A Guide To ECommerce Inventory Management
January 19, 2023
Do you own an eCommerce business? Do you find yourself struggling to keep up with customer demand or is your warehouse full of overstock? The trick to a successful business is proper inventory management. We’ll guide you through the process, so you can grow your eCommerce business with confidence.
If you own an eCommerce business, then you already know that inventory management is difficult. There are many variables to consider, from seasonality to fluctuations in demand. Supply chain delays and disruptions can get in the way, and changes in the economic environment are out of your control.
It takes more to grow a business than advertising and a smart budget. Maintaining the right levels of inventory is a crucial aspect in the success of your business. After all, order too little inventory and risk a stockout. Order too much and you’ll tie up valuable working capital in storage fees and unsold inventory.
In order to accomplish this, you’ll need to know how to manage your inventory. Let’s discuss the most valuable things you need to know about inventory management.
In this article:
- What is inventory management for eCommerce businesses?
- Why do you need inventory management?
- Manual vs automated inventory management
- Which inventory management strategy is right for you?
- Tips for effective eCommerce inventory management
- What is inventory auditing and how can it help you?
- Should you get inventory funding?
- Grow your business with proper eCommerce inventory management
What Is Inventory Management for ECommerce Businesses?
Inventory management is the process that a company uses to manage the acquisition, storage, and sales of goods. It’s important to know how much stock you need, how much you have at any given time, how much money you should sell it for, and how long to hold it in stock. Knowing these details is essential to every productive business.
In order to gain an understanding of these key aspects of inventory, it’s important to understand your customers’ current needs and future demand trends. Don’t slack when it comes to inventory management because failing to maintain optimal levels of inventory can affect your business in both the short term and long term.
Inventory management helps you answer the big questions while you’re considering the inventory list and budget. When do you need to reorder? How much do you need to order or reorder? Which products should you add to the list? How long should you keep inventory in stock? The answers to these questions and more are unique to every business, and depend on the inventory management strategies you choose to employ.
Why Do You Need Inventory Management?
Investing in inventory management is necessary for every eCommerce business. As an eCommerce seller, you need to be mindful when it comes to ordering the right amount of inventory, ensuring you accurately keep track of stock levels, and knowing when to reorder.
Inventory control, or making sure you have the right amount of inventory in stock, is a vital aspect of this process. Perishable goods can only be held in the warehouse for so long. Non-perishable goods can go out of style or you can miss the trend or sales spike if you don’t have them properly accounted for in your system. You’ll also be able to watch for missing items. If you have incorrect inventory records, you won’t know when you’re running low or out of stock, which can cause costly chain reactions for your business.
There are quite a few consequences to deal with if you don’t have a proper inventory management system in place. Besides the fact that you’ll have no idea what you have or how much, which is a huge problem in itself, you can waste your time and money. Without proper records, you may spend more funds than you should on goods and warehouse expenses. This money can be better spent elsewhere, such as for advertising, loan payments, or even ordering more inventory.
Disgruntled customers are also a hefty consequence. Your sales data should reflect what you have in stock. You don’t want an influx of sales for an item that’s not even available to ship. Without a smooth, efficient system, the warehouse won’t be able to keep track of shipments. This causes delays, confusion, and leads to bad business practices. Most customers won’t bother coming back to you in these cases.
Manual vs Automated Inventory Management
ECommerce inventory management can be done manually, but it’s not recommended. The room for human error is too great to risk, especially when there are so many beneficial software programs to choose from. The labor-intensive manual inventory system may have worked in the past, but today’s fast-paced environment necessitates a more efficient strategy.
If you are like most eCommerce businesses, then you want to reach as many customers as possible. Technology is the future, and it’s integrating into more business strategies every day. Adapting and changing with the times is the number one trait that every eCommerce business should have.
With that said, there are some drawbacks to automated management. The first being vulnerability to hackers. There are people hunting for information about your company and your customers. With a manual system, this would be impossible unless they physically stole the inventory sheets and customer profiles from your office. However, antivirus software fixes this problem for the most part. Another thing to consider is system crashes. Computers can overload, have power failures, or their hard drives can be corrupted. This means your information is most likely gone. So, back up your system often if you choose automated inventory management.
Which Inventory Management Strategy Is Right for You?
It’s imperative that you do your research before deciding on an inventory management system. Every eCommerce business has unique needs, and therefore requires a different structure. The size of your company and the nature of your business play a major role in your decision, as there are many types of inventory software to choose from.
The most important aspect of the system, however, is visibility of your inventory numbers across all your locations. You need to be able to see the details from the warehouse to the customer’s hands. This will help you determine products that are overstocked, understocked, out of stock, and missing.
