Inventory management is critical to the cash flow (and happy customers) of your eCommerce business.
It’s a careful balancing act: You need to make sure you have enough stock so you don’t run out of product while also ensuring you don’t have a surplus gathering dust in a warehouse. If the scales are imbalanced, it can be costly.
With too little inventory, you’ll be unable to fulfill orders and will lose out on potential customers. On the flipside, if you have excess inventory, you may end up with unsold stock that needs to be written off, or sold at a loss. In either scenario, you put your eCommerce business at commercial risk.
To overcome these and other potential hazards and pitfalls, you need a good inventory management system in place. This guide will help you understand how to manage your eCommerce inventory to ensure seamless operations. In it, we’ll walk you through:
- Different elements of eCommerce inventory management
- Inventory management strategies you can use for your own eCommerce business
- The costs of inventory management
- Inventory KPIs and metrics to pay attention to
By the end of this guide, you should feel confident in establishing or finetuning your eCommerce inventory management system.
What is eCommerce inventory management?
eCommerce inventory management is the act of sourcing, storing, tracking, and shipping your products. With the right configuration, your business will be able to measure and monitor the amount of stock available and the location, pricing, and assortment of those items.
This allows businesses to better manage their cash flow, predict and plan for sales velocity, and ensure a seamless buyer experience. With informed forecasting and an astute comprehension of your current inventory, you’ll be able to control stock levels so you always have the right amount to meet projected sales.
How you handle your eCommerce inventory will vary depending on the sales and distribution channels you use. This could be multi-channel inventory management, retail inventory management, or it may be specific to a certain marketplace such as Amazon, Walmart, or Shopify.
Inventory management per sales channel
Typically, you’ll need to have varying inventory management strategies depending on how you sell. This usually consists of any combination of the following:
- Amazon inventory management: If you sell products on Amazon, your inventory management processes have to be impeccable. Utilize specialized inventory management software that monitors sales on the platform and aligns this with inventory levels, order shipments, and overall sales. If you manage various Amazon stores and warehouses, Amazon inventory management can effectively manage stock levels across all of these. In addition, your business will be able to plan ahead for stock replenishment, reduce inventory costs, and synchronize inventory across listings.
- Walmart inventory management: Walmart.com is another popular eCommerce marketplace with its own set of inventory rules and best practices. Managing inventory for your Walmart Marketplace store might involve working with Walmart Fulfillment Services and ensuring you have enough stock to prevent your listings from selling out.
- Shopify inventory management: This refers to managing inventory for your own DTC websites. Having an established Shopify inventory management system allows Shopify merchants to identify inventory requirements and prevent loss due to misplaced stock, returns, surplus inventory, or spoilage.
- Retail inventory management: This refers to retail businesses with physical store locations and how they measure and monitor their inventory levels, locations, and pricing. This lets store owners and managers know when they need to reorder for their retail shops and warehouses. It also concerns how retail owners move inventory between warehouses and stores. For brick-and-mortar locations, organized inventory management can drive foot traffic to stores, increase sales, deliver an improved customer experience, and help optimize cash flow.
- Multi-channel inventory management: A combination of the above. This involves keeping track of inventory across a variety of sales channels and storage locations, which may include eCommerce, retail, marketplaces, and wholesale sources. With it, your business can accurately identify inventory reorder points and plan stock requirements based on forecasted sales.
If you sell products via Amazon, you have the choice of managing your inventory yourself or incorporating FBA (Fulfillment By Amazon) as your inventory data center. Managing Amazon inventory via FBA can help you anticipate stock replenishment, reduce inventory costs, and synchronize inventory across various listings.
Selling on Walmart may mean working with WFS (Walmart Fulfillment Services) while also fulfilling in-house.
Meanwhile, if you sell products using Shopify, you’ll most likely manage inventory levels yourself or with a logistics and fulfillment partner. If you choose to manage your inventory on your own, organization is key.
Having an organized inventory management process can help reduce your overall inventory costs while also optimizing fulfillment. A well-organized Shopify inventory management system, for example, allows Shopify merchants to determine inventory requirements and prevent loss caused by misplaced stock, returns, surplus inventory, or spoilage.
