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How to Manage Inventory in a Retail Store

16 Jul 2024

Let's talk about retail inventory management. Whether you thrive on ticking off boxes and creating lists, or if organising sends shivers down your spine, we can all agree on one thing: keeping your inventory in check is crucial for a successful retail operation.

Here at Epos Now, we're all about streamlining your inventory woes. Our retail POS system is equipped with top-notch organisational tools designed to make your inventory work for you. We're here to share some insider tips to help you whip your inventory into shape hassle-free!

In this guide, we'll cover:

  • What exactly is inventory management?
  • Why it's an absolute must for your retail business
  • Must-know inventory management techniques
  • Handy tips for setting up a POS inventory management system

Ready to take charge of your inventory like a boss? Let's get started.

What is retail inventory management?

Effective retail inventory management is essential for the success of any retail business. It involves overseeing the ordering, organising, storing, and selling of products to meet customer demand while optimising inventory levels and minimising inventory costs. A key component of proper inventory management is utilising an inventory management system or retail inventory management software. These tools help retailers track inventory levels, sales and inventory data, and inventory turnover rates to make informed decisions about purchasing, pricing, and promotions.

By managing inventory effectively, retailers can ensure that they have the right products available when customers need them, without tying up excessive capital in unsold inventory. This not only improves cash flow but also enhances operational efficiency and boosts profit margins. Retail inventory management also involves forecasting future sales trends and adjusting inventory levels accordingly to prevent stockouts or excess inventory. Additionally, retailers must conduct regular inventory counts and audits to maintain accurate inventory records and minimise inventory shrinkage.

Warehouse managements vs retail inventory management

Understanding the difference between warehouse management and inventory management is also good for retailers operating both physical stores and warehouses to know. While both involve overseeing inventory, they have different purposes and require unique approaches.

In-store inventory management primarily focuses on products intended for direct sale to customers. It involves analysing sales data to understand customer preferences and optimise product placement. On the other hand, warehouse management revolves around controlling and monitoring the storage of inventory within a warehouse. While there may be some overlap with inventory management, warehouse management requires separate systems due to its unique requirements.

Warehouse inventory is typically destined for distribution to stores or fulfilment of online orders, necessitating meticulous tracking of inventory locations at all times. To streamline warehouse operations and integrate them with point-of-sale systems, retailers can implement a warehouse management system. This integration reduces the risk of human error in inventory tracking and ensures greater accuracy in inventory management across different channels.

Different types of retail inventory management

In retail, inventory isn't one-size-fits-all. There are distinct types that businesses need to manage efficiently: raw materials, work in progress, finished goods, and maintenance and repair items.

  1. Raw materials: These are the basic materials used in production. If your business is involved in manufacturing, you'll likely have raw materials on hand. Examples include lumber for construction or fabric for clothing production.
  2. Work in progress: This inventory consists of items in the process of being transformed into finished goods. If your business manufactures products, you may have goods at various stages of completion. It's crucial to minimise the time items spend in this stage to maintain efficiency.
  3. Finished goods: This is the inventory ready for sale to customers, whether in-store or online. It includes products you've manufactured yourself or purchased from suppliers. Managing this inventory effectively is key to meeting customer demand and maximising sales.
  4. Maintenance and repair items: These are the tools, parts, and labour needed to service products sold by the retailer. For example, a bike retailer may need inventory for repairing and upgrading bicycles. While not products for sale themselves, these items are essential for providing after-sales service and support to customers.

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Why retail inventory management matters

Effective inventory management is the backbone of any successful retail business. It's good because it enables you to maintain control over your inventory, ensuring that you have the right products available at the right time. By keeping your inventory organised and optimised, you can maximise profitability and streamline operations.

Optimising orders with EOQ

One key aspect of inventory management is optimising your orders using the economic order quantity (EOQ) formula. This formula helps you determine the ideal order size that minimises storage and ordering costs while ensuring you have enough inventory to meet demand. By leveraging EOQ, you can strike the perfect balance between keeping adequate stock levels and avoiding excess inventory.

