Small to medium-sized enterprises (SMEs) that operate with products have a lot of inventory they need to manage. Typically, most businesses do manual inventory management with little technology involvement. However, these days organisations can leverage inventory management software for real-time insights on how much stock is left, what needs to be replaced or added, and what is not selling.
South African SMEs operate on very thin margins, so managing inventory effectively can be the difference between succeeding and failing. Beyond that, accurate inventory records are critical to staying compliant with regulating bodies, such as the South African Revenue Service (SARS).
In this article, we look at what inventory management is, challenges SMEs face in inventory management and the best practices for SMEs.
What is Inventory Management?
Inventory management is the process of tracking, controlling, and optimising a business’s stock, including raw materials, work-in-progress, and finished goods. Its primary goal is to ensure the right products are in the right place at the right time, avoiding costly stockouts while preventing overstocking that ties up cash.
Inventory management system types
There are several types of inventory management systems that businesses use depending on how they operate. Some of the most common are:
- Manual inventory system: Involves physically counting items and recording them on paper or in a spreadsheet.
- Periodic inventory system: Periodic inventory systems include manual and periodic counts. Periodic counts record item details as items move in and out of stock. Barcodes simplify stocktaking. A database contains the records of stock levels and locations.
- Perpetual inventory system: These systems provide real-time stock data, as they rely on automated scanners and trackers that continuously send updates on item movements.
Inventory Management Challenges for SMEs
These are some of the inventory management challenges SMEs face.
1. Inaccurate Forecasting
Forecasting is not just about predicting what customers might buy; it also helps businesses decide how to manage cash and how to keep orders moving. By not keeping up with demand and market trends, SMEs find it hard to know what stock they need soon. This leads to teams depending on past sales and ignoring current needs of customers.
2. Lack of Real-time Visibility
Poor visibility or a lack of visibility of stock levels is a common and costly issue. Not having an accurate view of inventory across every location and stage, fulfilment of terms will slow down, overselling will occur, and customers end up disappointed with their purchasing experience. These gaps usually stem from a disconnected system, missing information or inconsistent tracking.
3. Stock Keeping Unit (SKU) Overload and Inventory Chaos
SKU proliferation happens when adding too many product variations creates more problems than benefits. As the range grows, every new item becomes another SKU to track, store, predict, and ship.
If the SKU count shows more than what the system can handle, the accuracy will go down and operations can get messy. This means inventory counts take longer, and stock mistakes happen.
4. Non-compliance
Any inventory management system for an SME must be efficient and meet compliance demands. From labelling and Internet of Things (IoT) tracking to temperature checks, expiry controls and strict documentation. All these factors add a layer of complexity which most SME inventory management control systems can’t handle.
5. Manual Tracking Systems
Many small businesses rely on spreadsheets and paper notes to manage inventory controls, but this only works for a short period. As the volume of data increases, every update becomes another manual entry to type, double-check and hope no one will overwrite it.
When the process can’t keep up with inventory, accuracy and operations become difficult to manage.
6. Cash Flow Constraints
An inventory system for a growing business must not only track stock accurately but also determine the full cost behind every item. For most SMEs, these unhandled expenses are not just essential but need efficient handling.
From storage handling, shipping, return and the capital tied up in goods that don’t sell, these added costs create complexity, which signals that basic tracking needs additional help to manage everything.
Best Practices for Inventory Management
Here are key inventory management practices that every SME should adopt for streamlined operations.
1. Batch Tracking
Assigning unique batch numbers or codes during the receipt of goods enables smooth tracking of inventory by specific batches and purchase orders. This identifies the date of manufacturing and expiration and facilitates targeted recalls or quality control for batches with issues.
Batch tracking allows specific batch traceability and permits the first-in-first-out (FIFO) method to be implemented. It also links inventory sub-ledgers, purchase orders, and material batches for end-to-end tracking.