If, however, you have a physical location, your inventory management process may look different. Many eCommerce retailers who also have physical stores often choose to hold their eCommerce inventory at their shop. This allows them to cut back on warehouse costs by opting to use their brick-and-mortar store as a warehouse and fulfillment center.
If you do opt to store eCommerce inventory at a physical location, make sure you develop a process to keep online and store inventory separate. Alternatively, you could distribute your inventory across both your online and your physical shops. A multi-channel inventory management strategy can be beneficial if you have limited stock runs for some of your items. In this case, you can share stock across all your sales channels, carefully monitoring and updating product availability when product stock levels change.
7 Inventory management best practices to ensure seamless operations
If you’re looking to streamline your operations and raise your bottom line, you need to adopt quality inventory management strategies. With the right plan in place, you’ll reap the benefits of increased efficiency and accuracy — two factors which are invaluable to the overall (successful) operation of your eCommerce business.
Let’s take a closer look at some of the most useful inventory management strategies out there to ensure seamless eCommerce operations.
1) Calculate your inventory turnover ratio
Knowing how often you need to replenish stock means you’ll stay one step ahead of the game by ensuring your products remain in stock. Your inventory turnover is the rate at which your brand replaces inventory in any given sales period. This ratio, then, is the cost of goods sold divided by the average inventory for the same period.
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory for Selected Sales Period
You can then use this number to determine your next steps for forecasting, inventory management, sales, and marketing. Calculating your inventory turnover ratio reveals many insights about your store’s performance.
A low inventory turnover can be indicative of weak sales or a declining demand for your product. Meanwhile, a high inventory turnover would typically indicate products are selling fast and your goods are in strong demand.
This data helps you accurately decide whether you need to scale your inventory up or down, depending on product performance.
2) Run an ABC inventory analysis
You only have so much time in the day, so you need to use it efficiently. Not all your products deserve your undivided attention, and it’s important to determine where to direct your focus. Running an ABC inventory analysis offers clarity on which items have the greatest impact on inventory cost.
An ABC inventory analysis categorizes inventory into three segments based on their perceived value: A, B, and C.
- Products in category A deliver approximately 80% of the inventory value – likely comprising 20% of your inventory
- Products in category B deliver approximately 15% of the inventory value – likely comprising 30% of your inventory
- Products in category C deliver approximately 5% of the inventory value – likely comprising 50% of your inventory
Using the Pareto Principle (otherwise known as the 80/20 rule), the ABC inventory analysis identifies the 20% of inventory that delivers 80% of the value as the products in your A category.
To calculate which category your inventory items fall into, you need to multiply the individual product sales by the product cost. This will then tell you the inventory value for each product.
Use the following formula to run your ABC inventory analysis:
Annual Usage Value per Product = Annual Number of Items Sold * Cost per Item
Once you’ve calculated the ABC inventory analysis for your entire inventory, you’ll easily be able to determine which products deliver the highest value. The products in the A category are the ones you should prioritize in your inventory management.
3) Avoid just-in-time inventory
As its name suggests, just-in-time inventory refers to the process of producing an item only after a customer has placed an order. Doing so helps keep inventory levels low, cuts costs, and can increase efficiency. It’s an appealing management strategy for eCommerce start-ups or businesses that are unable to hold a large volume of stock due to capacity or cash flow restrictions.
While it may seem like the perfect solution for your business, it does fall victim to both supply and demand shocks.
A supply shock occurs when there’s a sudden increase or decrease in commodities such as raw materials from wholesalers. This could happen for a multitude of reasons, including issues with material sourcing, natural disasters, or political turmoil. Supply shocks can have a major impact on the price and availability of raw materials.
Meanwhile, a demand shock occurs when companies are unequipped to handle a sudden surge in demand for a product, which could result in unexpected delays, dissatisfied customers, and inability to fulfill orders at all.
The COVID-19 pandemic is a prime example of unprecedented supply and demand shocks. While it led to increased demand for sectors such as grocery stores, other industries saw demand halt. At the same time, many sectors experienced supply shock due to issues like manufacturing facility closures and increased border controls and regulations.
