Although inventory is one of the largest assets on the balance sheet for many businesses, there isn’t a one-size-fits-all formula to make sure it’s always at optimum levels. As labor fluctuations have impacted companies in recent years, it can be increasingly challenging to track and manage inventory effectively.
A key part of the equation involves inventory management strategies. The need is massive: In 2020, out-of-stock items in the retail sector were valued at $1.14 trillion. Yet 46% of small businesses don’t track their inventory systematically, according to IHL Group, a global research and advisory firm for the retail and hospitality industries.
Companies are innovating in response to these combined obstacles. For instance, in early 2022, Sam’s Club was adding technology to its floor-scrubbing robots so they can also scan shelves for accurate stocking and pricing. As a result, store managers receive timely inventory reports while employees focus on customers.
Putting inventory management to work
Robots aside, employing smart strategies to manage your inventory can also help make the most of your working capital. Here are five things to consider when developing your inventory strategy:
1. Remember that inventory is capital. Both over-stocking and under-stocking carry risk. Many times, your banker and other financial advisors will advise you to build some flexibility into your capital so that when you’re making a decision about stocking your shelves, you have the right funding in place. Funding availability can enable you to expand your inventory at the right price — especially stock that is a commodity or at low risk of obsolescence.
2. Weigh supply-chain issues against future desirability. Carrying more inventory can help you avoid problems that arise with a tricky supply chain — but only if your stock has staying power. For example, some Halloween inventory can carry over to the next year: The Hulk is a time-honored classic, and vampire fangs are eternal. On the other hand, “Tiger King” may not have staying power. If you suspect something won’t be so desirable six months or a year down the road, you may wish to be wary of tying up your capital.
3. Calculate stock levels against customer attitudes. Ultimately, what constitutes an ideal inventory supply depends on your unique business and your customers’ needs and wants. Consider your most recent experience as a consumer purchasing holiday goods, whether Valentine’s Day candy or Fourth of July flags. Gone are the days of overflowing clearance racks for discounted after-holiday purchases — instead, you may have noticed that many retailers keep only minimal holiday supplies, which sell out quickly. In this situation, will your customers tolerate potentially missing out? Or will they look elsewhere to spend their money? Your answer can help drive your inventory decisions and avoid excess inventory that could be taking up space (and capital) that you could be using for something else.
4. Take advantage of technology. Perhaps inventory-scanning robots aren’t in the cards for your business. Still, investing in inventory management technology can reduce your spending on inventory. After all, electronic systems can track inventory as you go — and they are unlikely to lose records or forget about inventory. With precision tracking, you can audit stock efficiently to avoid unexpected out-of-stock emergencies and rush-order fees. While new tech may be an investment, your banker can discuss financing options and help you calculate ROI.
5. Turn to your banker for cash management and other solutions. With deep expertise in your industry sector, your banker can suggest appropriate banking strategies for effective inventory management, such as sweep accounts and rapid, automated deposits, to free up cash flow, along with financing instruments that can deliver more flexibility for inventory management.
To learn more about how our expert bankers can assist you in maintaining workable inventory despite ups and downs in the supply chain and the labor market, contact your Western Alliance Bank relationship manager or find out more about what our bank can offer businesses like yours.