If tossing spoiled products into the dumpster and paying suppliers’ restocking fees is costing your business money, here’s how to polish your inventory management approach and operate more sustainably.
A significant line item for many small businesses, inventory expenses can quickly eat away at profits and leave companies holding the bag on excess, spoiled, or obsolete products. The COVID pandemic has exacerbated the problem for many small businesses, as customer needs continue to shift. Whether those goods are used to make final products, sold directly to customers, or a little of both, they have to be managed properly to avoid losing money and creating excess waste.
READ MORE: Inventory Management 101: How to Manage Small Business Inventory
Effective inventory management helps companies operate more sustainably, better utilize limited physical space, and reduce storage costs. It’s all about striking a balance between the amount of product in stock and what your customers are going to need within a specified period of time.
This helps avoid both stockouts and overstocks, the latter of which can result in unused inventory piling up on the warehouse or stockroom shelf.
Don’t throw it in the dumpster
Throwing away a few heads of lettuce or packages of meat may not seem like a big deal, but multiply that waste over a 12-month period and it can add up to a substantial financial loss. The perception that your company isn’t operating sustainably notwithstanding, these hidden costs can also impact healthy cash flow.
READ MORE: How to Solve Your Restaurant’s Food WasteIssue
All inventory has a physical cost associated with it, and that cost is covered either by the business' cash flow, bank loans, or other financial means. In a world where cash is king, it's important to remember that any money that'stied up in inventoryis cash that can't be used for other business purposes.
Along with physical inventory costs, the expenses associated with transporting, storing, insuring, and tracking the inventory also come into play when dealing with time-sensitive goods. If those items become unusable or unsalable, they then have to be written down or written off the company’s books. Awrite-downis necessary when the market value of the inventory falls below the cost reported on financial statements, and a write-off takes the inventory off the books once it no longer has value.
7 ways to start reducing waste now
Whether it's tomatoes that have a one-week shelf life, soon-to-be-obsolete electrical components, or a few cases of holiday figurines that didn’t sell last season, companies must accurately track, identify, and reduce inventory waste across all of these product categories.
Here are seven inventory management strategies that you can use to keep inventory waste to a minimum.
Get a good inventory count first
If you don’t already know exactly what’s on your warehouse, storeroom, or store shelves, it’s time to do a full inventory count. This will give you a good baseline to work from when setting minimum inventory levels and ensuring that you have products available when your customers need it. This can be done using manual systems, spreadsheets,orinventory management software.
Put someone in charge
By holding a manager or other employee responsible for overseeing inventory, you can effectively improve overall inventory performance and reduce wasted product. If your team is stretched to the limit, you can have someone specifically responsible for goods that are most in danger of spoiling or becoming unsalable/unusable quickly. Have that person handle the delivery receiving, quality control, inventory monitoring, and identification of slow-moving goods that fall into this category.
That way, when questions come up, you’ll know who to ask.
Understand the root of the problem
Business can be unpredictable, but slow-moving inventory problems as a whole can usually be attributed to several different root problems. Your demand forecasting capabilities may need to be updated for your current customer base, for instance, or maybe you need new suppliers who can better meet your delivery lead time requirements.
READ MORE: The Top Restaurant Trends in 2021
When forecasting, be sure to factor seasonality, current demand trends, and upcoming promotions into the mix (versus just the quantity of stock you need for a specific number ofdays). Look atdoing an inventory auditto understand where you currently stand.
Put the FIFO strategy to the test
An inventory management technique that helps companies reduce unsellable spoilage, first-in-first-out (FIFO) basically means selling your oldest stock first. Applicable for both perishable and non-perishable products, FIFO helps ensure that the oldest stock is cycled out.
Automate your inventory management system
If you’re not already using inventory management software, you can either purchase a standalone system or one that integrates directly with your existing business management software. Many of these systems are cloud- and subscription-based, meaning they don’t require a huge upfront investment.
These systems help you identify and track products; maintain the right inventory levels for each product; alert you when items are over- or under-stocked beyond a predefined threshold; and generate sales histories and other reports that you can use to avoid product spoilage, waste, and obsolete inventory problems.
Using more drop shipping
This inventory management technique allows you to sell products without actually having to hold onto that inventory. This, in turn, reduces the odds that perishable inventory will go to waste. Instead, awholesaler or manufacturer is responsiblefor carrying the inventory and shipping the products when a consumer makes a purchase. You don’t worry about inventory holding, storage, or fulfillment, all of which can consume valuable financial and time resources for a small business.
Have a Plan B in place
Even when your refrigeration levels are correct, stock levels monitored, and product expiration dates checked regularly, product spoilage or obsolescence is bound to happen. When it does, you’ll want to have a plan in place for unloading the goods quickly to make room for new stock. Mark them down at a deep discount, bundle them up with some of your other popular products, return them to the supplier, if possible, or donate them to a local charity.
While some inventory loss due to spoilage will happen, you can use the steps outlined above to ensure the smallest possible impact on your company and bottom line. Through careful monitoring, putting someone in charge, investing in an inventory management system, and using approaches like FIFO, you’ll be able to readily spot and mitigate issues before they turn into major problems.
Square has the tools to run your business — on your own terms. To help celebrate businesses paving their way forward, we partnered with Forbes onthe Next 1000 initiativeto spotlight bold entrepreneurs and share their most valuable lessons. By sharing firsthand experiences, we're helping businesses celebrate resilience, build skills, and explore what's next.See how Square works,andget more expert guidancefor the next era of small business.