Preventing excess stock

Excess stock can be a drain on resources and tie up valuable capital. Effective inventory management helps prevent excess stock by providing insights into sales trends and demand patterns. By accurately forecasting demand and monitoring inventory levels, you can avoid overstocking and minimise the risk of dead stock. This ensures that your resources are allocated efficiently and your cash flow remains healthy.

JIT stock management

Just-in-time (JIT) stock management is another valuable strategy that relies on precise inventory management. With JIT, you time your orders to arrive just when they are needed, minimising the need for excess inventory and reducing storage costs. By synchronising supply with demand, JIT stock management allows you to operate more efficiently and respond quickly to changes in customer preferences.

Streamlining with technology

In today's digital age, technology plays a crucial role in inventory management. Leveraging inventory management software and automation tools streamlines processes, saves time, and reduces the risk of errors. A retail inventory management system provides real-time visibility into inventory levels, allowing you to make informed decisions and adapt quickly to market changes. By embracing technology, you can enhance operational efficiency and position your business for long-term success.

Essential retail inventory management techniques

Here are some essential retail inventory management techniques every retailer should know:

Inventory valuation: understanding costs

Accurate inventory valuation is crucial for making informed decisions. Here are inventory management processes to understand inventory costs effectively:

The retail method

The retail method, designed with retailers in mind, offers a simple way to calculate inventory costs. Although it's not the most precise method, it helps gauge the relationship between cost and retail price. Essentially, it gives you a rough estimate of your inventory's value by comparing what you paid for it versus what you sell it for.

This method assumes that all your inventory has the same markup, making calculations easy. You just subtract the markup from the total value of your items to find the approximate cost. However, it falls short when you have products with different markups, leading to inaccuracies in your inventory cost overview.

In contrast, the weighted average method comes in handy when product prices don't fluctuate much. It involves pooling the costs of all units of a specific product and then dividing that total cost by the number of units you have. While this method is straightforward to track, it may not provide as accurate results as other methods like FIFO and LIFO, as it blends costs together without considering batch differences.

FIFO (first in, first out):

FIFO is like organising your inventory based on a first-come, first-served basis. Imagine you have a stack of boxes, and you sell the oldest box first. It's as simple as that. So, when you sell a product, you assume you're selling the oldest one you bought.

For example, let's say you bought two batches of a product at different prices. With FIFO, when you make a sale, you assume you're selling the older batch first, even if you have newer ones in stock. This method is great because it generally reflects how businesses naturally sell their products: they use up the oldest inventory first. However, it might not be the best for every situation, especially if your costs keep changing.

LIFO (Last in, first out):

Now, LIFO is like a reversed version of FIFO. Instead of selling the oldest products first, you sell the newest ones first. Picture a stack of boxes again, but this time, you grab the top box—the most recent one—and sell it first. So, when you sell a product, you assume you're selling the newest one you bought.

For instance, let's go back to those two batches of products. With LIFO, when you make a sale, you assume you're selling the newer batch first, even if you still have some of the older batch left. This method can be useful in certain situations, especially if your costs are rising over time. However, it's not as common as FIFO, and it's even banned in some places for financial reporting.

Maintaining inventory accuracy

Explore these techniques to uphold precision in inventory management:

Physical inventory counts:

Think of physical inventory counts like taking a big snapshot of your entire inventory. It's like doing a thorough check to make sure everything you think you have matches up with what's actually there. This inventory management process usually involves counting every single item in your inventory, from the big stuff to the small stuff. For example, imagine you own a bookstore. Doing a physical inventory count means someone goes through every shelf, every aisle, and counts each book one by one. It's time-consuming, but it gives you the most accurate picture of what's in your store.

Cycle counts:

Now, cycle counts are like mini inventory checks that you do more often. Instead of counting everything at once, you break it down into smaller, manageable chunks and count a portion of your inventory regularly. Using the bookstore example again, let's say you decide to count all the children's books this week, and then next week, you count all the mystery novels. By spreading out the counting throughout the year, you're still keeping an eye on your inventory without having to do one massive count.

