What is Inventory Management?
Inventory management is vital to any e-commerce business. If you don’t establish an effective inventory management approach, you risk frustrating customers, losing vital sales or investing in inventory that doesn’t sell. The following article is part of our Inventory Management Blog Series which covers all aspects of developing an effective inventory management strategy so you can optimize your sales and profit.
What does inventory management mean to you? For many businesses, it means a feeling of total and utter exasperation. If there isn’t a good system in place, you can find yourself constantly counting and recounting stock to reconcile incorrect inventory data caused by human error. You have to also make sure you never unexpectedly run out of stock or order too much stock. The thing is, inventory management doesn’t have to be frustrating at all. In this article, we’re going to simplify and define inventory management so it’s easy to understand and implement so you can master this vital part of your business once and for all.
- What’s Inventory Management And Why Is It So Important?
- What Are The Functions of Inventory Management?
- Managing Inventory In An Omnichannel World
- Key Aspects Of An Inventory Management System
- Common Obstacles To Address In Your Inventory Management System
- Analytics Options and Reports
- Inventory Management Integrations
- How to Choose the Right Inventory Management Software
- 9 Useful Inventory Management Tips
What’s Inventory Management And Why Is It So Important?
Anyone who runs an e-commerce business needs to implement a basic inventory management system. Inventory management isn’t just about the stuff you sell. It’s also about taking stock of your cash, labor, and your company’s assets. This makes it massively important because it ensures your business has exactly what it needs when it needs it. Unfortunately, 43% of small businesses don’t track their inventory, or they use a manual, outdated process.
An inventory management system configured for your business:
- Helps with inventory tracking and oversight: Your products are the core of your business. If you are not tracking your product inventory closely, you risk your business falling apart. And inventory management systems give you proper oversight of your stock.
- Prevents aging stock: “Days inventory outstanding” — the inventory on hand based on average sales per day — has been in a steady upswing since 2014, reaching an average of almost 55 days. If you invest more in your inventory when you have a surplus of sitting inventory, you will ultimately lose money. The benefit of inventory management is it keeps surplus and waste as low as possible while ensuring the production and storage of your inventory are handled with efficiency.
- Ensures product availability: With proper oversight, you have a closer eye on how your inventory moves so you don’t miss crucial sales or ruin the customer’s experience (and lose them as a customer) because you can’t fulfill an order. Inventory management systems allow you to account for buffer stock, which you can use to continue fulfilling orders while you wait for your replenishment stock to arrive.
Optimized inventory management means knowing what you have, where it is, and when more stock is coming in. This helps you to decrease costs from excess inventory, prevents overselling, ensures orders are fulfilled on time, and prevents fraud. Inventory management is important because you’re in control of your stock, which ultimately benefits the customer experience and your sales performance.
What Are The Functions of Inventory Management?
Let’s take a further look into the core functions of inventory management...
It’s much easier to sell to existing customers than it is to keep on acquiring new ones. Some studies have shown the likelihood of selling to an existing customer is as high as 70% while existing customers provide as much as 65% of the average company’s business.
Inventory management supports your retention goal by ensuring you always have stock for the products your customers expect you to have. If a customer finds out they can’t purchase the product from you, they’re going to shop elsewhere — your potential customer may never become your customer, and your existing customer may never return.
Better Shipping Accuracy
Imagine shipping an incorrect item to a customer. Anyone who has run a business knows it can happen — especially if you haven’t implemented an effective system to oversee your inventory.
By verifying information at each stage of the shipping and delivery process, an inventory management system improves your shipping and delivery accuracy while reducing your potential for error.
A good system can help your business be flexible and react to (and prevent) warehouse mistakes, delayed stock replenishment, damaged goods, and incorrect shipments. Having a close pulse on your inventory can help you identify the impact these scenarios may have on anticipated sales, allowing you to quickly accommodate your sales forecasts. It could also help you track where your inventory is moving internally.
An inventory management system makes this process easier by providing full visibility into how and why the stock is moving, whether it be for orders, mistakes, or damaged inventory. It could also help you prepare to readjust forecast numbers or place a purchase order with your supplier earlier than anticipated to make up for lost stock or incorrect shipments.
Managing Inventory In An Omnichannel World
Omnichannel shopping is quickly becoming the norm in the e-commerce industry. If you haven’t adopted an omnichannel shopping approach, you are losing precious opportunities to make sales. In 2019, customers demand more control over how, where and when they place their orders. This requires the capability to sell across multiple channels and connect the dots in the omnichannel shopping experience, like in-store pickups, online orders, or ship-to-store requests. If you don’t, you risk losing potential customers to your rivals.
A leading issue many companies run into is that you may have multiple sales channels that need to be brought together into one easily manageable system that allows for cross-channel inventory visibility.
