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May 9, 2022

Inventory management in E-commerce

Inventory management in E-commerce

Inventory management is essential for every business that has inventory, in other words, items that they sell. Keeping track of every product can be challenging and time-consuming, which is why having a good technique for inventory management is vital.

In inventory management, you have to keep track of what is on the shelves, what has been returned, what has been shipped out, and more.

There are many ways to manage your inventory and to make sure every product is accounted for. Finding the right way that works for you can be a matter of trial and error, however, learning about proper inventory management is an excellent way to start.

What is inventory management?

To put it in simple terms, inventory management helps businesses identify how much stock they have on the shelves and when to order more. When talking about inventory management, it means tracking all the products from purchase to POS and all the way to shipping.

The purpose of this practice is to identify and respond to trends. It helps you to ensure that the shelves are always filled and that you will get a proper warning of a possible shortage.

When inventory is sold, it becomes revenue. However, before inventory is sold, it ties up cash. So in other words, too much inventory (or stock) costs money and decreases cash flow.

To measure good inventory, you should look at the inventory turnover, which reflects how often inventory is sold within a time period. Frankly, a business does not want more stock than sales.

Why is inventory management essential?

This practice helps the business to make sure that there is the right amount of stock in the warehouse. This limits the risks of stockouts and inaccurate reports.

Also, when the inventory turnover is optimal, you will not have too much cash tied up or empty shelves that make the pearls of sweat appear on your face.

9 benefits of good inventory management

As mentioned, keeping track of inventory is essential to the success of your business. The aim is to meet the customer demand, which cannot be done without proper inventory management.

In fact, there are many benefits to the effective management of inventory. 

1. Reduce the number of missed sales

If you do not track and control your inventory properly, you might run out of products, which can make you miss out on sales. 

When using up-to-date inventory reports and even an inventory management tool, you can quickly see what products are running low, and compare the stock level to what has been selling well. 

Using inventory software can also allow you to set minimum inventory levels. You can then view the items that are low on stock and place an order before you run out.

2. Smartly invested cash

Another key to success in retail is investing your cash wisely. You can do this by purchasing the correct quantity of items: enough to keep the sales and cash flow going while preventing stockouts. 

Keep reports

Keeping reports and controlling your inventory allows you to ensure that the numbers are always right. Reading reports will also allow you to quickly identify those prodiúcts that move slowly.

Reports can also help you to figure out inventory costs.

3. Better reports and analytics

Having accurate analytics and reports produces accurate cost values for inventory. This is critical because it helps you to keep your financial reports accurate.

Knowing the cost of sales and what your income statement looks like allows you to keep an accurate balance sheet.

4. Detect problems early in the inventory system

When you control your inventory, you will detect possible problems early, even before they happen.

Instead of going through your inventory months after the problems have appeared and looking at discrepancies on your balance sheets, inventory management can help you to see any issues before they become an issue.

5. Customer satisfaction

Knowing what is in your inventory and how your shelves look will allow you to serve your customers better. For instance, when a customer says that they have not received their products, you will first check with your supply chain management.

However, the next step is to check your inventory reports and confirm that you have extra items in your warehouse and that you can replace the lost items.

Also, when your inventory management tools are up-to-date, you will be able to sell products that customers want faster. When you know that inventory is on the way and that you can communicate this to your customers when needed, it makes customers trust you more.

In fact, in this competitive world, good customer relationships can make the difference between success and failure.

6. Easy reordering

Reordering new inventory will be much more efficient and accurate when you know exactly how much product is available.

When you work with correct numbers and you know what is on the shelves and how fast it moves, you will be able to reorder new products accurately and on time.

Utilize inventory management tools

Some inventory management software even offers automations that will notify you when stock is low, and you can easily place a new order. Automations allow you to replenish your inventory smoothly and keep your sales coming in.

This, in turn, allows you to work methodically and make informed decisions when making purchases, instead of manually checking all warehouse shelves before reordering.

7. Reduction of theft and loss 

Products can be lost in many ways: items can be stolen or they can get damaged. Managing inventory levels gives you the possibility to identify issues before they become a problem.

Although no one wants to think about anyone stealing, it is necessary to be alert. Keeping accurate inventory records also tells your staff that you take your inventory seriously.

8. Trusted information tools

Accurate information is one of the key tools to success. Using analytics and software to gather information can help your business to grow. One excellent way to gather and share information is to use an inventory management system that integrates with other software that you use, such as POS or barcode scanners.

9. Lower warehouse costs

When your inventory reports are on point, you will know exactly how much product is on the shelves and where they are. This makes it easier for your staff to find the products and pack and ship them, thus saving time and money.

Optimize usage of space

Also, when you know how much product you need, you will be able to utilize the available space accordingly. There is no need to use more space than you need - and in some cases, pay for a bigger warehouse than necessary.

Inventory management challenges

There are some challenges when it comes to inventory, and as a business owner, you should be aware of them. The main issue is having too much inventory that sits on the shelves and does not sell.

Another issue is not having enough inventory to fulfill orders, or not understanding what products you have and where to find them.

In addition, there are some other issues you may run into if your inventory is not on point. 

Other inventory management issues may include, for instance, the following.

  • Not getting accurate stock details. You will not know when to reorder more stock, or if you have too much of it.
  • Poor process. Manual or otherwise inaccurate management can cause errors and take too much time.
  • Not being able to follow customer demands. Trends change all the time, and being able to know what customers want is a key to success.
  • Inefficient warehouse management. If you do not know where your items are and how to find them, your staff will have a hard time shipping out the correct items.

