Managing inventory can be a huge headache for the businessman, regardless of what type of business you do and when you started.
Inventory management is crucial, and if you mess with this, it will impact your whole business.
Understanding the ins and out of your inventory management is of utmost importance to build a profitable, sustainable eCommerce business that can be scalable.
However, it can be confusing to know where to start, what to cover and what else can be helpful to make this easier for you.
Well, you will find all the answers in this article.
What Is Inventory Management?
It’s a discipline of tracking as well as managing all of the activities that have been taken for managing the products.
Also, it includes balancing the inventory needs and the levels in the current inventory.
The goal of inventory management is to make sure that the business has adequate stock.
It records and controls the inventory bought for manufacturing, storing, and use for the business.
What Are Important Terms Used In Inventory Management?
To understand more about how you can make your inventory management useful and hassle-free, you first need to get familiar with the terms and concepts.
List of the most common phrases that you will come to know through this.
- Variants: These refer to variations of the products, which are the same but different based on the colors, size, etc.
- Inventory: Products, goods, or tangible items that are for selling purposes.
- SKUs: Stock Keeping Unit is an identification code used for managing, classifying, and organizing products.
- Supply Chain: Process and system that includes producing, managing, and distributing of the products.
- Units of Measures: Measuring the stocks, i.e., Kilograms. Items, ounces, etc.
- Buffer Stock: This one refers to extra stock on hand, which can be risky if supply and demand get uncertain.
- Dead Stock: Products that you have but can’t be sold.
- Lead Time: the time delays between ordering and receiving the inventory.
- JIT: Just In Time is an inventory that is manufactured to keep up with orders.
- Carrying Or Holding Cost: the overall cost of holding inventory versus the inventory’s value in a year.
How To Get Started With E-commerce Inventory Management?
Inventory management for e-commerce can help the business to optimize the best situations.
However, to know how you can do that, here are a few steps for you to consider.
Step 1: Understand Your Product Category Demand
To understand how you can handle inventory management better, first, you need to know about the demand and how it fluctuates for the product category over the period.
This is an important point, especially for those who are launching a new brand in an e-commerce shop.
Google Trends can help you in knowing the search demand. You can leverage this tool to know about the interest of customers and how they changed over 12 months or 5 years.
Also, you can use Google Analytics. This will help in seeing which pages or products have high visited numbers. You can get a record of the customers’ time on a particular part.
With this, you can know what makes your customer interested. And you can get the idea of products that hold their interest.
You can get more buffer stock so that you can utilize the opportunity.
Step 2: Forecasting Future Demand On Past Sales
The next thing you need to know is to optimize your inventory management and forecast the demand in the future. It also includes seasonal demand.
However, it’s not always exact, but you can get almost accurate ideas.
For this, you need past sales records. Track the points where the demand got increased.
This will help you look for opportunities to increase sales throughout the year.
It can be the holidays, special days, or events. This is when you can plan for the increased demand.
With this, you can prepare your inventory and set it according to that. It will help in preventing the chances of getting out of stock when the peak times are going on.
If you just started and you don’t have a sales history. You can use the analysis from Google Trends and Google Analytics.
Step 3: Set The Minimum Viable Stock
For those who have a shop that is already selling. Make sure you use this opportunity to set your products’ minimum viable stock levels.
Focus on every product that you are selling.
Here your goal is to determine the lowest possibility of inventory. So you can avoid delays and other errors.
For this, you will need more about demand and how to replace out-of-stock works.
Place the orders when the number of products dips below what you designated.
You can adjust the numbers depending on the demand and the overall performance.
Step 4: Do ABC analysis To Prioritizing Products
This will help make it more efficient and save you money; that’s why products use the ABC analysis.
Using ABC analysis can help in knowing which product requires attention from your perspective related to inventory management.
With this method, you can prioritize the existing inventory under three categories such as :
High-Value Products that have low frequency in sales. It can be a workout or sporting equipment.
Moderate Value Products that have a moderate frequency in sales. It can be jewelry and electronics.
Low-Value Product that has a high frequency in sales. It can be food and clothing.
Step 5: Get Ready For Seasonality
The e-commerce owners can take advantage of the seasons. It can be particular seasons like holidays or summertime.
The seasonality has much more chances of sales, so you need to be ready.
The most important thing here is the inventory. And if you have low levels, it will ruin the good opportunities and slow down sales.
That’s why you use the time to prepare your inventory for those seasons beforehand.
