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Effective ecommerce stock management is designed to minimize costs of storing inventory while ensuring proper stock levels are maintained. This helps prevent disruptions and delays in order fulfillment.
For ecommerce businesses competing globally, it’s crucial to have a solid system in place, as any delays or stock issues can lose you business. To help you avoid tricky situations, we’ve laid out some guidelines on how to get started with ecommerce stock management.
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What Is Ecommerce Inventory Management?
Ecommerce inventory management is the process of sourcing, tracking, shipping, and storing goods and materials for a business that sells products online. Inventory management ensures that you have the correct amount of stock to fulfill orders as they come in, so customers get their products quickly. This is key in maintaining high levels of customer satisfaction.
Inventory management also helps you manage costs associated with storing stock and find areas that can be improved over time. Generally, businesses will use a mix of software and manual systems to monitor inventory, track changes, and ensure goods are stored and shipped properly.
Why Is Ecommerce Inventory Management Important?
There are many reasons it’s important for you to have a well-organized ecommerce inventory management system:
- Avoid over or under stocking: By keeping track of inventory levels, you can avoid overstocking or running out of stock.
- Improve profitability: Accurate inventory management can prevent product waste, which in turn improves profitability.
- Customer satisfaction: With proper inventory management, you can ensure you’re able to meet customer demand by keeping popular products in stock.
- Cash flow management: Inventory management allows you to better manage your cash flow by reducing the need to purchase large quantities of inventory upfront. This can help free up cash for other business needs.
- Improved forecasting: By effectively tracking inventory, you can make more accurate forecasts about future demand for your products – what’s selling and what’s not. This helps inform everything from production to sales and marketing.
- Reduced risk of loss: Proper inventory management reduces the risk of loss as a result of product damage, theft, or obsolescence, saving you lost revenue and protecting your bottom line.
Ecommerce Inventory Management Challenges
Sometimes you might encounter challenges in inventory management, and these challenges can be either in or out of your control. By preparing for any situation that may arise, you can work to mitigate them as much as possible. Here are some possible challenges to be aware of:
- Managing multi-channel inventory: Selling through multiple online channels including your website, third-party marketplaces like Amazon or Etsy, and social media can make maintaining accurate stock levels difficult.
- Handling returns and exchanges: Managing returns and exchanges from customers can throw off your inventory levels and can be time-consuming to process.
- Accurately counting inventory: Whether you manage your inventory with software or manually, no system is completely immune to errors such as miscounting, scanning twice, or forgetting stock.
- Changes in customer demand: The market can be finicky and customer demand can often change with little to no warning, which may lead you to have stock shortages or deadstock that can no longer be sold.
- Supply chain issues: There are often external issues in the supply chain such as shipping delays, factory closures, or material shortages that may affect your inventory levels.
How to Get Started with Ecommerce Inventory Management
1. Decide on Your Business Model
The first thing to do when setting up an inventory management system for your ecommerce business is to determine how you’ll fulfill orders. If you’ve been operating an ecommerce store for a while, you likely already have a system in place, which may involve working with wholesalers.
If you’re just starting out with ecommerce, you may want to look into some alternative inventory management models.
One alternative business model is just-in-time inventory. Just-in-time inventory relies on ordering stock only as it is needed and not holding extra. This method can be risky, though. If there are any issues or delays, it may result in lost sales, but it can often be a more cost-efficient way as it mitigates overstock or deadstock issues.
Another business model is dropshipping. With dropshipping you don’t have to manage any of the stock yourself. Instead, when someone places an order through your website, you order the product from your dropshipper, who sends it directly to the customer.
Dropshipping is a low-cost way to get started, but it also means you have no direct control over your inventory. Additionally, the price per product is generally going to be higher than ordering wholesale and holding the product. This is mainly from high dropshipping company fees.
2. Calculate Your Inventory Needs
The first thing to do when setting up an inventory management system for your ecommerce business is to determine your needs.
While you’ll want to be as precise as possible, if you’re operating a newer business, it will need to be more of an estimation that you adjust over time. If you’re running an established business, you can use historical data to accurately calculate your needs.