2. Implement FIFO
Using oldest inventory items first, based on receipt dates, reduces losses from product expiration and obsolescence. By implementing FIFO, it can help SMEs maintain freshness of perishable products. FIFO should be combined with batch tracing for easy identification of receipt dates. By following FIFO results accurately can be the most accurate valuation of inventory for accounting purposes.
3. Conduct Regular Audits
Conducting periodic wall-to-wall physical inventory counts and comparing the quantities counted to the balances in inventory records helps identify discrepancies and variances. Regular cycle counts highlight inventory losses due to damage, expiration, theft or errors for write-offs. Leveraging asset tags with unique identifiers further simplifies physical audits by enabling quick barcode or QR code scanning to verify asset presence and condition.
It ensures that the inventory management system reflects the actual stock available on hand. Conducting audits also provides an audit trail that helps prevent inventory misplacement.
4. Utilising Inventory Management software
A centralised digital system for inventory management, orders, shipments and other transactions provides real-time visibility into stock levels across the supply chain. Inventory management software can help SMEs automate routine processes, minimising errors and delays.
Additionally, these platforms provide insightful reports to enable data-driven decision-making. They also integrate accounting, sales orders, procurement and other functions for seamless information flow.
5. Do an ABC Analysis
The ABC analysis involves classifying inventory into A, B, and C categories based on annual consumption value. Tight controls and focus need to be applied to A-items that account for 70-80% of the total inventory value.
B-categorised items warrant less oversight and get medium-level attention and resources. C-items require the least management attention as they make up a small portion of the total value. This strategic approach concentrates resources where they provide maximum impact.
6. Safety Stock Management
Determining optimal safety stock levels provides a buffer to handle uncertainties in demand as well as variability in supply delivery lead times. Historical sales patterns and demand forecasts help set up the required safety stock levels.
The aim here is to avoid stockouts and overstocking. Replenishment cycles can be derived from agreed-upon or projected order frequency and lead times.
7. Manage Supplier Relationships
Strategically developing partnerships with reliable suppliers enables negotiating long-term contracts that provide assured supply and stable pricing. Involving suppliers early in product design as well as in inventory and production planning allows better coordination.
By sharing demand forecasts with suppliers, SMEs can facilitate synchronised strategies, and inventory costs can be optimised through approaches like vendor-managed inventory.
8. Categorisation of Inventory
Categorising inventory into raw materials, work-in-progress, finished goods, and returnable inventory enables SMEs to have tailored managed practices. Efficient inventory categorisation helps develop efficient operations.
For example, finished goods may need demand forecasting and sales order tracking, while raw materials focus on replenishment times and supply lead times. With seamless categorisation, you can manage inventory efficiently and ensure that you have ample supplies to meet the daily demand.
9. Continuous Process Improvement
Regularly reviewing and refining inventory management processes using approaches such as the lean and just-in-time models, and advanced automated tools helps to identify problem areas. Improving workflows, storage layouts, procedures and key metrics boost overall inventory performance.
By doing small improvements consistently, SMEs can address areas of waste, gain efficiency and keep pace with evolving business needs.
10. Improved Warehouse Layout
A robust warehouse layout significantly improves inventory traceability, space utilisation, order fulfilment and inventory accuracy. By designing warehouse layouts based on inventory velocity or frequency of access, material movement and picking efficiency can be improved. This means fast-moving items should be stored near shipping areas, while slower items can be in areas further away.
11. Set Inventory KPIs
Setting inventory key performance indicators (KPIs) includes defining goals to give direction to your business activity. Examples of KPIs include maintaining a minimum stock level, having a stable inventory turnover ratio, and reducing revenue shrinkage.
Data-driven KPIs can help reflect and monitor the efficacy of your business operations. Additionally, it helps identify metrics that are not performing well. This way, you can conduct a detailed analysis of your inventory trends and patterns and generate deeper insights into inventory procurement and consumption.
Small to medium-sized enterprises (SMEs) that operate with products have a lot of inventory they need to manage. Typically, most businesses do manual inventory management… Read More