Step 7: Get Inventory Management Software
Well, to scale your business, you need inventory management software that can handle the work on your behalf and save time and trouble.
It can help to track your inventory, letting you know when you need to add more items and when you don’t.
So it saves from overstocked and understocked-like situations.
Tracking the inventory all across your channels so you know everything and all data is in your access. Invest in inventory management software to keep your business going in the direction you want.
What Are The Challenges In E-commerce Inventory Management?
There are always some inventory challenges that eCommerce business owners face at some point.
Some of these problems are inevitable, but understanding how you can address them if it happens and what you can do so you don’t have to face major losses can be helpful.
To understand that, here are some of the common yet most challenging issues that affect the profitability and growth of your business.
Overstocking Products And Overselling It
The most common issue in e-commerce inventory is not understanding how much product you will need to meet your customer’s demand.
If you let the control go, there are chances that you will fall into a situation where either you have less product than the actual demand, which leads to unsatisfied customers and fewer sales.
Or you overestimated the amount of product, and now the situation of dead stocks is arising.
There are lots of e-commerce owners who keep a large supply on hand when the seasons approach.
However, it highlights some major challenges too :
A large stock supply can be expensive if you are manufacturing your own product. It takes more inventory, raw material, processing, and labor costs.
If you don’t know what to do with overstocked products or the demand for your products is lower this season, you might end up wasting your money.
Dead Stock Situation
As mentioned earlier, having too many products but insufficient demand can lead to a dead stock situation.
There are many reasons behind having deadstock, as it can be due to shopping behavior shift or out of trend.
How To Deal With This?
These days, eCommerce business is getting more transparent with their customers. This is helpful for building trust and making stronger bonds.
To avoid issues like overstocking and overselling, you can flag your products.
Mentioned the stocks or let the customers know the remaining quantities.
If the product is going to be out of stock, put it out there so the customers can know too.
Also, you can ask for pre-ordering; this will help you to know the amount you need to manufacture to meet the demands.
Lack Of Visibility
One of the other problems that you might face is a lack of visibility, especially when the product demand increases and your inventory management becomes a total mess.
The basic two visibility challenge that you can face, as well as the impact on how you are going to meet the demand, are:
To grow the e-commerce business, you might consider expanding the business on different channels. It includes eBay, Etsy, Amazon, etc.
Here the problem is it’s not easy to keep all of the tracking of your sales and order unless you have the inventory management software.
Without that, it can be difficult, especially if you missed anything. This will cause more chaos, and inventory management will turn more complex.
To grow your business, you also require more storage options. And this is where you need multiple warehouses.
Partnering with different warehouses helps you in having access to its products so you can meet the demands of customers.
But if you don’t have the inventory software for managing everything, doing the work alone with multiple warehouses can be confusing.
How To Deal With It?
No doubt you need complete visibility to make the decision. That’s why you need inventory management after.
Also, ensure you offer similar interactions and experiences on different platforms to the customers.
Keep your brand consistent, and do more interactions and engagement.
Scaling Problem With Manual Management
Business owners also face problems related to scale. When it’s the beginning stage of the eCommerce business, manually tracking and order is relatively easy and tempting.
E-commerce business owners use it for doing manual management across multi-channels.
However, the manual approach becomes much more difficult to handle once your business grows and the demand increases.
You might also need to partner with more people, vendors, and manufacturers as you add more products.
It added the numbers of the warehouse, which gets tricky if you are managing everything manually.
It increases the chances of making more mistakes, misplaced orders, etc., that affect the inventory.
How To Deal With It?
Well, it can be tempting to use the manual approach initially.
However, it’s important to develop the habit, tactics, tools, etc., which can help you do these works hassle-free.
It will not just save time, but you can avoid lots of problems later.
Also, you get the accessibility that allows you to expand your business and scale whenever you want.
Lack Of Data Insights
Inventory management can get stuck because of the lack of data insight, and it can cause too much hassle for an eCommerce owner.
For your business to grow, earn more profit, make better designs, and always be prepared, you need more and more data.
Understanding your own inventory, change in time, forecasting, etc., can be easily understood if you have the research data on your hand.
How To Deal With It?
Having a centralized system that can add all the inventory management-related data on a real-time and 24 /7 basis can help access valuable data.
What Are The Techniques That You Can Use?
However, there is no specific way that can make managing inventory easy.
That’s why you get different techniques that are used by leading companies and e-commerce businesses all over the world.
