In the second episode of Secret Life of Inventory, we dive into the world of retail inventory management. Running a retail business seems straightforward enough. Buy products, sell them to customers, make a profit. But here’s what most people don’t realize: the difference between thriving retailers and those filing for bankruptcy (I’m looking at you, Kmart) often comes down to one critical factor that happens behind the scenes. Good inventory management.
Watch our episode on retail inventory management below to learn the ins and outs of how to manage your inventory like a pro. For a quick overview of what we covered in the episode, read on.
What is retail inventory management?
Let’s start with the basics. When we talk about retail inventory management, we’re dealing with two main types of inventory that are equally important to your success: finished goods and packing materials.
- Finished goods: The products sitting on your shelves, ready for customers to purchase.
- Packing materials: The materials used to get your finished products to your customers.
It may not seem like a big deal to track packing materials, but try thinking about it this way: if you’re selling a $5,000 camera and you run out of the special bubble wrap needed to ship it safely, that customer isn’t going to get their camera.
This is why successful retailers never sleep on packing materials. Your boxes, tissue paper, and protective packaging are just as critical as the products themselves.
The five categories of finished products
You can break down finished goods into five distinct categories, and understanding these categories can transform how you manage your business.
- Ready-for-sale inventory is obvious. It’s what customers can buy right now.
- Allocated products refer to those that have been sold and assigned to a customer. This distinction is crucial because the product might still be sitting on your shelf, even though it has already been sold.
- In-transit inventory refers to products that have left your facility but have not yet reached the customer.
- Safety stock is your business’s parachute for when things go wrong (and they will). Consider safety stock as your cushion for those “just in case” moments.
- Seasonal inventory is stock you can plan for. Whether it’s Valentine’s Day, Black Friday, or that predictable March surge you’ve noticed in your sales data, seasonal inventory helps you prepare for known demand patterns.
Why this actually matters for your bottom line
Here’s the thing about effective retail inventory management—it’s not just about organization. It’s about having exactly what you need to meet customer demand without tying up too much cash in products that sit on shelves collecting dust.
Good inventory management saves you money by reducing carrying costs and preventing dead stock.
However, the time savings from proper inventory management may provide the most value. Think about cooking in your own kitchen versus trying to make the same meal in someone else’s kitchen. In your own space, you know exactly where everything is, and you can whip up a great meal in just 20 minutes. In an unfamiliar kitchen, that same meal takes twice as long because you’re constantly searching for tools and ingredients.
Inventory management works the same way. When everything is organized and you know exactly what you have and where it is, your entire operation runs smoothly. And when your processes are smooth and efficient, you can scale and grow your business.
When retail giants fall: inventory management disasters
Even giant retailers aren’t immune to the problems poor inventory management can bring. Take Forever 21, which built a $4.4 billion empire through fast fashion, mass-producing trendy clothes at low prices with quick turnovers. However, when the retail landscape shifted in 2017, they failed to adapt their inventory strategy. Instead of adjusting, they continued to expand and accumulate excess inventory. In fast fashion, when styles change faster than you can sell them, that excess becomes dead stock. As a result, they were forced to dramatically reduce prices, which destroyed their profit margins and eventually led to bankruptcy in 2019.
Meanwhile, the price wars of the 1990s revealed another valuable lesson in inventory management. While Walmart implemented just-in-time inventory management, Kmart continued to use outdated inventory techniques. The results were stark: over five years, Kmart’s stock dropped 60% while Walmart’s rose 80%. Kmart’s inability to modernize its inventory systems ultimately led to its merger with Sears.
The lesson? Even billion-dollar companies can’t survive poor inventory management.
Building your inventory management foundation
So what should you actually do? The most effective thing you can do is invest in a proper inventory management system. Modern systems let you handle purchase orders, sales orders, and even pick, pack, and ship, all while using barcodes to track everything in real-time.
Another easy win is keeping a healthy supply of safety stock. As we’ve seen in recent years, supply chain disruptions can happen unexpectedly. And yes, you need to start a cycle count program. Nobody likes counting inventory, but even the best systems in the world will have discrepancies between what’s in your computer and what’s actually on your shelves.
The bottom line
Successful retail isn’t about having the most products or the biggest store, it’s about having the right products at the right time in the right quantities. It’s about understanding that inventory management has a direct impact on your cash flow, customer satisfaction, and ability to grow.
Ready to dive deeper into these inventory management strategies? Watch the full podcast episode to learn more.
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