Inventory Management Best Practices

Proper inventory management includes knowing what to buy, how much to buy, and when to buy it. Properly categorizing merchandise and knowing how to analyze information to support inventory management decisions is critical. With or without a computer, a retailer must be able to measure merchandise performance correctly and react in a timely manner to problems and opportunities. This is a very important element that makes the difference between success or failure for all retailers.

The following information helps retailers setup categories to manage their inventory efficiently. The best practices found below will touch on how to categorize merchandise which issues and opportunities may require your attention. You need to look at your sales and profit margin for each category on a daily, monthly and yearly basis and then ask yourself the following questions. It is very important to use your time and money on the right decision, and a computer system must provide you with basic elements to do this quickly and accurately.

If the profit margin for this category is HIGH, then ask yourself...
  • Why is my profit margin high?
  • Are my total sales high or low for this category?
  • Should I dedicate more floor space to this type of merchandise?  Will I sell more if I do?
  • Should I train my employees how to sell and push this merchandise?
  • Am I running out of stock and losing sales in this category?  Your system should have another report that can quickly give you this information.
  • Which product lines are making me the most money in this category?
  • Should I order more of a certain product line that is very profitable? You may need to assign a “Brand” to each inventory item, so that you can report based on this information. The MultiFlex RMS solution offers multiple ways to view this information.  
If the profit margin for this category is LOW, then ask yourself...
  • Why are my profits low?
  • Are my total sales high or low for this category?
  • Should I stop ordering this type of merchandise and eliminate it?  
    Can I replace the empty floor space with something that's more profitable?
  • Which product lines are making me the most money in this category?
  • Should I switch product lines?
  • Can I find a supplier with better prices?
  • Can I negotiate better prices with my existing supplier?
  • Did the profit margin in this category change from yesterday or last month?  Why? Do I have a pricing error? Do I have an employee discounting without permission?

Why Correct Categories and Departments are Critical

The most important step to support data that you get from any solution is to properly assign departments and categories to your inventory items. Few retailers utilize departments and categories correctly, and this is absolutely essential to getting the most from your RMS software.  Correctly categorizing your merchandise can give you powerful information that allows you to manage your business much more effectively.

First of all, as a rule of thumb you should not have more than 100 categories. At maximum, you should have 10 departments and 10 categories within each department for a maximum of 100 total categories. If you assign over 100 categories, you'll end up with too many insignificant categories that account for less than 1% of your business.  Many retailers think they need more categories, but even the largest retailers in the world manage their businesses successfully with fewer than 100 categories. 

The technical definition of a category is a grouping or assortment of merchandise that the customer finds interchangeable.  When creating your categories, think about what your customer is going to buy. For example, if customers are looking for tent in a sports store, they probably aren’t going to buy a bicycle. However, they might comparison shop for different sizes and brands of tents. So “tents” could be a category.

A typical fashion store might have departments like:  Tops, Pants, Shirts, Skirts, and Sports. Then each of these departments would have categories within them.  For example, the Tops department might have categories like: V-neck, U Neck, Tank Top, Round-neck, and so on. 

Now comes the interesting part. Once you have categories assigned to your merchandise, you can use your software to quickly create some very powerful reports.  Here's one example of a basic report:

Sales total for Sept. 2018:





GM %

V neck





U Neck           





Tank Top          





Dept. Top total:  









GM %






Sleeping bags    





Air mattresses   





Dept. Sports total:  





This might seem like a bunch of numbers, but the key to maximizing your profits is how you utilize this information.  We can't stress how important it is to analyze your financials on a daily basis. Small adjustments can make a huge difference on your bottom line.

However, you need to be careful about jumping to conclusions.  You need to consider other factors that might skew the numbers, like overstock clearance sales, holidays, and weather patterns, lost leader discounts that get customers in your store. The proper product mix will keep customers coming back.

The Importance of Historical Data

Additionally, you need to collect enough historical data to make accurate decisions.  That's why it's so important to correctly categorize your merchandise right away and start collecting data.  Categorizing your merchandise is a very important retail management fundamental that successful retailers have used for years. You can, and should, implement this concept in your business even if you don't have a RMS system.  

However, a good RMS system makes it much easier by saving you time and giving you the reports to support your decisions. If you have multiple store locations, then the benefits become obvious not only in the reduction of operating expenses, but also in the ease of making decisions about what to buy, when to buy, and how much to buy based on reliable, real-time data.

We can assist you with correct department and category assignment as part of your MultiFlex RMS implementation process. Please prepare a list of departments and categories applicable to your business, and we will review them together at the time of training and implementation. Further directions on this can be found in the Implementation Guide.