About  51% of US retailers admit that their retail inventory solutions need improvement. As a business owner, you’ve probably experienced this struggle firsthand. Overstocked, and you’re hemorrhaging cash on excess. Understocked, you’ll be facing irate customers and missed sales opportunities.

Bringing to the fold inventory optimization best practices is the answer to these retail woes, and that’s what this guide is here to help you achieve. Whether a retail giant or an Etsy shop, these tactics can streamline operations, increase turnover, and transform inventory from a headache to a competitive advantage.

Here are your tips.

1. Implement an inventory management system

Running a busy retail store? Or perhaps you have a growing e-commerce business. Without an inventory management system, you very well know the chaos that comes with it.

Here are some possibilities: you’re constantly running out of popular items or overstocking slow-movers. You may not even have a single clue about what’s selling well or gathering dust on your shelves! A good inventory system can steer you clear of these pitfalls. You get real-time updates on stock levels, automated reordering, and detailed reports. This way, you get to analyze your inventory performance much more effectively.

An inventory management system works just as well when creating your own inventory. Going for a trusty manufacturing inventory control software can give you complete visibility into your raw material stocks, work-in-progress levels, and finished goods inventory. This may very well eliminate the need for guesswork in your inventory management processes.

2. Forecast demand

You’ve got this awesome inventory system tracking everything. The bad news is it won’t be enough to stay ahead of the game. Demand forecasting comes to the rescue, allowing you to analyze your past sales data and, thus, identify seasonal patterns and trends.

Maybe you sell way more flip-flops in the summer months or see a spike in Christmas sweater sales every December. Your forecasting tools can crunch those numbers and give you a good idea of how much inventory you’ll need for those peak periods.

But it’s not just about seasons – you also need to factor in things like market trends, competitor activity, and even economic conditions. If a new fashion trend is taking off or a hot new product is disrupting your industry, your forecasting methods need to adapt and help you adjust your inventory levels accordingly.

3. Practice cycle counting

Annually, you carry out this inventory count where you have to shut down operations for days, hire temporary staff, and spend hours upon hours counting every last item. No doubt this process can be exhausting. But does it really have to be your yearly story? No way, so long as you perform cycle counting.

Here, you’re not counting everything at once; instead, you consistently count smaller subsets of your inventory throughout the year. The result? You get to identify discrepancies and fix them as you go.

Mark you, a survey found that   65% of inventory records in retail stores suffer some form of inaccuracies. Since you’re counting more frequently, you can catch any errors or shrinkage early.

4. Optimize stock levels

Okay, so you’ve got your inventory counted and accounted for. What you need to do now is make sure you have just the right amount of each item. Got too little? You risk stockouts and disappointed customers. Meanwhile, by having too much, you’re tying up valuable cash in excess inventory that’s just gathering dust.

The key here is finding the Goldilocks zone, which means having just enough. And how do you achieve that? By setting smart reorder points and safety stock levels for each product.

As its name implies, the reorder point is that stock level triggering a reorder. Take note of this and you’ll never run out before the new shipment arrives. Your safety stock is a buffer to protect against unplanned spikes in demand or supplier delays.

For instance, you’re selling artisanal coffee beans online. Your top seller is that rich Sumatran dark roast. You know that the process of ordering to delivery takes 10 days, and you sell around 50 bags per week. You may set the reorder point to 100 bags so you can squeeze in one more order before running out. You can then keep an extra 50-bag safety stock, and you’re golden.

5. Analyze inventory turnover

Inventory turnover… it’s one of those metrics that can really shine a light on whether or not you’re efficiently managing your stock. Now, why does it matter?

The longer inventory sits on your shelves or in your warehouse, the more it costs you in terms of storage, insurance, obsolescence risk, and that all-important tied-up capital. Ideally, you want your inventory turning over quickly to minimize such carrying expenses costs.

The key is to analyze turnover rates at the product level. You might find that those flat-screen TVs are flying off the shelves with a super high turnover, while those outdated VCR players are collecting dust at an abysmal rate. That’s your cue to ramp up stock levels on the hot sellers and clear out the deadweight.

