As you run your small business, it’s imperative that your warehouse runs efficiently. It’s no secret that the health of your business and stellar customer satisfaction ratings all depend on having must-have items in stock and to ship them on time. To successfully do this, inventory management is a must. But if you are like 43 percent of small businesses in the U.S, you still track inventory with a manual process—like spreadsheets or hand-written records. If so, then it’s very likely you have gaps in your inventory data. Like it or not, those errors build up over time. If mistakes aren’t caught, efficiencies within your warehouse suffer, with time and money wasted.
Lee Lewtawsky, parts technician and purchaser for Precision Drilling, knows what that feels like. The company’s support center near Edmonton, Alberta provides maintenance and repairs to all of its $900 million in equipment. Lewtawsky had to manually update item counts into a spreadsheet and physically locate inventory, all without any record of a component’s history (i.e. the item’s age, usage history or availability).
When equipment needed repaired, it had become the rule—rather than the exception—to unnecessarily order new parts.
“We had a mess. Parts were scattered all over and we wasted lots of time looking for things or ordering things we already had. I wanted to make inventory-control easier and more efficient,” Lewtawsky said.
To put this scenario into perspective, the average cost of a repair part was $5000 to $6000. So not only did Lewtawksy and his warehouse staff waste man power trying to locate parts, they simply lost a lot of money unnecessarily purchasing new parts.
Switching to an automated inventory management system provided Lewtawsky and his staff with 100 percent insight into his inventory data and gave him instant access to accurate, real-time data. He gained two days a month that he had previously spent working on manual inventory tracking.
You might be comfortable with your manual process because it’s the way you’ve always done it. My hope is that you want to make a difference in your business’ success, like Lewtawsky did at Precision Drilling. But if you are still on the fence about switching to an automated system, keep reading. You’ll gain the ability to accurately track important inventory metrics and improve your future business decisions.
- Gross Margin: This may sound like a no-brainer. But all too often small business owners overlook the importance of understanding gross margin. Gross margin is calculated as “a company’s total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage,” according to Investopedia.
Why it’s important: Tracking increased inventory should improve efficiency and lower the cost per unit—or increase the margin.
- Inventory levels and accuracy: As a small business, the pressure is even greater to get and keep inventory levels right on target. In fact, customers may turn to you to get better and more personal service. So, be sure to know how much you have of each product.
Why it’s important: Inventory management helps you determine how much stock you should have on hand, calculates seasonality, and identifies problems within your business processes. Regular inventory counts are a must, especially for items that generate most of your revenue.
- Inventory Turnover: To calculate inventory turnover, first choose a time period you’d like to track, then track the cost of goods sold for that time. Then divide the cost of goods sold by your average inventory.
Why it’s important: The inventory turnover ratio tracks how quickly you’re replacing inventory. Business owners want to prevent storing too much inventory in a warehouse. The higher the inventory turns, the better the business uses its inventory assets. With an inventory tracking system, you can dramatically increase profitability and accurately track inventory without extra expense.
- Item fill rate: This metric calculates the service level between two parties. It is the percentage of items a customer ordered that your business was able to ship. The lower the ratio, the poorer your inventory performance. You should track the fill rate for each individual order and for all orders.
Why it’s important: When you accurately track fill rate, you should be able to answer the following question: What percentage of orders go out completely filled and what percentage have items missing?
Each of these metrics can be valuable resources for the future success of your business. Once you collect the performance data over time, you can create clear goals for your operations and employees. When you define these goals, you can then build on them with more specific metrics from each. This will get your small business progressing to success.