What does this mean? Let’s imagine a customer wants an item that is out of stock in your store. With cross-channel inventory visibility, a store associate can find the item at another store or manually place an online order through your e-commerce store which will be fulfilled by your warehouse, allowing the customer to still purchase the product. This means your business is more capable of meeting your customer demands. And with 87% of customers thinking brands need to put more effort into providing a seamless experience, you can't cut corners.
An omnichannel shopping experience also means your customers are shopping online and offline. This requires you to not only have enough stock in your store and at your fulfillment warehouses to keep up with the potential increased demand, but also get ahead of it by anticipating a need for more stock if there is high consumer interest for a particular product. If your sales metrics indicate high consumer interest, you can place a higher order for stock or prepare to order from your supplier more frequently to maintain sales.
Key Aspects Of An Inventory Management System
To make sure your inventory management is effective, there are some key things you need to keep in mind.
First is how you will forecast demand and customer needs. This is not an easy step, but you need to forecast future demand as accurately as possible by looking at the results from previous selling tactics, inventory records, and sales.
What does all this tell you about future demand? Will it increase or decrease? Is there a particular season where you sell more or less than usual? This will determine your approach for ordering stock.
Next, categorize your inventory. This will make your warehouse more efficient in how it is run. Break down your inventory into three categories:
- Items that sell the most
- Items that sell at a modest pace
- Items that take a while to turn over
Next, pick a method or technique that works best for you. For example, it’s a good idea to implement safety stock if demand uncertainty is a big worry of yours. If that approach doesn’t work, you can also use minimum stock levels, or a minimum threshold of inventory, to help indicate you need to replace your stock when that threshold is reached.
Then, decide how you will track your outgoing and incoming inventory. If your budget is small and you have the time, you can keep tabs on what’s moving out and in via a spreadsheet or even pieces of paper. However, if this is going to take up too much time, there are software options to automate the process.
Common Obstacles To Address In Your Inventory Management System
Although we’ve outlined several reasons why inventory management is so important for business, it’s also worth pointing out some of the common obstacles. These obstacles might cause friction in your inventory management approach if you don’t align on how each should be addressed. These include:
- Deciding who takes control: Who’s going to make your big inventory decisions? How many people are involved in those decisions? Outlining the structure and authority for who controls inventory can help track accountability and prevent confusion down the road.
- Managing spaces and people: To keep track of your warehouse, you will need to carefully manage your space and your staff. They are the ones directly handling your products so there should be proper operating procedures in place so everyone is working on the same page.
- Keeping up with demand: If you make more sales than you have products, you’ve committed oversell, which is potentially damaging to your bottom line and customer experience. How will you reconcile oversold items for customers? When you oversell, you need to quickly order additional inventory, which is not the most cost-effective. But you also need to determine how you will address this with the customer.
- Running out of stock: In contrast to overselling, running out of stock isn’t as damaging but it can have similar consequences. If your product is out of stock for too long, your customers will prefer to purchase from someone other than you, which puts them at risk of never returning. How quickly will you replenish stock that unexpectedly runs out?
Let’s be clear about one thing: Inventory management isn’t easy. It’s time-consuming, can be complex and problems will arise.
However, with data showing U.S. retailers are currently sitting on about $1.43 in inventory for every $1 of sales they make, businesses can’t stall any longer on implementing an effective inventory management system.
Analytics Options and Reports
Analytics can enhance inventory management by offering ample data that can help your overall business strategy.
With inventory management software, you should have a variety of analytics options and reports available to help you see how certain products are performing across all of your warehouses, including your in-house, third-party logistics (3PL) and Fulfillment by Amazon (FBA) warehouses. The reports should cover data such as:
- Product age
- Sales velocity
- Inventory quantities
With this data in one place, you can identify new opportunities to reduce inventory liabilities. Proper analytics offer clear insights into purchasing behavior, sales and inventory performance, and business optimization.
Inventory Management Integrations
To know what you have in your warehouse and where your stock is located, your inventory management must be integrated with your back-end systems. This provides a competitive edge, allowing your company to minimize labor costs, optimize inventory handling, plan effectively and avoid data entry errors.
A good inventory management software can be integrated with:
- Shipping providers
- Shopping carts
Through successful integrations, your inventory management system can communicate directly with your back-end systems, maintaining consistency of data and creating a more streamlined business process.
Be prepared to see a complete 360-degree view of your inventory and supply chain.
How to Choose the Right Inventory Management Software
It’s well worth investing in inventory management software. While it’s possible to manually manage inventory, the software reduces the inevitable human error in the equation. But how do you choose the one that’s right for you? Here are some tips:
- Consider your product: The product you’re selling can dictate the software you purchase. For example, if you run a clothing store, you’ll want software that lets you categorize according to color and size.
- Features: What features do you want from a piece of inventory management software? Do you need your data synced in real-time? How much support will your team need? Do you need to be able to create different Purchase Order templates for each vendor? Is there a discount, pricing tiers, or a minimum order quantity that needs to be captured for each vendor? These factors and more need to be considered in your software decision.
