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Inventory is vital to sales. Without an inventory, there is no e-commerce business. Proper inventory management can make or break your business, and — as your business grows — outdated practices will become detrimental.
To address such concerns, this article will cover the importance of proper inventory management and walk through some appropriate techniques depending on your business’s growth stage.
The importance of good inventory management
To begin, I’ll share why effectively managing your inventory is vital and briefly talk about what issues you may face if your methods aren’t up-to-date.
1) Get a birds-eye view of your business
A growing business typically faces an increasing need for fulfillment and inventory management. Selling in multiple channels can also result in a fragmented supply chain. This will require more diligence in monitoring one’s profits, expenses, and where inventory moves the fastest.
Imagine you’re considering a multi-channel approach to meet climbing demand, or maybe you’re already selling on various channels. To avoid gaps in insight, you can digitally connect your channels and supply chain to obtain end-to-end visibility and traceability.
2) Avoid selling out
With growth comes the added responsibility of effectively managing supply and demand, plus anticipating how much product you’ll need on-hand. Not having enough or overselling prevents you from serving new and existing customers.
This can snowball into lost revenue, lower search engine result placements, and lost customer loyalty as they resort to a competitor while you’re out of stock. All of this can be avoided through inventory management.
3) Prevent overstocking
Having too much inventory on-hand can also hurt your business financially. Depending on your fulfillment solution, you may deal with expensive long-term storage fees. You also risk having old or aged inventory in stock, which depreciates and loses value over time.
For example, if you use Fulfillment by Amazon, you’ll pay monthly inventory storage fees that increase as you store and sell more units. Also, on top of the monthly expenses, you’ll also incur additional charges:
- Long-term storage fees for situations where your inventory sits in Amazon’s fulfillment centers for too long,
- And FBA inventory storage overage fees for when you go over the company’s storage limits.
4) Maximize operational efficiency
As you grow, you’ll need to understand where to place inventory faster deliveries and which warehouses to use for shorter supply chains. Manual tracking becomes inadequate, like managing inventory and orders through offline spreadsheets and documents.
Superb inventory management helps streamline any inefficient processes and automate manual ones. You can also locate your fulfillment hubs strategically, thus optimizing your distribution and delivery systems.
Different inventory management techniques
Next, I’ll walk you through some approaches to proper inventory management. First, I’ll show you general techniques that fit any business, then move into specific approaches appropriate for your business’s growth stage — from small sellers to large enterprises.
General practices
Here are some general inventory management techniques.
Regular stock auditing
You can maintain a precise level of inventory plus prevent overselling and overstocking by consistently auditing your stock. Auditing also helps you gather data accurately, especially if you have a digitally-connected system, which is great for setting KPIs.
There are various auditing methods, but it’s recommended that you do so at least once a year. Here are some of them:
- Cycle counting, typically done every few months, involves confirming whether or not your physical inventory counts match your records.
- Annual physical inventory counts also involve comparing your records with what you have, but these audits are only held once at the end of the year.
- Spot checking involves verifying inventory at different times of the year. It doesn’t follow a specific schedule and is best for tracking fast-moving items.
First-in-First-Out (FIFO)
FIFO is an inventory management approach where the first products to enter your storage and distribution facilities are also the first to exit. This means that what you’ve had for the longest time moves before they age or expire.
This minimizes chances of overstocking and ensures that you sell items while they’re at their best quality, thus keeping your customers satisfied and your inventory flowing.
Economic Order Quantity (EOQ)
Companies perform EOQ calculations to find a good representation of their ideal order size, which helps pinpoint the maximum or the minimum number of units you can order. This allows them to keep up with customer demands without overspending.
Inventory managers, for instance, use it to minimize holding costs and excess inventory. It also helps free up cash for retailers. EOQ’s formula may have different variations; however, the most common one uses the following variables:
- D = Demand rate (in units, annual)
- S = Order cost or costs of production
- H = Holding costs (per unit, per year)
Sample calculation
This is what the formula looks like: EOQ = √ [2DS/H]. To show you how it works, imagine you’re a business that sells cell phone cases, and you’re expecting this year’s demand to be similar to last year’s:
- D = Demand from last year was 20,000 units,
- S = Your average order or production cost was $10,000,
- H = And your holding cost is $2 per unit per year.
So based on the formula, your calculation will be EOQ = √ [2 x 20,000 x $10,000 / $2], then you’ll get EOQ = √ [200,000,000]. Your final answer will be EOQ = 14,142. This result means your EOQ is 14,142 units per order, roughly twice yearly.
