Are you running an online business? If yes, inventory management is a must for any ecommerce business to thrive. It is integral to expansion and must be considered to succeed in this competitive arena.
The article discusses critical points of ecommerce inventory management and what it entails.
What is inventory management?
Inventory management refers to the sourcing, storage and sale of stock. It involves knowing how much stock your business has, how much to sell and where and how long to keep the stock.
Why is inventory management important for ecommerce?
The importance of an effective, cohesive inventory management system is paramount. A good inventory management system can make or break your business reputation and relationship with your retailers.
One of the largest issues that clients face is overselling. More often than not, retailers will send product orders (POs) to suppliers, but due to their inventory management system not being up to date, suppliers are left overselling their products and cannot fulfill their incoming POs. This causes frustration to both suppliers and retailers.
Ecommerce inventory management enables businesses to prevent waste, save cost and time. It is crucial if you want your company to stay on top.
You’ll be surprised how many firms have collapsed due to a lack of knowledge in inventory management.
Thus, the proper techniques and systems can play a significant role in making your business profitable.
Common inventory metrics and terms
The following are some ecommerce inventory management terms and metrics that are commonly used:
Inventory carrying cost
The inventory carrying cost is the total of all expenses related to holding stock, such as rent, warehousing, insurance and labour. It also includes products that are expired and damaged.
In addition, you’ll find that the carrying cost is dependent on factors such as location, inventory turnover rate, storage needs, total SKUs and in-house/outsourced retail fulfilment.
Inventory holding cost
Inventory holding costs refers to the total costs associated with unsold inventory storage. This would include warehousing, labour, transport, insurance, depreciation, and opportunity costs.
The formula for inventory holding cost is the sum of storage costs, employee salaries, opportunity costs, and depreciation costs divided by the total annual inventory value.
As you can see, it’s pretty simple to calculate once you’ve determined the subtotal of each cost.
Inventory turnover rate
You must measure your inventory turnover rate. This is because it will help you manage your supply chain and sales channels. Besides this, it’s also essential for inventory forecasting.
High turnover rates could mean that you’re selling your products in a timely manner, while low turnover rates could mean that some products are not selling well.
You can calculate your inventory turnover rate by dividing the cost of goods sold by the average inventory.
Inventory shrinkage refers to the event in which inventory levels are less than what is recorded. Common causes of inventory shrinkage include employee theft, consumer theft, management errors and inventory damage.
To calculate the rate of inventory shrinkage, minus actual inventory from recorded inventory and divide this sum by recorded inventory.
Inventory days on hand
Inventory days on hand will tell how fast a business finishes its inventory levels. Accurate stock levels mean that your customer will be able to purchase what they want without waiting for you to restock.
To calculate inventory days on hand, divide the average inventory for the year with the cost of goods sold and multiply this figure by 365. The fewer inventory days on hand, the better.
Inventory write-off removes the cost of some stock from your accounting records. It is carried out when goods cannot be sold due to loss, damage, theft or decline in value.
Work in progress inventory (WIP)
WIP is a term used to describe the total cost of unfinished goods that are still in production. It’s often used by businesses that sell custom products. Sum up the beginning WIP inventory and manufacturing cost and then minus the cost of goods manufactured to calculate WIP inventory.
Reorder point (ROP)
ROP is the minimum quantity of a particular product in inventory before more stock should be ordered. It ensures that you order before you run out of stock. You’ll find that each product has a different sales cycle, and thus, accurate data is needed to determine ROP.
To calculate the ROP of a product, sum up the lead time demand + safety stock.
Just in time inventory
Just in time inventory, or JIT, is used to manage a supply chain. It is designed to increase efficiency, cut costs, and decrease waste by receiving products only when necessary.
JIT is often employed in the manufacturing sector but can also be used in ecommerce. As a result, you’ll be able to reduce your storage costs, and thus, spend less on inventory investments. It can, however, be somewhat risky for your supply chain if not adequately planned.
Finished goods inventory
Finished goods inventory refers to total stock available for purchase or orders that can be fulfilled. This helps businesses avoid stockouts, backorders, and order cancellations due waiting for an item to be restocked.
Inventory weighted average
The inventory weighted average determines the amount of money that goes into your inventory and the costs of goods sold. To calculate the inventory weighted average, take the cost of goods available and divide it by the total units available in inventory.
SKU is short for ‘stock keeping unit’. It is an ID code used to organize or classify products in your inventory.
The term variants in ecommerce inventory management refer to variations of the same item. For example, a product that comes in a few different colours.
The supply chain covers the systems and processes your business uses to produce, manage, and distribute its products.
Deadstock, buffer stock, minimum viable stock
The terms above describe different types of products in your inventory.
