January 30, 2019
You’ve got stuff, and probably lots of it. The success of your eCommerce business depends on customers buying this stuff, hopefully over and over again.
But, there’s only one problem. How you manage your stuff – meaning your inventory – could potentially interfere with how much money your business makes. Even worse, it could result in you losing money.
At Magento, we aim to help eCommerce business owners remain profitable while keeping their customers happy through proper inventory management. Now, if you’re not familiar with what inventory management is – or how to do it right – no worries.
In this guide, we’ll be covering 10 techniques to help you keep your inventory in order and avoid some of the most common merchandise mishaps.
Why is Inventory Management Important?
The basis of your business is quickly getting products to customers and turning a profit. This means your products need to be ready-to-go as soon as the order comes in.
While it sounds simple enough, inventory management is actually a bit more involved. It means ensuring you have the necessary items in stock and having a contingency plan for when things don’t go as planned. Good inventory management also works to help you avoid losing money through overstocking or improper accounting.
Why does this matter?
Inventory Management Saves You Money
Holding inventory takes money. If you have items in stock and they aren’t sold, you don’t turn a profit. All you end up with are products sitting on your shelves collecting dust in a warehouse.
On the other hand, if you don’t have products in stock, you may struggle to get merchandise from suppliers in time. In the meantime, you may end up having to place the dreaded “out of stock” label on your product pages. Being unable to deliver on demand can result in loss of sales, canceled orders, and unhappy customers.
Poor Inventory Management is Bad for Business
There are countless horror stories from even the biggest corporations losing money due to poor inventory management such as a stockpile of Barbie SUVs at Target, a $100 million loss for Nike, or a Christmas fiasco for Best Buy resulting in a mob of “infuriated” customers.
Don’t let your online business become another cautionary tale, get proactive with your inventory management and be prepared for any situation.
Common Struggles eCommerce Businesses Have with Inventory Management
Inventory management is something which doesn’t come naturally to many business owners. At times you may feel like you’re spending countless hours checking inventory and making sure the numbers add up. If you aren’t a numbers-oriented individual, this may seem like a tedious, confusing effort.
Don’t worry, you’re not alone in your struggles. As we discussed above, even the most established eCommerce business owners have faced their share of inventory issues at one time or another.
Here are some of the most common issues eCommerce websites face when it comes to inventory management.
No Centralized System
How are you tracking your inventory? Are you relying on a bunch of spreadsheets, reports from suppliers, and order logs? Are you using inventory management software?
Many eCommerce business owners simply don’t know how to start a dedicated inventory system or how to make sense of the stock they already have on hand. Without a clear cut strategy in mind, you can quickly have a mess of numbers on your hands. This is why implementing a centralized inventory management system is key to your success.
An automated, online system created for your eCommerce store offers the best solution. It will allow you to track inbound orders while accurately tracking inventory quantity at the same time. You can do this through software solutions engineered specifically for eCommerce businesses.
Have you ever gone to fulfill orders thinking you have three products in stock when really you only have one? Incorrect inventory can force you to have to cancel orders, leading to your business having a poor reputation among unhappy customers. Even worse, it can make you question your inventory numbers across the board, leading to major accounting issues.
Staying on top of your numbers is a major business priority. If you’re doing your inventory management by hand, operations can get confusing fast. This common issue presents another reason why you need an automated system offering accurate inventory updates in real-time.
Over or Under-Stocking
As we said before, you don’t want overstocked inventory nor do you want understocked inventory either. Overstocking and understocking alike can both cause undesirable financial issues.
Holding onto excess inventory ties up capital, meaning you have less money for essentials like marketing efforts and maintaining your eCommerce store. If you don’t end up selling those extra products, you’ll find yourself taking a loss.
If you’re understocked, you may end up canceling orders which is going to leave you with dissatisfied customers. Furthermore, if potential customers visit your store and see you don’t have the items they’re looking for, they’ll almost certainly go elsewhere to get what they need.
How do you maintain a steady balance and make sure your numbers are in order? These questions and more will be answered with these 10 inventory management techniques.
10 Inventory Management Techniques to Save You Money...and Sanity
Become the savvy eCommerce business owner you aim to be while avoiding costly inventory mistakes with these 10 techniques.
1. Plan for Demand
Forecasting the demand for your products may sound like you need to know how to read the future. However, if you’ve been in business for a while, assessing demand may be easier than you think.
You will need to review past sales and trends for a close estimate of how much inventory you should have in stock. If you don’t have this history to look back on, things could be a little more difficult but certainly not impossible.
At a minimum, look at data for the past year to establish a “base demand” level for each season. Then, use this information to forecast what future demand will be like. You can also make an estimation based on your marketing efforts and average conversion rates. This will help you determine how much inventory to have in stock for a given time.
2. Set Minimum Stock Levels
Also known as your “par levels”, your Minimum Stock Level (MSL) is the minimum amount of product you should have on hand at all times. When inventory falls below this number, it’s time to order more.
This number will vary based on expected demand and how quickly a particular product sells. However, once you have determined your MSLs, it will help you systematize your product orders. Just be sure to re-assess your MSLs periodically as market conditions can change over time.