4) Plan your seasonal inventory
The life cycle of your products may not always be linear. Many online retailers find product sales peak at certain times throughout the year, such as Black Friday or Christmas. For this reason, it’s important to lay out your inventory to account for seasonal peaks and drops.
If you don’t plan in advance, you risk having surplus stock that you can’t move, or not having enough to fulfill orders. You can manage your seasonal inventory by:
- Tracking historical data to determine product life cycle and demand at seasonal periods
- Automating purchase orders and stock transfers to maintain optimal product stock levels
- Calculating inventory expenses and how to manage the flow of seasonal stock
- Using the seasonal period as an opportunity to sell surplus stock at a markdown price or as a bundle
Seasonal periods offer an opportunity to increase your average eCommerce sales at intermittent intervals throughout the year. Getting organized and planning ahead will allow you to maximize your return on investment during these key times.
5) Stay on top of your 3PL inventory
For large eCommerce businesses, managing the supply chain can be both challenging and costly. Any errors or delays in the logistics stage can negatively impact the customer experience, the growth of your business, and your profits.
One way to alleviate these issues is to outsource inventory management to a third party — this is known as third-party logistics (3PL) inventory management. Outsourcing your 3PL inventory management can reduce friction during logistics and pass on significant benefits as your eCommerce business expands. Your 3PL should be equipped to handle more complex supply chain processes and logistics requirements.
With that said, you can’t simply outsource inventory management to a 3PL partner and hope for the best. You have to stay on top of it by analyzing performance and making sure your 3PL is effectively managing all aspects of inventory across storage, replenishment, fulfillment, shipping, and returns.
The insights from your 3PL inventory management should feed into other areas of your business as well, such as sales, marketing, and business development. This information will allow your team to make informed decisions to increase growth while minimizing product waste.
6) Install an inventory control system
An inventory control system can help you maximize inventory value and performance by keeping costs in check. It can also track your eCommerce goods through the supply chain.
A well-organized inventory control system will minimize friction by consolidating purchasing, shipping, warehousing, and returns into one system and automating many manual processes. This will result in greater clarity concerning your inventory levels, where inventory is, and what you need to reorder to maintain optimal stock levels.
The types of inventory control systems you could use for your eCommerce business include manual inventory, periodic inventory, and perpetual inventory.
Manual inventory means your inventory system is updated, maintained, and controlled without the use of a technical system; you or your team are responsible for physically counting inventory items on a frequent basis. As a result, this is the least accurate inventory management system and commonly consumes the most time, money, and resources.
Periodic inventory refers to when a physical stock count is conducted at set periods to measure inventory levels and the cost of goods sold (COGS). Calculating COGS allows retailers to see their gross margin. Much like manual inventory, the physical stock count can be time-consuming and can lead to reporting errors. Companies using periodic inventory control often only count inventory at set periods, such as quarterly or annually. Because of this, the figures reported can be both outdated and inaccurate.
Meanwhile, perpetual inventory is a method of tracking inventory levels continuously, with automatic inventory level updates being made each time a product is sold or received. It’s the most sophisticated method and offers the highest level of accuracy and efficiency.
7) Switch to perpetual inventory as soon as possible
Knowing how much stock you hold at any given time can be a powerful asset. With perpetual inventory management, you’re able to see how much stock has been sold or received in real time.
It’s the most sophisticated of the inventory control systems and allows you to understand current inventory levels down to the smallest detail so you can better understand and manage inventory costs.
Perpetual inventory systems automate numerous key activities in the inventory process, making your inventory flow more efficient and your life easier.
One thing we love about perpetual inventory is the automatic update of reorder points as sales increase or decrease. This helps ensure optimal inventory stock levels at all times. Additionally, perpetual inventory systems also recalculate the cost of goods sold (COGS) each time a product change occurs, and purchase orders are automatically generated and sent to your supplier, which removes the middleman.
Inventory management costs
While the cost of each product is the most obvious inventory cost, it isn’t the only one to consider. You also need to look at the costs wracked up at every stage of the inventory operations, from ordering, holding, and fulfilling to managing inventory.