Spot checking:

Spot checking is like doing a quick check-up on your inventory. Instead of counting everything, you focus on specific items or areas to make sure everything looks right. For instance, let's say you run a clothing store, and you notice that one type of shirt is selling really well. You might do a spot check on that particular shirt to make sure you have enough in stock and that they're in good condition. It's a way to catch any issues or discrepancies early on without having to count everything.

ABC analysis:

ABC analysis is like sorting your inventory into three categories based on how important they are to your business. It helps you focus your attention and resources where they'll have the most impact.

Imagine you're organising your closet. You have clothes you wear all the time, some you wear occasionally, and others you hardly ever touch. ABC analysis does something similar with your inventory.

  • Group A: These are your superstar items—the ones that bring in the most revenue. They might make up a small percentage of your inventory, but they contribute a big chunk of your sales. These are your priority items that need close monitoring and management.
  • Group B: These items are important but not as critical as Group A. They're still selling well, but they don't have the same impact on your bottom line. You'll want to keep an eye on them, but they don't need as much attention as Group A.
  • Group C: These are your low-priority items. They might not sell as often or bring in as much revenue due to not being able to meet customer demand, but they're still part of your inventory. While they're not the focus of your attention, you still want to keep track of them to avoid any surprises.

For example, let's say you own a hardware store. Your Group A items might be power tools—they're expensive, but they fly off the shelves and bring in a lot of revenue. Your Group B items could be things like gardening supplies—they sell well, but not as quickly as power tools. And your Group C items might be niche items like specialty screws—they don't sell often, but they're still part of your inventory.

By using ABC analysis, you can prioritise your inventory management efforts, ensuring you're giving the most attention to the items that matter most to your business.

The complete retail POS system

Delight shoppers, speed up sales, and grow your business. Tailor your Epos Now retail POS to your exact needs with our App Store. 

Tips for an optimised POS inventory system setup:

  • Organise your products: Start by organising your products in your POS System in a way that makes sense for your business. Create clear categories and subcategories that reflect how you sell and track your inventory.
  • Use descriptive names: Make sure your products have clear, descriptive names that are easy to understand. Avoid using abbreviations or codes that only you would know, as this can lead to confusion down the line.
  • Set up barcodes: Implementing barcode scanning can significantly speed up the checkout process and reduce errors. Make sure each of your products has a unique barcode, and that your POS system is set up to recognise and you can use barcode scanners to scan them. TIP: Check out our guide on how barcode scanners work for more info!
  • Establish reorder points: Determine minimum stock levels for each of your products to ensure you never run out of inventory. Set up automatic reorder points in your POS system so that you receive alerts when it's time to restock.
  • Implement stock alerts: Set up stock alerts in your POS system to notify you when inventory levels are running low. This way, you can proactively reorder products before you run out, preventing stock outs and lost sales.
  • Integrate with suppliers: Look into POS integrations with your suppliers to streamline the ordering process. This allows for automatic ordering and updates inventory levels in real-time, reducing manual data entry and errors.
  • Train your staff: Make sure your staff is properly trained on how to use your POS system effectively. Provide ongoing training and support to ensure everyone understands how to input sales, process returns, and manage inventory accurately.
  • Regularly update inventory: Schedule regular inventory counts to ensure your POS software reflects accurate stock levels. This helps prevent discrepancies between your physical inventory and what's recorded in your system.
  • Review sales data: Use the reporting features of your POS system to analyse sales data and identify trends. This can help you make informed decisions about which products to reorder, which to discount, and which to remove from your inventory altogether.

By implementing these tips, you can optimise your POS inventory system to improve inventory turnover, maintain accurate records of average inventory, and leverage inventory management systems effectively for streamlined operations.

Final thoughts

So, there you have it! Our blog has walked you through some key strategies for getting the most out of your inventory management system in retail. By putting these tips into action—like organising your products smartly, using barcode scanning, and teaming up with your suppliers—you'll streamline your operations, dodge those dreaded stockouts, and boost your profits. 

Liked this blog? Check out our additional inventory resources including our inventory classification guide, and our inventory turnover ratio for retail guide. 

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