3. Maintain the Correct Inventory Quantity
As a follow up to determining your MSLs, you should make sure you’re actually maintaining this amount of inventory. It’s one thing to know your par levels; it’s another to stay on top of ordering stock.
If you have a centralized inventory management system, you can automate ordering inventory. If your stock falls below a certain number, your system will notify you and/or place an order with the supplier.
4. Prioritize Your Products (a.k.a. ABC Analysis)
Prioritizing your products helps you keep costs low because it identities which products need to be ordered most frequently.
You can do this by following the ABC Analysis:
- A Items: Your best-selling items which sell most regularly, holding the most value in your business
- B Items: Items that don’t sell as regularly but cost more to hold, giving them average importance
- C Items: All items that remain and make up the bulk of your inventory costs while also contributing the least to your bottom line
As you may have expected, you will devote the most attention to your A Items when it comes to maintaining inventory.
For the other categories, you don’t have to be as proactive. In fact, you may want to avoid stocking too much of these items, as they’re sold less frequently and don’t offer your business the greatest value.
5. Have a Contingency Plan
A classic saying is “Hope for the best, plan for the worst” and this is especially true for business. If you don’t have a contingency plan for when things go south, there can be dire consequences.
A wide range of inventory issues can come up for eCommerce businesses, so you need to be prepared.
Some questions to ask yourself are:
- What if my sales spike and I run out of stock?
- What if I run out of room for products in my warehouse?
- What if I miscalculate how much inventory I have?
- What if my supplier runs out of my product?
- What if the manufacturer discontinues my product?
- What if there is an unexpected recall?
- What if there are cash flow issues?
How you prepare for these potential issues will vary depending on your business model and unique situation. As a business owner, it’s your responsibility to consider what could possibly go wrong and ensure you are prepared for the worst.
Be proactive and create a viable plan of action for any and all situations. By doing so you can avoid major profit loss and a queue of angry customers.
6. Centralize Your Inventory Management
We touched on the fact that not having a centralized inventory management system can be a major issue for eCommerce businesses. Relying on pen, paper, and a filing cabinet to manage your inventory isn’t going to cut it in today’s digital marketplace.
If you want to keep on top of your game, you’ll need a cloud-based inventory management system. This will allow you to track, forecast, analyze, calculate, and control your stock in real-time, from anywhere in the world.
There’s really no better way to stay on top of your inventory, avoid miscalculations, and save your business money. Also, do you really want to put your workday on hold and chase down errant paperwork?
7. Keep Open Communication with Customers and Suppliers
Inventory management isn’t only about the numbers, it’s also about managing expectations. In other words, you don’t want to over-promise or under-deliver.
If an item is out of stock, make sure the numbers on your website are up-to-date. If a product is recalled, notify your customer in a timely manner. Be honest and upfront about your delivery times, especially during peak-seasons. Make sure customers are aware of your refund policy.
On the supplier side, make sure you have a good relationship which promotes honest, open communication. If a supplier runs out of products, raises prices, or develop manufacturing issues, you’ll be the first to know, allowing you to adjust inventory accordingly.
8. Audit Your Systems
If you’ve already implemented some of these techniques, you may think your system runs like a well-oiled machine. But as we’ve clearly seen, even the biggest and best businesses run into inventory issues with inventory.
You need to audit your systems periodically to make sure everything is in working order. Demands change with the trends and seasons, prices fluctuate, and customers migrate to other brands. Not only do your marketing efforts have to keep up, but so does your inventory management.
9. Consider Dropshipping
In recent years, dropshipping has established a reputation as being a great backup solution for eCommerce businesses.
Dropshipping means that instead of actually carrying the inventory yourself, the manufacturer holds and delivers said inventory for you. Dropshipping thus eliminates the costs associated with holding and storing inventory.
If you aren’t sure if a manufacturer offers dropshipping options, just ask. This can save you a lot of money and headaches as it can remove the task of inventory management from your business operations completely.
10. Use the FIFO Method
Everyone loves a good acronym, especially when it means saving your business money by implementing effective inventory management.
FIFO – First In First Out – is a strategy focusing on getting your oldest stock (first in) sold first (first out). This is especially important if you’re in the business of selling perishable items.
You don’t want to be holding goods and have them expire even before they leave the shelves. You also don’t want non-perishables to sit there gathering dust or risk damage as they wait to be sold.
To follow the FIFO method, your warehouse needs to be in order. Set up an order picking system which ensures your oldest items are the first to be shipped out. Make sure you’re keeping track of item expiration dates as well as trendy items which can fall out of interest with consumers, leaving you with shelves of unwanted merchandise. Fidget spinners anyone?
Get Your eCommerce Inventory Management Under Control
We hope you’re doing your best to avoid costly inventory mistakes. But if you’re new to this inventory management business, we’re more than happy to help.
With these 10 techniques, you can quickly get your eCommerce inventory under control, save money, and keep your customers happy.
From following the ABC method to having a contingency plan, you’ll have everything you need to be successful in your eCommerce inventory management.
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