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 a crucial aspect, and if you end up messing with this, it will impact your whole business.
To build a profitable, sustainable eCommerce business that can be scalable, understanding ins and out of your inventory management is of utmost importance.
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?
- What Are Important Terms Used In Inventory Management?
- How To Get Started With E-commerce Inventory Management?
- What Are The Challenges In Ecommerce Inventory Management?
- What Are The Techniques That You Can Use?
- What Are The Best Practices You Can Do?
- Frequently Asked Questions ( FAQs)
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, the first thing you need to do is to get familiar with the terms and concepts.
Here is a list of the most common phrases that you will come to know through this.
- Variants: It refers 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 distribution of the products.
- Units of Measures: Measuring the stocks i.e. Kilograms. Items, ounces, etc.
- Buffer Stock: This one refers to extra stock that is on hand and it 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 that happen between ordering the inventory and receiving it.
- JIT: Just In Time is an inventory which 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 it changed over 12 months or 5 years.
Also, you can use Google Analytics. This will help in seeing which page or products have high visited numbers. You can get a record of the time that the customers spend on the particular part.
With this, you can know what makes your customer interested. And you can get the idea of products that are holding their interest.
You can get more buffer stock, so 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 the seasonal demand.
However, it’s not always exact but you can get almost accurate ideas.
For this, you need the past sales records. Track the points where the demand got increased.
This will help you in looking for opportunities where you can 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 the 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 are using this opportunity for setting the minimum viable stock levels for your products.
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 are going to need more about demand and how to replace out-of-stock works.
Place the orders when the numbers of products are dipping below than 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 in making it more efficient and saving your money, that’s why products by using 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 and for that, you need to be ready.
The most important thing here is the inventory. And if you have levels low it will ruin the good opportunities and slow down the sales.
That’s why to use the time to get your inventory ready 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 as well as trouble.
It can help to pulse on 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 Ecommerce 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 these issues 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 the demand of your customer.
If you let the control go, there are chances that you 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 :
If you are manufacturing your own product, having a large supply of stock can be expensive. 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 not enough demand can lead to a dead stock situation.
There are lots of reasons behind having deadstock, as it can be due to shopping behavior shift or out of trend.
How To Deal With This?
These days, the eCommerce business is getting more transparent to 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 trackings of your sales and order unless you have the inventory management software.
Without that, it can be a difficult situation especially if you missed anything. This will cause more chaos and the 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 a confusing process.
How To Deal With It?
No doubt you need complete visibility to make the decision. That’s why you need inventory management after.
Also, make sure you are offering similar interactions and experiences on different platforms to the customers.
Keep your brand consistent, do more interactions and engagement.
Scaling Problem With Manual Management
The business owners also face problems related to scale. When it’s the beginning stage of the eCommerce business, manually tracking and ordering is relatively easy as well as tempting.
E-commerce business owners use it for doing manual management across multi-channels.
However, once your business starts to grow, and the demand increases, the manual approach becomes much more difficult to handle.
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 at the beginning.
However it’s important to develop the habit, tactics, tools, etc which can help you in doing these works much 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 of 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 in getting access to 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 the 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 that you get here is to manage the expectation of your customers and make sure you are offering accurate delivery.
ABC analysis is a technique for inventory categorization that split 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 least or most valuable.
- Category C are those transitions which are small but vital for the 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 metris.
However make sure that when you are ordering 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 so it can meet if the beyond goes more than what expected.
With this inventory management technique, you can prevent the stock outs that mostly cause when you do incorrect forecasting or the customer demand gets changed 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 wastages. Also, use this for boosting up the efficiency.
Just in time, the core tenant is to streamline the cost of inventory and needs in the warehouse. This depletes and then ordering the products that are required. It eliminates the situation where you need to do the stockpiling of 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 as well as monitoring the set of traits that are similar.
With this method, you can get help in 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 you are using this technique, you sell first that older inventory then you 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 to 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 that is based on the purchase of the business 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 that you get with your coordinated delivery as well as 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 for selling more.
But it ended up increasing the costs and diminishing the profits. Here you also get discounts when you do the 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 the eCommerce stores too. But before this, you should have the predictive analysis so you can accurately estimate how much product you need, 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 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 the technique rooted in sales forecasting.
Well, it comes with unique layering that 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, this is for ensuring that there is on-hand material in future needs.
The biggest benefit you get here is you don’t have to invest more than what’s necessary.
But the point you should be focused on is having 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 organized, easy to track, and make sure you have stock ready to meet the demands.
Properly managed inventory also avoids the pitfalls so you can get 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 Unit or SKU. 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 and pack them into the boxes for further process. You can do all the work much hassle-free.
Also, it plays an important role once your business starts to grow and you add more products to your e-commerce business.
Especially if you are planning to add more similar items and it needs to differentiate based on their family of products, using SKU is a smart choice.
Takeaway: SKU helps in keeping the process much faster, You can easily identify the products, know where you need to store them, and keep the tabs on the quantities that 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 stale.
- Having much efficient business operation.
- Avoiding paying too much for storage.
- Avoiding overstaking like situations.
- Less situation of overselling.
- Decreasing bad customer services.
To do accurate forecasting, you need to analyze the data of past experiences and results, identifying the season when sales can be high, average sales calculation, and monitoring different other leads.
With these four basic elements, you can do the prediction on demands and the 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 the 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 the ceratin 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, they are also known as safety stocks.
This will help when situations start to get out of hand. Or maybe your shipping is dealy, the demand of 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 you can 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 the inventory management will turn more daunting and time taking.
It increases the chances of mistakes and errors, and updating your product becomes much hassle.
To make sure you don’t get caught up with all of this mess, you need to invest in a software solution.
Even though you might take a manual approach at the beginning, but 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 the 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 the audits can help you in ensuring that whatever data you have is accurate.
That’s why you need to do routine inventory audits. This will help you in counting the physical stock numbers you have on hand, updating the records, and keeping your data check. 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, and this helps in keeping your business run smoothly.
Consider The Dropshipping Options
With the dropshipping method, you can 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 spreadsheet not an ideal way to manage inventory?
The spreadsheet is not an effective way for managing the inventory because you need to update it manually. Not just it consumes time, but you can end up feeding 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 has been passed, or discontinuation.
Why should e-commerce should not overlook inventory management?
It’s an important component for 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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I am a certified and awarded marketing expert. I’ve spent the last decade reading and writing marketing books and blogs as well as my articles helps people to start their business from scratch or boost their existing business.