6. Implement ABC analysis

What is ABC analysis in this arena? To prioritize your highest-value, fastest-moving products for the tightest inventory control while requiring less rigorous tracking for lower-value, slower items.

For example, your ‘A’ items are those critical 20% of products comprising 80% of your sales value and inventory investment. Those get the white-glove treatment with very frequent cycle counting, stringent reorder parameters, etc. The ‘B’ and ‘C’ categories get progressively less intensive tracking.

Say you own an auto parts store. Your high-end car batteries and late-model engine components might be ‘A’ items that you monitor extremely closely. The ‘B’ group could be maintenance items like filters and windshield wipers. And those boxes of 20-year-old taillight bulbs collecting dust? Pure ‘C’ items that you only verify a couple times a year.

7. Leverage data analytics

Think about it – you’re sitting on mountains of raw data from your inventory system, sales records, supplier shipments, and more. But without proper analysis, all those numbers are useless. Tap into inventory analytics tools and you turn that data into real, actionable insights. The payoff? Growth and increase in earnings.

A 2022 McKinsey study corroborates this. It concludes that companies that properly leverage data, analytics, and tech achieve growth above market rates. They also report a substantial increase in earnings by 15% to 25%.

So, how do you get this right?

For instance, you run a busy grocery store. Your analytics dashboard can slice and dice that sales data to spot trends like which products are selling better on weekends versus weekdays.

Maybe you see a spike in beer and chip sales every Sunday – makes sense with the big game on. You can then optimize your ordering and shelf stocking accordingly.

Or the analytics might uncover slower-moving items that are tying up cash unnecessarily. You can then look at promotions, repositioning, or pruning those parts of your inventory mix. The tools can even do predictive forecasting, using algorithms to anticipate future demand based on variables like weather patterns, holidays, and more.

8. Implement just-in-time (JIT) practices

The core idea here is to strip out any excess inventory costs by having supplies show up at your facility right when you need them for production or fulfillment. Now, pulling this off requires incredible coordination with your suppliers to sync up their shipping with your sales cycles and production schedules.

You’ll also need world-class forecasting capabilities to make sure you’re ordering the right quantities at the right times. But when you nail it? The payoffs can be huge in terms of lower inventory carrying costs, less obsolescence risk, and smaller storage footprints needed.

The potential downside is that any hiccup in the timing – like a supplier delay or demand spike –can throw a wrench into your operations and lead to shortages or stoppages.

9. Optimize warehouse layout

The key strategies here include zoning, slotting, and optimizing your picking processes.

Zoning means creating dedicated areas for different types of items – high-value goods get a secure zone, fast movers are near the shipping dock, etc. It keeps things organized and cuts down on travel time.

Slotting is all about strategically positioning your highest-velocity items in the most easily accessible locations. Those super popular items get the prime real estate closest to packing stations, while slower movers can reside in farther-flung corners of the warehouse.

And then there’s pickle optimization, which is about designing logical, efficient routes and processes for your pickers to streamline all that walking, scanning, and pulling of items for orders. Little things like shortcutting routes and setting up put walls can collectively save tons of time and labor costs.

10. Regularly review and adjust

Customer demands are always shifting based on trends and seasonality. Your product mix is evolving. Supply chains get disrupted by all sorts of internal and external factors. Even your business goals and priorities could pivot from one year to the next.

If your inventory management policies stay stagnant, you’re going to start accumulating waste and inefficiencies. That’s why it’s so crucial to bake in regular review cycles – monthly, quarterly, annually. Whatever makes sense for your specific operations.

During these check-ins, you’ll want to scrutinize metrics like inventory turnover rates, stockout frequencies, carrying costs, forecasting accuracy, and more. Look for areas of opportunity and don’t be afraid to make surgical adjustments.

In closing

There you have it – a blueprint of inventory optimization best practices to help your business operate leanly and keep customers satisfied. Now, inventory management isn’t a once-and-done process. It’s something you’ll dwell on for a while to get right. But by keeping these tips in mind and working with the right tools and pros, it’ll only be a matter of time before things start working out for you.