Inventory management: definition, methods and tools for a shop

Inventory management means having the right product, in the right quantity, in the right place, when the customer asks for it, without tying up more cash than necessary. For a shop, it decides a good part of the margin: every stock-out is a lost sale, every surplus is cash sitting idle.

This guide lays out the basics: what you manage, how you count it, how you value it and how you steer it. To go further on optimisation, read Stock optimisation: indicators, methods and software.

What is inventory management?

Inventory management covers everything that touches goods between purchase and sale:

• buy: what to order, how much, from which supplier and when;
• receive: check deliveries and enter them into stock;
• allocate: between the stockroom, the shops and the e-shop warehouse;
• sell: take every item sold out of stock, at the till as well as online;
• count: do the stocktake and correct the discrepancies;
• value: know what the stock is worth in the accounts.

In a small shop, one person often does all of this. The more shops, channels and references there are, the more you need a system that keeps the figures up to date.

Why it matters so much for a shop

Stock is often a retailer's biggest use of cash. Approximate management costs you in three ways:

• Stock-outs: the customer leaves without buying, or buys elsewhere. It is an invisible loss, because it appears in no sales report.
• Overstock: cash is tied up, space runs short, and you will often have to mark down.
• Shrinkage and markdown: selling at a loss what you bought too much of, or recording breakage and theft.

Good inventory management does not look for the lowest possible stock. It looks for the balance between these three costs, product by product.

The different types of stock

• Available stock: what can be sold right away.
• Safety stock: the reserve that covers unforeseen sales and delivery delays.
• Seasonal stock: bought in advance for a peak period, such as the sales, Christmas or back to school.
• Stock on order: ordered but not yet received. It counts in your restocking decisions.
• Stock in transit: on its way between two shops, or between the warehouse and a store.
• Dead stock: items that have not sold for a long time. They cost space and cash.

Stocktaking: knowing what you really have

The stock shown by your till or your e-shop is never exactly the real stock: input errors, breakage, theft, returns recorded wrongly. Stocktaking is there to correct these discrepancies.

• Annual stocktake: a full count, at least once a year, usually at the close of the financial year. It is required for the accounts.
• Cycle counting: you count part of the stock every week, starting with the most expensive or best-selling items. Discrepancies are spotted earlier.
• Perpetual inventory: stock is updated at every receipt and every sale, thanks to the till and the software. It is the basis of any reliable management.

Valuing your stock

For the accounts, the stock has to be given a value. Two methods are common in France:

• Weighted average cost: each item is worth the average of its purchase prices.
• First in, first out (FIFO): the items sold are considered to be the oldest ones.

On the shelf, FIFO is also a storage rule: sell the oldest first, especially for dated or seasonal products.

The indicators to track

• Stock cover: how many days of sales your stock covers. Too low, and a stock-out is near. Too high, and cash sits idle.
• Turnover: how many times the stock renews over a period. It is calculated by dividing the cost of sales by the average stock.
• Stock-out rate: the share of days when a product in demand was missing.
• Dead stock: the value of items with no sale for 60 or 90 days.
• Margin after carrying cost: the gross margin, minus what it costs to keep the stock.

These indicators only make sense per product and per shop. A global average almost always hides a stock-out on one side and an overstock on the other.

Restocking methods

• Reorder point: you reorder when stock falls below a threshold, calculated from sales during the delivery lead time and from the safety stock.
• Min/max: you top stock back up to a maximum as soon as it falls below a minimum.
• Fixed-date ordering: you order every week or every month, adjusting the quantities.
• Demand forecasting: you estimate upcoming sales, day by day, taking into account seasons, weather and trends, then order what covers the period.

Threshold methods work well on regular products. Forecasting becomes necessary as soon as sales depend on seasons, promotions or weather. We detail how Sweet forecasts sales product by product in the article on Horizon.

Stock-out alerts

A stock-out alert warns you before the shelf is empty. To be useful, it must:

• be calculated per shop, not on total stock;
• take into account the supplier's delivery lead time;
• take into account the stock already on order;
• suggest an action: order, or transfer from another shop that has too much.

Managing the stock of several shops and an e-shop

With several points of sale, the difficulty changes in nature: the same product can be missing in one shop and sit idle in another. You then need to:

• bring together the sales of all the tills and the e-shop in a single reference stock;
• track stock shop by shop;
• transfer before buying again, when one store has too much of an item that is missing elsewhere;
• group supplier orders to reach the minimums and the free-shipping threshold.

Spreadsheet or inventory management software?

A spreadsheet is enough for a few dozen references and a single shop. Beyond that, it quickly goes wrong: it is not linked to sales, it forgets stock on order and it warns you of nothing.

Inventory management software connects to the till, the e-shop and the logistics provider, updates stock at every sale, calculates restocks and alerts you before stock-outs. The criteria for choosing one, and the steps to set it up, are detailed in our guide to optimising your stock.

What Sway One does

Sway One plugs into the tools you already use: Shopify, PrestaShop, WooCommerce, your tills such as Square, SumUp or Lightspeed, and your logistics provider. It brings together the sales of all your channels, then:

• forecasts demand product by product and shop by shop;
• suggests restocks, with the quantities, taking into account order minimums, free shipping and lead times;
• warns of stock-outs per shop and suggests transfers between stores;
• turns restocks into supplier purchase orders;
• then measures what each decision earned.

On our simulated shops, Sweet 1.4, the engine of Sway One, raises the margin gained from +4.1% to +7.4% on average. The detail is in the Sweet 1.4 article, and the gains calculator estimates what that represents for your shop.

Frequently asked questions

What is the definition of inventory management?

It is the set of decisions and operations that make it possible to have the right product, in the right quantity, in the right place and at the right time: buying, receiving, allocating, selling, counting and valuing goods.

What are the main inventory management methods?

For restocking: the reorder point, min/max, fixed-date ordering and demand forecasting. For valuation: weighted average cost and FIFO. For counting: annual, cycle or perpetual inventory.

How do you calculate stock cover?

Divide the available stock by the average sales of one day. A stock of 120 pieces at 4 sales per day covers 30 days.

How do you avoid stock-outs?

Track stock shop by shop, take supplier lead times and stock on order into account, keep a safety stock on the products that matter, and get alerted before the shelf is empty.

Do you need software to manage your stock?

Not for a small shop with few references. As soon as there are several channels, several shops or marked seasons, software linked to sales avoids most of a spreadsheet's errors.