Retailers big and small across Australia have had to contend with cautious consumer spending as a result of rate hikes and subsequent cost-of-living pressures. With this in mind, many will likely be sitting on larger-than-usual piles of excess inventory this peak season.

Unorganised and unutilised inventory can be a drain on a retail business. However, retailers who treat inventory management as an opportunity to establish more control over their expenses, increase their revenue, tackle shrinkage and improve their customer experience can establish a competitive advantage in the approaching peak season.

But what is inventory management and why is it important, for both you and your customers? And what techniques and strategies can your retail business take advantage of?

Inventory management at a glance

Inventory management – the process through which stock is ordered, organised, stored and sold – is far more important than simply organising your products. When effective it has the potential to increase your profit margins, reduce excess stock and inventory costs, and improve operational efficiency. The benefits for you and your customers are numerous.

Having the right products in stock and easily accessible during peak season ensures that your shoppers can find the products they want, when they want them. This also improves transparency and reduces the risk of lost sales due to stockouts, which can be frustrating and even persuade a shopper to visit your competitor.

Through inventory management you can also minimise overstock, which can tie up too much revenue and incurs carrying costs. If you can strike the right balance between the two, you’ll be better positioned to maximise revenue and profitability.

You can also use real-time inventory data to optimise pricing strategies to drive more sales. For example, you can use it to determine which items are overstocked and could be worth discounting, or knowing when to stop promoting an item that has almost sold out.

Ultimately, all of the benefits are passed on to your shoppers. In Australia’s vibrant retail sector, it’s not always easy to differentiate on price or product, but customer service can be a competitive differentiator. Don’t overlook inventory management’s ability to drive this.

For example, when you have a better handle on your inventory you can reduce lead times, provide more accurate delivery estimates, and offer a smoother holistic shopping experience that increases customer satisfaction and retention. The benefits for you and your shoppers are evident, but what are some inventory management techniques you should know about?

Improving your inventory management

There is no one-size-fits all approach to inventory management, which is influenced by factors such as the type of stock you hold, how many locations your retail operation has, and whether you’re pure play or omnichannel. Here are a few practical techniques to consider.

The first step, which is time-consuming but lays the foundation for everything that follows, is a full physical inventory count. This involves counting every single item in your store(s) and warehouse(s). It provides the most accurate snapshot of inventory, but is impractical to perform frequently. Typically, it’s recommended to conduct a full count at least once a year when SKU (Stock Keeping Unit) levels are lowest, like the end of January or July.

Cycle counting is a great approach to bridge the gap between full inventory counts. It involves counting smaller amounts of inventory more regularly, allowing you to maintain an always-on overview without the burden of counting everything frequently. For instance, a bookstore might choose to cycle count all children’s books in one session and non-fiction books in another.

Then there’s spot checking, which involves counting the same inventory segment for several consecutive weeks to identify patterns, unexpected changes, or shrinkage in specific products. High-risk items, like low-cost accessories, can benefit from regular spot checks to detect issues promptly.

The ABC inventory classification system categorises items based on their revenue generation. Group A is the top 20% of SKUs generating 80% of revenue. Group B is the next 30% of SKUs contributing 15% of revenue. And Group C is the remaining 50% of SKUs yielding 5% of revenue. These categories help you prioritise. Group A items require more frequent monitoring, while B and C items need less frequent attention. By aligning your inventory counts with these categories, you can optimise the efficiency of your inventory management practices.

These methods help strike a balance between accuracy and efficiency while ensuring that the most valuable and high-performing inventory items receive the attention they deserve. By now, most retailers have digitally transformed and are using a POS system – which sits at the heart of a retail operation, including inventory management. An optimised POS system like Lightspeed and an optimised approach can make a significant difference to inventory management.

Ultimately, inventory management is how retailers can exert more control over their stock, using the insights you derive to help maximise profit margins, decrease surplus stock, reduce inventory costs, operate more efficiently and enhance customer experiences. Despite cautious consumer spending, their expectations remain high. Through effective inventory management, however, your retailer business can exceed those expectations and make the most of the upcoming peak period.

Andrew Fraser is managing director of APAC at Lightspeed.