Ask yourself questions such as: What are the priorities for my business? Are my sales seasonal? How long does it take to get inventory in stock? Does the system prevent stolen or misplaced inventory?
With all these questions in mind, let’s review the best inventory management strategies.
1. Just-In-Time Inventory (JIT)
This strategy is useful for those who only want to keep enough stock to fill orders—the volume of inventory equaling the amount of orders filled. Seasonal businesses typically use this type of strategy. This choice guarantees that you won’t overstock your shelves or warehouses.
There’s no need to worry about lost money or items for that matter, as there aren’t a lot of goods to keep track of. They aren’t sitting and waiting for an order to come in months or even years down the line.
If you’re a company that relies on trends, this is not the strategy for you. You would need to stock up for that inevitable spike, and ordering the amount of goods needed for the spike would be difficult with this approach. Trends are about preparation, after all.
Dropshipping is quickly gaining recognition and popularity. You, the business owner, don’t touch the inventory at all. You act as the middleman between the customer and manufacturer, as usual, but the order is fulfilled by the manufacturer—invoiced and sent by them. You get your money without doing anything other than supervising the initial transaction.
This is a great strategy for those who are just starting their eCommerce business and don’t have the money for goods or warehouse storage. The downside is that you don’t retain control over the process after it reaches the manufacturer. They control when and how they ship the product, which means it could be good or bad for the eCommerce business’s image.
3. Safety stock
The safety stock strategy is a great option for those who want to “play it safe.” You never know what’s going to happen in the market. Sometimes the forecasting is wrong or maybe the materials aren’t going to be available during a certain period of time. Keeping back-up goods on hand will compensate for unexpected sales spikes, supply chain delays, and even system errors.
Other than helping you prepare for the unexpected, keeping safety stock allows you to plan campaigns with confidence. For example, you may have noticed that a certain product is doing better than usual. You can push that best-selling product in your advertisements, and you won’t have to worry about struggling to fulfill orders because you’ll already have inventory on hand.
4. ABC Analysis
When you have a wide assortment of goods, each with a different value and quantity, you’re going to want to use different restocking strategies. How do you do this?
The ABC analysis strategy categorizes your inventory, so you can better track and manage each category list. The categories are determined by factors such as the various products’ value and importance to the business’ revenue. This helps you prioritize items. For example, category A would be the most important to the business’ sales, containing the high-value or high-priced items. Category B would be of medium importance, listing products that have a lower value or account for a smaller portion of profits. Category C contains the least important items, those that are low priced and less essential to your business’ success.
When you break down your vast inventory into sections, it’s easier to manage. It may seem like a lot of work, but if you have a proper inventory management system, this strategy will benefit you in the long run.
5. First in, first out (FIFO)
This inventory management strategy is a favorite among retailers. It’s especially useful for those who sell perishable goods. The first products that arrive, or the first to expire, are the first ones out the door and in the customer’s hands.
This process is often used by those with non-perishable goods, as well. If you don’t want to hold onto certain products for too long, this strategy would work well. Just keep the fluctuating costs in mind, as you may see some massive differences in the costs between when it was received and sold again. This can impact you negatively or positively, but it’s a good idea to record it either way.
Tips for Effective ECommerce Inventory Management
There is a lot to keep track of in your business’s comings and goings. However, the more time and effort you put into inventory management, the more revenue you’ll bring in and the happier your customers will be.
We’ve listed the essential tips for inventory management to keep you on track. Every business is different and will act on these methods at different times. Each will require varying amounts of effort, depending on the size of your company’s inventory. However, it’s important to consider these processes and take care of them regularly so your business can thrive.
1. Keep safety stock on hand
No matter which strategy you use or how much inventory you have on hand, it’s a good idea to have a backup plan. Just as you should have an emergency fund for the slow business months, you need a strategy for unexpected sales spikes. Plus if you’re suddenly unable to procure new inventory, you’ll be out of luck if you don’t have any safety stock.
Remember, the unexpected can, and will, happen in eCommerce. Your manufacturer could run out of materials or simply be overwhelmed, meaning that your customers won’t get their orders on time. Your shipment could be delayed in port, or an entire container could arrive damaged. No customer wants an item that’s on “backorder.” They’ll simply spend their money somewhere else. Therefore, even a small amount of safety stock could make the difference between keeping customers or losing them.
2. Balance your inventory
This is where a quality inventory management system comes in handy. It’s essential that you keep accurate records of your inventory, so that you can balance your inventory properly. It’s hard enough as it is, without worrying about incorrect reports.