KPI tracking
Tracking the right KPIs will help you determine pain points for your business and create action plans to address them, but always make sure that your KPIs align with your business goals. Here are some examples:
- Sell-through rate: Helps you compare how much stock you receive with how much you sell (Sales ÷ Stock at the beginning of the month x 100)
- Stock-to-sales ratio: Good for forecasting inventory (Stock at the beginning of the month ÷ Month’s sales)
- Forward weeks of supply: This lets you recognize how long inventory stays in stock and when items should be reordered or repriced
- Average inventory: Determines the amount of inventory you have over specific periods (Current inventory + Previous inventory ÷ 2)
Small or one-person businesses
For smaller businesses or individual sellers, dropshipping or just-in-time (JIT) inventory management are great approaches. They’re best for organizations with a limited number of customers and are also great for testing new products.
Dropshipping
Since you purchase items from a third-party manufacturer or seller and have them shipped directly to your customers, dropshipping doesn’t require you to handle products directly or keep them in stock.
It’s both cost-efficient and easier to track and provides you a wider selection of products to sell — since you can access many suppliers that offer to dropship.
JIT
Rather than ordering inventory at fixed intervals, JIT involves ordering your items only when needed. You easily avoid overstocking and reduce costs. It can also minimize your space requirements since you don’t stockpile products.
Another advantage is that JIT allows you to move from one product to another easily. For example, apparel retailers can order only what they need for a specific season — like winter clothing. Once the season’s over, they can switch it up.
Growing brands
Due to the need to keep up with increasing customer demand and inventory, growing businesses may have a periodic inventory system where, every now and then, they count their physical goods and record them at different time intervals.
These companies usually have connector systems and inventory management tools for listing. During the growing stage, most companies must begin running inventory forecasts.
Inventory management tools
Inventory management tools can integrate your systems and sales channels, then create detailed reports from the data it receives. Such comprehensive inventory reports can provide you with information on the following:
- Your warehouses and how much inventory they hold or lack.
- Which items are moving fastest during certain periods and geographic locations, thus giving you insights into consumer behavior?
- Your purchasing showing which products are frequently being replenished.
Such details can help you make information-driven decisions, like setting precise thresholds for inventory you keep in stock. Then, you can set alerts that tell you when items reach a certain level. After receiving the notifications, you can replenish or stop purchasing products.
Such functionality can help growing businesses avoid overselling or overstocking. With insights into customer patterns, they can even develop marketing strategies accordingly.
Inventory forecasting
Effective inventory forecasting can ensure you make a profit instead of overstocking items you’ll end up not selling. It offers growing businesses fewer storage costs, more savings, satisfied customers, and proper planning for potential trends.
Here are some basic terms you should be aware of:
- Reorder point: The lowest stock threshold that prompts inventory replenishment
- Stock-outs: Happens when customer demand exceeds your on-hand inventory
- Safety stock: Extra inventory you keep as a buffer for stock-outs
- Lead-time demand: How long it takes suppliers to deliver your inventory compared to when you placed your order
Enterprise merchants
Enterprise-level businesses are typically eCommerce giants who need to employ perpetual inventory techniques to get insights into large quantities of inventory with real-time data. They’re likely to use ABC inventory analysis and systems for managing omnichannel inventory.
ABC inventory analysis
ABC analysis is suitable for enterprises since they have multiple SKUs and need to know what to prioritize. Its proper execution involves grouping inventory into three categories — which are created based on the revenue they generate:
- Category A: These products possess the highest value. It’s also the category with the fewest products.
- Category B: These are mid-level items that aren’t controlled as tightly. They’re numerous compared to Category A products but have less utility.
- Category C: These are more general products. They’re the most plentiful but generate the least amount of revenue.
This inventory management technique helps you forecast more accurately, knowing which categories have higher customer demand. You can also justify an increase in pricing, for instance, for categories that are in-season and performing well.
As for managing your inventory, it helps you allocate your stock accordingly — like storing more Category A items in your warehouse compared to Categories B and C — and maximizing your profitability.
Omnichannel inventory systems
Also, enterprises normally sell on many channels. This means they need to have systems to manage omnichannel inventory, typically done using technology and ERPs.
These solutions consolidate data across channels into one system, which helps enterprises precisely monitor each channel’s inventory level. This also allows businesses to plan, purchase, and allocate products accordingly.
Systems and ERPs even offer enterprises a glimpse of how specific items perform in certain channels, allowing businesses to formulate appropriate strategies to maximize their profitability and minimize costs.
Not to mention, the end-to-end visibility and traceability show at which workflow stage your inventory is. If an inventory is in the order fulfillment stage, for instance, knowing where it is helps enterprises provide customers with information about their purchases.
Wrapping up – Select the right inventory management techniques based on your stage of growth
To recap:
- For example, small businesses or individual sellers have yet to have a strong customer base. Thus, stocking up will be impractical, so JIT or drop shipping is ideal.
- Growing businesses, meanwhile, are undergoing a transition. They'll need to update their practices to keep pace with increasing demands and inventory needs.
- As for large enterprises, the consistent and strong influx of business requires them to implement techniques that will continuously manage all their channels.
Your business stage will be accompanied by corresponding inventory management issues. Use the appropriate inventory management methods for your growth goals and forecasts.
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