Ordering inventory
Each time your company places an order with a supplier, you incur inventory costs. While some costs associated with ordering inventory will be low, they can quickly add up.
Before placing an order, first calculate the estimated price. Costs associated with ordering inventory will include purchase requisition, purchasing, invoicing, transportation and processing fees, and labor costs.
Holding excess inventory
The price of excess inventory can be deadly to an eCommerce business. When managing your stock levels, make sure you have enough to cover potential increases in demand without holding too much.
The cost of maintaining excess inventory can be as much as 25%–32% of the inventory’s value, as per studies discussed in Merchandise Buying and Management. With this in mind, eCommerce owners need to manage stock levels carefully to minimize the risk of holding too much inventory.
Note that if you have items that quickly lose value or expire, your overstocking costs may be even higher as you face depreciation and waste.
Inventory storage and warehousing
eCommerce businesses with high stock levels or that anticipate increased expansion are all too familiar with the potential costs of product storage and warehousing. Outsourcing warehousing to a third party can reduce this by only paying for the space you need within a shared facility. This storage space can then fluctuate as your held inventory levels grow or decrease throughout the year in line with seasonal sale trends.
Fulfilling orders and managing inventory
Your business incurs inventory costs with every order placed as well. So, you need to calculate the cost of order fulfillment and account for this in your product pricing structure.
Some order fulfillment costs to consider include packaging and shipment, labor costs, and the price of any fulfillment platforms or partners you use.
Managing inventory through every stage of the product life cycle also comes with a price. You’ll need to calculate the cost of the inventory management system you use, ensuring you’ve selected the most appropriate one for your business needs and expected growth. You’ll also need to total the cost of labor and resources used to manage inventory.
Inventory KPIs and metrics to pay attention to
If you’re serious about optimizing your eCommerce inventory management, you need to familiarize yourself with your most valuable inventory management KPIs and metrics. With these, you can confidently monitor your inventory levels and make informed decisions to grow your business and streamline operations strategically.
You can track an almost unlimited number of inventory KPIs and metrics, but you need to focus your efforts to gain any useful insight. Knowing which KPIs align best with your business goals and how to monitor and improve these metrics is the golden ticket to upgrading the performance of your eCommerce business.
Some of the inventory KPIs and metrics you should pay attention to include:
- Inventory Turnover Ratio – the number of times your organization sells and replaces stock in a given period of time
- Days on Hand (DOH) – the average number of days it takes to sell inventory, or the average age of inventory divided by the cost of sale for that period
- Stock-to-Sales Ratio – the measurement of the amount of inventory in storage comparative to the number of sales made
- Sell-Through Rate – the comparison of the amount of inventory sold versus the amount of inventory received from a manufacturer
- Backorder Rate – the measurement of the number of orders that can’t be fulfilled when a customer places an order
- Rate of Return, or Return on Investment – the percentage of profit from an investment over a period of time
- Revenue per Unit – how much one unit of product is worth
- Cost per Unit – how much one product unit costs to produce or buy
- Gross Margin by Product – the amount of money retained per dollar of sales
- Time to Receive – the amount of time taken for stock validation, adding new stock to records, and preparing stock for storage
- Lost Sales Ratio – the number of days a specific product is out of stock compared to the expected rate of sale for that product
- Inventory Shrinkage – the amount of expected inventory versus the amount of inventory physically accounted for
The right inventory KPIs will help your business move closer toward its intended goals. They should always be specific, measurable, achievable, relevant, and timely (SMART).
However, measuring too many inventory metrics can be overwhelming. Instead, focus on the inventory KPIs that are of the highest value to your business and your goals.
Wrapping up — Master your inventory management for seamless eCommerce operations
Inventory management doesn’t have to be complicated.
Follow a few inventory best practices and choose a system that’s sophisticated enough to handle your eCommerce needs and deliver a good customer experience. Better yet, remember that you don’t have to manage inventory on your own. You can use a listing tool, eCommerce connector, automation and monitoring platform, and fulfillment partner for a seamless experience.
Whether you choose to go it alone or with a partner, make sure you optimize your inventory management process by tracking your inventory KPIs and ensuring accurate data. These are the metrics that help you build a future-proof, profitable business.