If you’re just starting your eCommerce business, then you’re probably struggling to find a balance in your numbers. You don’t want to overstock, possibly losing that projected profit due to lack of sales. You could lose customers if you have too little stock, too. Again, they won’t wait for you. It’ll take a few tries to find your balance, as every business is unique in their inventory and methods.
3. Use the kitting technique to get rid of excess inventory
After preparing, estimating, and reading over the best ways to balance your inventory, you may have overstocked anyway. This can happen due to unexpected dips in the market or a small miscalculation in your order.
No matter the reason that you ended up with the excess goods, you can use the kitting technique to get rid of it more quickly. Kitting is when you sell complimentary items together in a “kit”, encouraging customers to buy more than they typically would. This both helps you get rid of excess inventory and raises your average order value (AOV), which is great for business.
For example, you can offer customers a “buy 2, get 1 free” deal on certain items. This will increase revenue and your customers will thank you for the great deal by coming back to your store time and time again.
4. Forecast sales and demand trends
Ordering the optimal amount of inventory means that you have to predict sales and demand trends. No, you don’t need to be a psychic for this, though it can be difficult if you are new to the process. The easiest way is to review your past sales. Which products are selling the most? At this time last year, was there a spike in a certain product? Did a specific campaign increase sales?
Use this data to prepare your inventory’s budget and orders. You can even take a look at the competition and Google Analytics. These tools will help you determine if you need to add a trending item to your inventory or stock up on something you already have. Don’t forget to consider items that are similar to what’s trending or “about to trend.” For example, if a specific barbecue grill is on the rise, offer outdoor cookware or a cheaper alternative. People love options and accessories.
5. Be smart with your storage
You probably have a list of items that sell regularly, but scaling your business and adding new trending items requires additional storage space. This means that you have to constantly reorganize and think about where to put all the goods you ordered. While you’re considering your new system, keep in mind that bestsellers should be easy to access, package, and ship.
Whether you are the one personally fulfilling the orders, you have employees doing it for you, or you use a fulfillment service, efficiency is key to a quick, positive customer experience. You can’t take too long to complete those incoming orders. You can use your spare room, basement, and even a rented storage unit if you can’t afford space in a warehouse. In short, create the easiest storage location and layout possible.
What Is Inventory Auditing and How Can It Help You?
Inventory auditing is the process of ensuring that your records match the actual physical inventory levels.
It’s vital to conduct inventory auditing often. Even if you have the best of the best inventory management software, computers can mess up, too. Human error is also a factor because it takes humans to input or scan the inventory’s information. In short, there’s room for mistakes.
In order to conduct an audit, you or an auditor will manually count all the goods available and compare it to the numbers in your automated system. This will provide accurate numbers and even fix problems that you’ve been having; for example, you could have missing stock, or items that were never counted. From there, you can take preventative measures, so it doesn’t happen in the future.
Should You Get Inventory Funding?
If you have your inventory management system working properly, then you’re probably reviewing your budget. Did you realize that you don’t have enough cash flow? When you’re just starting out, you might not have a lot of working capital to spend on inventory.
If you need a boost, then funding may be the way to go. This is the same for those who plan on growing their eCommerce business, too. It takes money to make money, after all. If you want to be prepared for those inevitable spikes or survive the slow seasons, then additional cash is needed. There are many financing options out there that can be used for inventory, including loans, a merchant cash advance, revenue based financing, crowdfunding, lines of credit, and more.
Grow Your Business With Proper Inventory Management
Inventory management takes time and effort, but it’s part of owning a successful eCommerce business. Leaving room for error can mean loss of inventory, money, and customers. In the age of eCommerce, there is tons of competition to keep up with. That means you’ll want to have the best software, business methods, and budget for the job. Without them, you’ll quickly fall to the bottom of the list. With all this in mind, take the information you’ve learned and apply it to your own unique eCommerce business. You’ll be glad you made the effort to improve your business’s inventory management.
Proper inventory management takes working capital. You need cash on hand to order more inventory when needed, pay for warehouse storage, acquire software solutions, and take care of audits.
If you’re looking for funding to pay your inventory expenses and grow your business, 8fig can help. We offer flexible, continuous funding for up to 90% of your supply chain costs, including inventory. Plus, our planning and analysis tools will ensure that you have the cash flow you need to succeed.
Find out how 8fig can help your business reach its full potential by signing up for a Growth Plan today!
Rebecca is an eCommerce writer at 8fig. She strives to provide sellers with the information and support they need to succeed in the ever changing eCommerce space.