Deadstock refers to products that are in stock but don’t sell anymore.
Buffer stock is the extra that you have on hand. It helps you limit the risk of not fulfilling orders when there is uncertain supply and demand.
Minimum viable stock is the amount you need on hand to fulfil orders without any delay.
Lead time notes the period between when you order a product from your supplier and when it arrives.
The ABC analysis is a method that enables you to prioritize your products in the following three categories:
(A): Products that are high value but with low sales frequency.
(B): Products that are of a moderate value with moderate sales frequency.
(C): Products that are low value but with high sales frequency.
First in First out (FIFO)
FIFO refers to selling older stock before the newer ones, even if more recent stock is available in the inventory. It keeps things fresh, enables a good flow of products and helps you avoid keeping old stock and having clearance sales.
While it makes sense for food companies to employ this method, businesses in other niches should also take note of FIFO. For example, fashion changes every season, and you don’t want to be stuck with piles of bell-bottom jeans that will never come back to fashion.
People who dropship don’t have an inventory of products on hand. So instead, the product is directly shipped from a third party (or supplier) to the customer to fulfil the order.
Centralised inventory control
Centralized inventory control software enables you to track, manage and control inventory when you’re selling on multiple ecommerce sites. For example, your product is on eBay, Amazon and Etsy.
Inventory auditing is when you check or count your available inventory so that they tally with the numbers on your automation systems. This helps you to fulfil orders on time.
Inventory forecasting involves informed decision-making on ordering products based on previous data available and business trends and seasons.
How to prepare ecommerce inventory?
Getting started on your ecommerce inventory can seem like a daunting task. However, it’s definitely worth it. Here’s are some things you can do to make it simpler:
1. Understand product category demand
The best thing you can do for efficient inventory management is to understand the demand for your product over time.
Google Trends and Google Analytics can provide insight into how product demand changes and which products are more popular. You can then order your stock accordingly.
2. Forecast future demand
Next, have a look at your sales history to forecast future demand. Observe when interest in a particular product is the highest and plan for the increased demand.
For example, certain products have a very high demand during the holiday season. Thus, by forecasting future demand, you’ll be able to stock the product and cater to peak demand times.
3. Set initial minimum viable stock levels
It’s vital that you set initial minimum viable stock levels for each product you’re selling. By doing so, you’ll know when to order stock and avoid delays in fulfilling orders.
To determine the number, you will have to understand product demand and the lead time for the product.
Then, place an order for your product when inventory hits below the number. Remember that you should adjust the number as interest in your product grows or wanes from time to time.
4. Prioritise the products with ABC analysis
According to the ABC analysis mentioned above, you’ll also want to prioritize your products to increase inventory management effectiveness.
Understand which products require more attention in terms of inventory management. For example, keeping more C category stock as they move the fastest or ordering A category stock more often as you keep less of it in hand.
5. Implement inventory management software
You should also consider investing in inventory management software. While it’s possible to carry out some of the above tips manually, it can be time-consuming with the potential of human error.
Inventory management software can help you scale and grow your business. It works to sync your inventory tracking, compile real-time inventory, ensure that your stocks are at the right level, and provide you with reliable data.
How to manage ecommerce inventory?
Your company must be able to manage its inventory. Here are the key components that encompass an efficient ecommerce inventory management process:
An inventory audit is a process in which the company’s financial records and actual quantity of goods are checked and matched. Inventory audits establish accurate reporting and provide you with accurate stock levels. Thus, it’ll help you to avoid stockouts.
It helps monitor your stocked goods. This would involve ordering, restocking, and forecasting. Inventory management helps prevent stockouts, delays and cash flow issues.
Inventory control is a process that works to optimize inventory storage. It helps you stock the right quantities to fulfil orders without delay while avoiding overstocking. Thus, you’ll reduce your cost, improve your warehouse and still be able to deliver orders to your customers.
Inventory distribution should be given attention to better serve your customers.
For example, suppose you’re looking at two-day ground shipping. In that case, you may have to split your inventory to several fulfilment centres across the country, rather than having your products in only one centre.
Inventory scanners scan barcodes on the product. This information will then be read and tracked by inventory management software.
As a result, inventory scanning solutions will help you streamline your inventory management process. And because it’s automated, you don’t have to worry about human error.
It involves keeping track of SKUs, where they are stored and how many are available at a particular location. The knowledge of real-time inventory levels of each product helps with inventory control and makes your supply chain more efficient.
This step aims to show numbers for how many of each product you have, how many you are ordering and how many you need.
It helps you avoid stockouts and over-ordering, keeping your costs as low as possible. Inventory reporting can be electronic or physical, but connecting it to your software and inventory management systems will give you an added advantage.
