Inventory management is challenging for any business, but for a business operating mostly online, controlling inventory becomes incredibly complex.
Inventory management (also known as stock control) refers to the process of organizing and managing your stock levels throughout the supply chain. Ideally, you have just enough inventory on hand that customers don’t face delays in receiving the products they order, but you don’t have so much that the cost of storing inventory is too high or your goods expire waiting for purchase orders.
eCommerce inventory management terms & concepts
While some terms may seem simple to understand, knowing the technical terminology is the first step to inventory management basics. For starters:
- Inventory refers to tangible items, including raw materials, that you will sell to customers
- Your minimum viable stock is the minimum amount of product you must have on hand to keep up with demand with no delays.
- Lead time refers to the amount of time between the moment you order inventory from a supplier and the moment it arrives.
- These basics concepts are packaged up and coined as logistics.
Whole logistic departments are sometimes necessary for major retailers; as they must consider many different time-constraint and products.
Challenges of inventory management systems & processes
eCommerce inventory management comes with more than just the challenges of managing multiple sales platforms and warehouses. If your eCommerce business operates on numerous sites you should absolutely keep track of what sells through each of those channels, because it will help you make better business decisions in the long run. Additionally, if you have multiple warehouses, you have to be on top of how much inventory you have left, where it is, and even the lead times it'll take those companies to replenish their stock.
Other risks include overstocking and overselling. Overstocking happens when you have too much of a specific item, while overselling happens when you sell items you no longer have in inventory. Huge liabilities for online retailers, overselling and overstocking can happen in a world where people can shop at literally any time of day and don't physically need to be holding something to purchase it, making your product allocation forecasting more dynamic than ever.
Dropshipping provides an elegant solution to overstocking or overselling—where retailers market the product and handle transactions, while the supplier takes care of the production, storage, and shipping. Even dropshipping has its challenges though, as you must trust the supplier has enough inventory on-hand to meet any influx in orders you create. If they fail to stock inventory your customers want, your customers will be forced your way with their frustrations.
Do you need an inventory management platform?
If you have an eCommerce business, it can be beneficial to invest in an inventory management platform. You can manage sales manually—especially if your business is new or small—but it takes vast amounts of time, energy, and money to do so. Manual inventory management is also prone to costly errors, especially as you scale up your operations.
If you have any thoughts of growing your business or spending less time controlling inventory, inventory management software can help you stay on top of inventory levels and give you vital data to decide how much stock you need. With software like this, you can ensure items are ordered when needed (preventing overstocking or understocking), sync your inventory tracking to other internal tools and systems you have in place, and learn valuable information about your customer's spending habits to help determine how you control your inventory and sales.
How to manage inventory for online stores
To understand the basics of inventory management, take some time to understand term like demand, seasonality, forecasting, minimum viable stock, and ABC analysis.
Learn about your product demand & seasonality
Seasonality affects sales for many reasons. People have varying purchasing power depending on holiday seasons, or some costs of goods may be higher or lower depending on raw material access and allocation.
Keeping your inventory levels low during the slow months will help you be prepared to gear up before the busy months. Additionally, you can use special offers to sell off inventory that’s about to expire.
Forecast future demand from previous sales data
Because sales levels are dynamic and it takes time for the stock you’ve ordered to get to you, you have to forecast future sales. This enables you to order products in time for a surge in demand. If people come to your site on October 1 looking for Halloween decorations, you need those decorations ready to go by October 1. That might mean ordering them in early September, late August, or even July depending on shipping or inventory delays.
Look at your previous sales data and forecast surges or declines in sales to determine when you need to place your order. Otherwise, gauge your efforts against competitors in the market, or offer deals and discounts if people fill out surveys about their shopping habits.
Build minimum viable stock numbers
Using purchase histories, sales histories, and cost of goods sold (COGS) will help you determine how much stock you need to meet the demand for your products. Having an inventory management software will help you keep a more immediate and accurate understanding of when sales are high, when they slow down, and how long it takes for suppliers to fulfill your orders, while manually tracking this information helps you create a timeline map of how much inventory you have and will need in the future.
You might need to set a policy that certain items are automatically reordered when you only have 5 in your inventory, for example. Or that some items are ordered a set time before a new season begins. These are just a couple of the ways setting up a minimum viable stock will help you organize your logistics and optimize your sales.
Perform an ABC analysis on your inventory
An ABC analysis puts your inventory into three categories.
- A- The high-value products with a low sales frequency
- B- The moderate-value products with moderate sales frequency
- C- The low-value products with high sales frequency
We can assume, due to the Pareto Principle, that 80% of your sales are linked to 20% of your customers, as those customers are usually buying products in your A category, making those products and those customers your highest priority.
After all, inventory management is all about making your hard work appeal to your customers every time they're shopping. By putting what the customer wants in front of them, you’ll ensure the success of your eCommerce efforts every time.
This article is intended for general informational purposes only and does not constitute legal advice or an opinion on any issue. It should not be regarded as comprehensive or a substitute for professional advice.