These inventory practices can help you in doing the management much better. It includes:
Economic Order Quantity Or EOQ
Well, with this formula, you can get the ideal understanding of what quantity your business needs. It’s based on different variables such as demand rate, the total cost of production, etc.
With EOQ, you can minimize your related cost. Using this formula can help in identifying the product quantity that will be enough to order
It can be used for delivery and storing the inventory purpose too.
Backordering is another technique that you can consider choosing.
However, it needs your extra attention and discipline because you are taking money on a guarantee that the products will be delivered to the customers.
The practice involves selling a product without having inventory. The core component you get here is to manage your customers’ expectations and ensure you are offering accurate delivery.
ABC analysis is a technique for inventory categorization that splits the subject into three different categories.
With these three different categories, it becomes easier to understand the heavy impact on the overall inventory cost.
These three categories are divided into category A, category B, and category C
- Category A refers to the products which hold the most value and contribute to the profit in the largest ways.
- Category B includes that product that is between the least or most valuable.
- Category C is those transitions that are small but vital for profit. However, it doesn’t matter to the company as an individual.
Bulk Ordering & Ship
Bulk order helps in saving money, as when you purchase a large quantity of your inventory, this helps in contributing to the
positive inventory accounting metrics.
However, ensure that when you order in bulk, you are not pouring all of your operating capital into that.
It should have the balance, so you know what you’re ordering, how much, and the effect it will have on your capital.
Safety Stock Inventory
Safety stock inventory is called to ensure that extra inventory is ordered to meet if the beyond goes more than expected.
With this inventory management technique, you can prevent the stock-outs that mostly cause when you do incorrect forecasting or the customer demand changes due to some reasons.
Just In Time Inventory Management
JIT or Just In Time inventory management is good to consider If you are looking for an option to eliminate wastage. Also, use this for boosting efficiency.
Just in time, the core tenant is to streamline the cost of inventory and needs in the warehouse. This depletes and then orders the products that are required. It eliminates the situation where you need to stockpile the inventory.
However, you have a certain level of risks here too. That’s why make sure you do your research to make sure it’s effective for your business.
Batch tracking does the quality control where the users can do the grouping and monitor the set of similar traits.
With this method, you can get help tracking the expiration of your inventory.
Or it will help in tracking any defective items that might be backed in the batch.
First In, First Out
FIFO, or first in, first out, is one of the common techniques that you can consider. It is mostly used in industries like food and hospitals.
Well, when using this technique, you sell that older inventory first, then use the front of new products.
This helps in selling all of the products in a timely manner.
This makes sure that your products are not pushed back onto the shelf.
However, FIFO is highly used in the Food industry, but different industries can use this too.
FIFO is also a good technique so you can update and improve products. With this, you can make sure your older inventory is out too.
Reorder Point Formula
Reorder point formula is a technique based on the business’s purchase and its sale cycle that depends on a per-product basis.
Reorder points usually have higher numbers as compare to
safety stock number in lead time.
When you choose Dropshipping technique, this one refers to not holding any actual inventory for the business.
This is an agreement you get with your coordinated delivery and your customers that you can manufacture the product or can wholesalers.
With this technique, you can eliminate the risks that come when you have to purchase lots of inventory to sell more.
But it ended up increasing the costs and diminishing the profits. Here you also get discounts when you do bulk orders.
It’s inventory 101, but make sure you are not overlooking this one.
Setting per level allows you to get the bare minimum stock level that you need on hand for some time.
Par levels are also a classic technique that is used for managing inventory in professional kitchens.
However, it works well for eCommerce stores too. But before this, you should have the predictive analysis to estimate how much product you need accurately, etc.
Day Sales Of Inventory
DSI, or Day Sales Of Inventory, is more like a financial formula and less the inventory management technique.
With DSI, you can identify the average number of days that the company will need to sell through the inventory.
When you have a lower DSI, it means that your business is healthy in sales and you are selling through inventory much faster.
It also means the average age of inventory.
Material Requirement Planning
MRP, or Material requirement planning, is a technique rooted in sales forecasting.
Well, it comes with unique layering,, which means the manufacturers are required to meet the sales data that is forecasted accurately.
Another one is manufacturers and inventory managers required to work on the material suppliers to ensure that there is on-hand material for future needs.
The biggest benefit you get here is that you don’t have to invest more than necessary.
But the point you should be focused on has accurate forecasting that can scale with demand. If not, then you might end up missing profitable opportunities for the business.