Inventory accounting is essential as it works to track changes in inventory value over time. It allows you to be aware of your inventory value based on factors such as how much inventory you have, supplier pricing, and the price you are selling your product. It also accounts for damaged, outdated and expired inventory.
Benefits of ecommerce inventory management
Here’s how ecommerce inventory management can help your business:
- Increased information transparency – You’ll know when items are ordered, manufactured, packed, shipped and delivered. You’ll also know how much inventory you have and how much you need to order.
- Improved delivery – You’ll be able to track deliveries in real-time and improve product flow to customers.
- Reduce lead times – Because you know how much inventory you have and how much you need to order, you probably be able to see a reduction in lead times.
- Reduced costs – Businesses who actively manage their inventory can decrease inventory write-offs and holding costs.
- Decrease stockouts – You will be able to order products before you run out of inventory, thus decreasing stockouts and increasing your order fulfilment rates.
- Increased sales – Having an accurate inventory allows you to focus on selling your products and thus increase sales and profits.
- Accurate planning – You will be able to conduct precise inventory forecasting based on reliable data.
- Increase employee efficiency – A good ecommerce inventory management system will enable your employees to save time and increase productivity.
- Increase inventory turnover – By keeping track of inventory, you’ll be able to optimize the value of your products.
- Increased customer satisfaction and loyalty – Your customers will trust you because you’re able to fulfil orders without delay.
How to choose the right inventory management software?
Having an inventory management software is essential because manual methods can lead to human error.
However, choosing a suitable software can be quite difficult as you have to consider factors such as company size, the nature of your business, as well as other specific needs and challenges you’re facing.
The following questions should help you with your decision:
- How many people will be accessing the software?
- Do you need to access the software with multiple devices?
- Will the software allow for scalability in tandem with company growth?
- Will you be able to integrate the software with other systems that you’re already using or planning to use?
- Is data migration assistance provided?
- Is customized reporting available?
- Will you be able to audit inventory history with the software?
- Does it have features to prevent lost, misplaced or stolen inventory?
- How is their tech support quality?
Smart inventory management in ecommerce
Smart inventory management in ecommerce will help you:
- Analyze real-time data
- Account for overstocking and understocking
- Account got seasonality
- Adjust the lifecycle of the product
The appropriate software will help you decide on the lower and higher price points to optimize your profits. You’ll be able to balance your stock for the best profit and storage.
Additionally, smart software will also help with inventory reports, providing you with the information according to inventory history and current market trends. Ultimately, it enables you to spend your money in the right areas.
Quick tips for ecommerce inventory management
The tips below will enable you to manage your inventory even better, plus keeping your customers happy and satisfied.
Balance the inventory
While we want to avoid over and understocking, inventory management is so much more than that. Finding the right balance will result in profit.
This would mean that you don’t want to have too much that you end up liquidating or too little that you have to decline orders. Both these situations will cause a loss of profits and a bad customer experience. The right software can help you balance your inventory and take it to the next level.
Keep a check on past purchases to predict future stock
You will be able to decide on whether you need to order more or less when you keep track of past purchases. You will also be able to assess yearly trends and order your products accordingly.
Keep inventory of safety stock
It’s crucial that you have safety stock in hand as unforeseen circumstances can occur. Having an inventory will prepare you for times when there is unexpected demand.
Do not overstock
While you don’t want to be under-stocked and end up being unable to fulfil orders, you don’t want to be overstocked either. Over-stocking means you will have to fork out more money, which can lead to cash flow issues and losses if the goods are not sold.
Additionally, you’ll also have to think about storage. If you’re renting space, overstocking means extra costs.
Create visibility across multiple channels
Companies tend to face challenges in terms of visibility across multiple channels and warehouses as their business and inventory grow. It’s likely that you’ll sell your product on numerous platforms and start to partner with different warehouses, manufacturers and suppliers.
Hence, it’s crucial that you create visibility to keep track of orders and inventory. Lack of visibility will result in difficulty in decision making with regard to supply chain, pricing, sales and marketing, and product availability.
Besides this, it’s also advisable to take note (and take advantage) of seasonality. Holidays, events, and certain times of the year are peak seasons in which you can promote your products and have special offers.
Make sure you don’t miss out on the opportunity to sell your stock during peak seasons. Have your stock ready for successful sales periods. Time your stock orders well so that you keep operating costs as low as possible.
Inventory management is essential if you want your business to grow. You’ll need information regarding your inventory at your fingertips to maximize your profits.
Nonetheless, it can be quite a daunting process if you’ve not done it before or if your business is growing fast.
As such, you can contact us at Andmakers and allow our team to simplify fulfilment and dropshipping processes with our platform connections and unlimited sales channels.