory management system can deliver predictability in a highly unpredictable world.

Samuel Greengard - The Author

The Author

Samuel Greengard

Samuel Greengard is a veteran journalist who has contributed to many business and technology publications. He is also the author of two books: The Internet of Things (MIT Press, 2015) and the AARP Crash Course in Finding the Work You Love: The Essential Guide to Reinventing Your Life (Sterling, 2008).

Sources

1. “Strong trade growth in 2018 rests on policy choices,” World Trade Organization; https://www.wto.org/english/news_e/pres18_e/pr820_e.htm
2. State of Small Business Report, Wasp Barcode Technologies; http://www.waspbarcode.com/small-business-report
3. “Ten ways to improve inventory management,” Bain & Company; https://www.bain.com/insights/ten-ways-to-improve-your-inventory-management-wsj/
4. “ABC Analysis,” BusinessDictionary; http://www.businessdictionary.com/definition/ABC-analysis.html
5. “Ten ways to improve inventory management,” Bain & Company; https://www.bain.com/insights/ten-ways-to-improve-your-inventory-management-wsj/
6. “5 Steps to Live Life Simpler, Faster and Fuller with an Inventory Management System,” EmergeBlog; https://emergeapp.net/sales/benefits-inventory-management-software/
7. “What are the main benefits of a JIT (just in time) production strategy?,” Investopedia; https://www.investopedia.com/ask/answers/040215/what-are-main-benefits-jit-just-time-production-strategy.asp
8. “Ten ways to improve inventory management,” Bain & Company; https://www.bain.com/insights/ten-ways-to-improve-your-inventory-management-wsj/

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