What Are The Best Practices You Can Do?
Well, implementing the pro level of the inventory management system to eCommerce business can be expensive.
However, if you can use the practices that can make inventory management much more organized, easy to track, and ensure you have stock ready to meet the demands.
Properly managed inventory also avoids the pitfalls of getting more profit and sales.
Use Your SKU Number
Each of your products requires to be identified first. That’s why you are going to need a unique ID number.
Well, these numbers are also called Stock Keeping Units or SKUs. With this, your ID should be unique.
Using SKU numbers can help in identifying products much faster. So when you pick them from the shelf, pack them into the boxes for further processing. You can do all the work much more hassle-free.
Also, it plays an important role once your business grows and you add more products to your e-commerce business.
Especially if you are planning to add more similar items and need to differentiate based on their family of products, using SKU is a smart choice.
Takeaway: SKU helps keep the process much faster; you can easily identify the products, know where you need to store them, and keep tabs on the quantities you have on hand.
Do Accurate Forecasting
When it comes to inventory management, forecasting is one of the most important components that you should know how to do.
Accurate forecasting can help you in leading :
- Avoiding unnecessary inventory that can become stale.
- Having much more efficient business operation.
- Avoiding paying too much for storage.
- Avoiding overtaking-like situations.
- Less situation of overselling.
- Decreasing bad customer service.
To do accurate forecasting, you need to analyze the data of past experiences and results, identify the season when sales can be high, average sales calculation, and monitor different other leads.
With these four basic elements, you can make the prediction on demands and numbers in the future.
Takeaway: Forecasting helps you in having an idea of what you can expect in the future.
Since it’s based on data, you get a more accurate approach. You can decide which product might get better sales and be prepared to avoid any future problems in advance.
Maintain Stock For Emergencies
There are chances of a certain situation when you need more stock to meet the demands. And your business should be ready for that.
That’s why you need emergency stocks, also known as safety stocks.
This will help when situations start to get out of hand. Or maybe your shipping is dealy, the demand for the product is higher than you expected, etc.
Emergency stock helps in ensuring that your products don’t get out of stock when the chances of more sales are there.
You get the backup, and it helps in preventing unhappy customers, marketplace suspensive, and negative reviews.
Takeaway: Maintaining emergency stock or safety stock gives peace of mind, especially during the high sale season.
You can keep the stock on hand or have a backup supplier.
Invest In Software Solution When It’s Needed
There are many eCommerce business owners who start their inventory management manually with a checklist and spreadsheet.
However, it can be useful, and you can work, but this will go for only the beginning period when sales are low.
Once the numbers start to increase and your business starts to grow, manually handling inventory management will become more daunting and time-consuming.
It increases the chances of mistakes and errors, and updating your product becomes much hassle.
You need to invest in a software solution to ensure you don’t get caught up with all of this mess.
Even though you might take a manual approach at the beginning, choose the right time to get a software solution for your business.
There is some free inventory management solution too that you can consider.
Takeaway: Not just investing in inventory management is worth it as you get hassle-free and easy-to-manage inventory management, But also you can assure that all works are going to inflow.
Conduct the Audits To Your Inventory
Regardless of the size of your business, conducting audits can help you ensure that whatever data you have is accurate.
That’s why you need to do routine inventory audits. This will help you count the physical stock numbers you have on hand, update the records, and check your data. This helps in making future decisions better.
Takeaway: Inventory Audits can be helpful, but it’s important to do it on a consistent basis.
The more you have, the better data you get, which helps keep your business running smoothly.
Consider The Dropshipping Options
The dropshipping method allows you to sell products without having the inventory yourself.
Instead of you, the wholesaler or manufacturers are the ones who have the responsibility to manage the inventory and carry it to shipping.
This is an easy way that helps you in saving yourself from holding inventory, fulfillment, and storage.
Frequently Asked Questions ( FAQs)
Why is a spreadsheet not an ideal way to manage inventory?
The spreadsheet is not an effective way to manage the inventory because you need to update it manually. Not only does it consume time, but you can feed wrong or misplaced data. You can’t scale when you are using the spreadsheet.
What are Dead Stocks?
Dead stocks are referred to those items that can’t be sold anymore. It can be due to different reasons, such as the product recall, the expiration date that has been passed, or discontinuation.
Why should e-commerce not overlook inventory management?
It’s an important component of running a successful business. It’s a perpetual thing where you need to keep your attention as its mind needs to change from time to time for it to become more effective.
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