- Distribution channels: If you’ve already implemented an omnichannel shopping experience, you’ll need to go for a piece of software that brings your channels together into one place.
- Integrations: Managing an e-commerce store typically means you are using many different pieces of software and applications to keep it running. Using a stock and inventory management software that can integrate with your existing systems minimizes friction between them, allowing you to maintain efficiency.
Most importantly, make sure you have a defined budget, know what data integrations you need, and make sure the software you choose can address your overall and day-to-day inventory challenges.
9 Useful Inventory Management Tips
While there will be some company-specific inventory management procedures, these nine techniques can help any company better manage its inventory.
Having a strong working relationship with your suppliers is key. When items are selling slowly or you need to purchase new items quickly due to overselling, a good relationship with your suppliers will prove to be beneficial. Be friendly, get to learn who they are and have their information handy. If you communicate with them often, they’ll be more likely to help you in a pinch.
Determine Your Minimum Inventory Levels
A minimum inventory level is the fewest number of units you must always have in stock of a product. If your stock falls below or near your minimum level, it’s your first indication that it is time to replenish stock. Established minimum inventory levels help prevent item shortages without needing to order excess units.
Many factors can impact your minimum inventory level, but a standard formula to follow is:
Current Sales Velocity x Max Lead Time (the time it takes your supplier to fulfill a purchase order) = Est. Minimum Inventory Level
Whether you sell online, offline or both — figuring out your minimum level is imperative. This will take a bit of market research on your part, but it will save time and hassle later on.
Fast-, Slow- and Non-Moving (FSN)
The FSN method is good for organizing your warehouse or identifying products that might be obsolete. It classifies inventory into three categories: non-moving inventory, fast-moving inventory and slow-moving inventory.
The higher the stay of an item in the inventory, the slower the movement. Products classified as non-moving can be evaluated closely to determine if they should be discontinued, or if the remaining products should be liquidated.
Prioritize with ABC
As a complement to the FSN method, you can use the ABC technique to organize your warehouse appropriately. Carry out an ABC analysis to identify what needs prioritizing in your inventory.
Classify your inventory into the following three categories:
- A — Products that sell frequently (fast-moving)
- B — Products that sell at a moderate pace (slow-moving)
- C — Products that sell at a slower pace (non-moving)
The fastest-moving items in your inventory should be placed close to the staging, shipping and receiving area — as seen in the diagram above. This optimizes your warehouse labor when picking products, increasing productivity and ultimately leading to reduced costs.
First In, First Out (FIFO)
In inventory management, the oldest stock should always get shipped first while the newest stock should get sold last. This is crucial for items with expiration dates, such as food.
But even without perishable goods, boxes sitting in your inventory for way too long can get worn and damaged.
When new inventory has been received in your warehouse, ensure the old products are placed in front of the queue for fulfillment.
Known as the LIFO inventory method, last-in-first-out is best for business selling nonperishable goods. Think retail and e-commerce businesses that sell shoes, clothes, and furniture. It is the opposite of FIFO, ensuring the most recent items purchased are sold first.
LIFO might be useful if your inventory costs continue to increase because it assumes you’ll ship out the higher-cost items first. This results in higher reported costs and lower profits.
If this is the approach you would want to take, investing in a strong inventory management system can help you manage your fluctuating costs.
Manage Returns Effectively
A major issue faced by many businesses is the handling of returns. If you have to restock an unwanted item, make sure all your labeling systems are in place so the product can be repackaged. If the product must now be marked as used or refurbished, you should categorize it appropriately.
If the stock has been returned because it is defective, make sure you don't adjust your stock levels upward. Instead, get in contact with your suppliers and reconcile the issue with them, whether it be that they refund you for the defective product or replace it.
Dropshipping can be a useful option in your inventory management approach because, in theory, it means you don’t have an inventory to manage. This is true if you rely on a supplier such as AliExpress from China. The caveat is you’re relying on just one supplier, and they might either run out of stock themselves, or they might discontinue a popular product.
On the other hand, if you rely on more than one supplier, there’s less chance you’ll run into a scenario where you can’t access stock for a product. Either way, dropshippers have to perform a balancing act between keeping their clients happy and making sure they don’t run out of stock.
If you want to sell a product, but don’t want to or can’t manage the stock directly, you can consider working with a dropshipper.
Take Advantage of Technology
Technology is rapidly expanding in the e-commerce, 3PL and retail industries.
Even though it is not easy to adapt to these technological changes in inventory management, companies cannot afford to wait any longer. 54% of them expect an increase in the number of SKUs they carry, meaning the number of units they manage will increase.
With proper inventory management technology, human error will be reduced, costs will be minimized and inventory will be synchronized across multiple channels.
Now is the time to rein in your inventory management. It will save you time, hassle and — more importantly — money. Choose the techniques that work for you, invest in the right software and be wary of the obstacles.