One technique you can use to help you prioritize inventory correctly is to run an ABC analysis. This analysis helps you identify which items you should reorder more frequently and which items aren’t as vital. It breaks down like this:
- A Items: high-selling items that represent about 80% of your revenue
- B Items: mid-range-selling items that make up around 15% of your revenue
- C Items: low-selling items that represent only around 5% of your revenue.
Think of A items like the main products you sell. For a sunglasses shop, these might be the top-performing glasses everyone wants. B items are specialized glasses that aren’t as frequently purchased. C items would be things like cases and accessories that are mostly sold as add-ons. Having this information can help you adequately prepare for your inventory needs.
3. Define Minimum Stock Levels
No matter how you prioritize your inventory needs, you’ll need to set minimum stock levels – also known as safety or buffer stock. Setting minimum stock levels can help you avoid lost sales due to unanticipated spikes in demand or issues in the supply chain. There are two main ways to set minimum stock levels.
First is PAR (periodic automatic replacement) levels which sets the minimum and maximum amount of stock you should have on hand at any given time. PAR levels are common for businesses that sell perishable goods like food or cosmetics.
For perishable goods, in particular, you don’t want to over order stock that might expire, but you still want enough available for immediate purchases.
To calculate PAR levels, you can use this formula:
(weekly inventory use + safety stock)/number of deliveries each week = PAR Levels
Weekly inventory can be calculated as the average of the historical data. Safety stock will vary depending on the product, but generally, 20-30% of the weekly inventory is a good baseline to start with.
The second way to determine minimum stock levels is with a reorder point. Similar to PAR, the reorder point has a minimum quantity of stock predetermined and when the inventory dips below that number, it’s time to reorder.
This system is more frequently used with goods that aren’t perishable, as there is less of an issue with maximum stock going off before being sold.
To calculate reorder point, you can use this formula:
(daily average sales x lead time) + safety stock = reorder point
The daily average sales records how many units of a product you have historically sold in a week. Lead time is the amount of time it takes to receive an order for new inventory, after you have placed the order. So if you order stock on Monday and it arrives on Friday, your lead time is five days.
4. Choose an Inventory Management System
There are two main types of inventory management systems: periodic and perpetual. These serve different purposes and one may suit you more than the other.
Periodic inventory management involves manually checking inventory at certain intervals – weekly, monthly, or quarterly. It’s best for small or new businesses that have low inventory and low sales volume. It’s cheap to implement, but is susceptible to human errors and not easily scalable.
Perpetual inventory management, on the other hand, involves updating inventory levels in real time, as they are sold or received. This is the preferred system for businesses that have high sales volumes or work across multiple channels.
This system makes it easy to stay up-to-date with issues, overstocks, or backorders. However, it can be costly to implement and maintain. A perpetual inventory system might include adding barcodes or SKU codes onto your products and using software like Unleashed, Sortly, or Inventory Now, which can be costly for high volumes of stock.
5. Have a Contingency Plan
Even with the perfect inventory system, things are bound to go wrong occasionally. You can be prepared by creating a contingency plan for how you plan to deal with common scenarios like:
- Sudden spike in demand
- Cash flow issues
- No extra storage available
- Discontinued products
You can create a plan to minimize these risks by regularly reviewing and analyzing your inventory data to identify trends and opportunities for improvement.
Ask yourself where your weak points are in order to better plan for unexpected events like these. Was there a spike in demand in the past, that you can note for the next year? Did you have issues with supplier relationships and need to find a new one? Is it time to outsource order fulfillment or hire an inventory manager?
While any adjustments might disrupt the system, for the long-term health of your inventory management, it’s important to consider these adjustments as necessary.
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The Bottom Line
Implementing a proper ecommerce inventory management system is a cost-effective way to streamline your order fulfillment system. There are many tools and techniques available to help you set up the perfect system.
There are different methods that work better for different small businesses, but having a reliable system in place and regularly monitoring it means that you can mitigate risk of over or undering stocking your products.
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