What is inventory?

In short, inventory is products, components, and raw materials that a business sells or uses to manufacture its products.

Inventory is also considered an asset when looking at it from the accounting point of view.

Inventory vs. stock - what is the difference?

When talking about inventory, you may hear the words inventory and stock being thrown around a lot. Frankly, both of these mean the same thing.

Managers often refer to “stock on hand” when they talk about finished goods that are ready to sell and ship. 

The word “inventory” is used more broadly and it refers to stored products and raw materials that are used in production.

Different types of inventory

To understand the concept of inventory better, you have to understand the types of inventory. There are roughly 12 different types of inventory, which include the following:

  • Raw materials
  • Work-in-progress (WIP)
  • Transit 
  • Theoretical
  • Finished goods
  • Decoupling inventory
  • Safety stock
  • Excess and maintenance
  • Repair and operations (MRO)
  • Packing materials
  • Cycle inventory
  • Service inventory

Inventory management process

The inventory management process starts with deciding what products you want to sell. The whole process also includes receiving your inventory, selling it to a customer, packing it, and shipping it.

In addition, business owners need to account for possible returns, loss, theft, and damage.

Efficient inventory management processes can help you to run your business more efficiently and to save money, effort, and time.

How inventory management works

Even though inventory management may sound complicated , the purpose of inventory management is quite simple: to understand stock levels and location. This can be achieved manually, but in today’s modern world, it is easier to use the technology available to us and make inventory management easier and smoother. 

Inventory management techniques

When you use effective inventory management techniques to your advantage, you will be able to control your stock and ensure that you will never run out of products, or have too many of them.

Also, a good inventory management technique ensures that you will know exactly where everything is and how much of it is on the shelves. 

Below, we introduce 12 efficient and useful inventory management techniques. Not all techniques are suitable for all businesses: to manage your inventory in the best possible way, you should consider which of the following techniques works best for your business.

1. Cycle counts

The cycle counts procedure includes dividing your inventory into more focused categories of products that need to be calculated.

For instance, you can divide your products into categories by product, vendor, or warehouse location.

By using an inventory management tool, this can be done easily and efficiently.

However, there are two counts that are excellent control methods for inventory: these are high value and high-risk counts.

High-value counts are a list of items that have the highest cost. These products tend to be most cash-intensive, meaning that you should always aim to track them accurately.

On the other hand, high-risk counts are products that have the largest inventory inconsistencies historically. For instance, these products may be prone to spoilage or theft, or they account for the most breakages or returns.

Learning which products fall into this category will help you to mitigate the causes.

2. FIFO, AVCO, LIFO

There are three common calculations when thinking about inventory valuation.

  • FIFO (first-in, first-out)
  • AVCO (average cost)
  • LIFO (last-in, last-out)

As a business owner, it is your job to choose the right valuation method. In fact, this is so crucial that it can impact your profitability.

Choosing the right inventory valuation method is a crucial step as it can have a significant impact on your reported profitability.

3. ABC analysis

The goal of ABC analysis is to prioritize the attention on inventory and products that need it most. 

In fact, the Pareto Principle tells us that 80 % of overall inventory sales come from about 20 % of your total items.

Here, ABC analysis can be helpful, since it will allow you to make your inventory more efficient.

4. Just in time (JIT)

Just in time ordering is exactly what it sounds like: reordering new inventory right before you run out.

Although this may sound like a stressful and risky strategy, it is a good way to offset possible risks that are linked to inventory management.

When you use JIT, you will receive your goods right before you need to sell or ship them.

JIT is not necessarily bad

Small businesses can especially benefit from this, because they may not have as much cash flow as bigger companies, and their warehouse space may be much smaller. 

So, instead of putting all of your money in inventory, you can use that cash to invest in marketing and attracting more customers.

However, for this method to work, you will need to have a strong and established relationship with your supplier.

Otherwise, you may risk disappointing customers if they have to wait for their order to arrive for a long time.

5. Dead inventory and surplus inventory

When products are not sold or used by the time they are removed from the sales process, they are referred to as dead inventory or dead stock.

Surplus inventory means excess inventory that can ultimately turn into dead stock if you do not implement an effective inventory management strategy.

Inventory management tools can help

Using inventory management software or other tools, you will be able to track dead inventory and surplus inventory.

This kind of management process can help you to identify which way your inventory is headed and how to turn it around.

6. Par levels

Par level means the minimum amount of items you want to have in stock at all times. If your inventory count drops below this minimum level, you will need to reorder that specific product.

You can always track your par levels manually, but this is time-consuming and there is always room for error.

However, if you use an efficient inventory management tool, you can set par levels into the tool and it will notify you when the stock drops below par level.

7. Safety stock

Safety stock is extra stock. This is the inventory you hold in your warehouse or storage to cover any possible overselling due to peaks, such as holidays.

Before you can purchase safety stock, you will need to first figure out what your ideal level of safety stock is.

It should be enough that you do not oversell on fast-moving stock, but not so much that it will become dead stock.

8. Contingency planning

Successful businesses always have a contingency plan, and this strongly relates to customer satisfaction. When you ensure that you do not run out of stock, your customers trust you and know that you will always have the product they need. After all, it is easier to resell an old customer than reach new ones. 

9. Consignment inventory

In the past years, consignment has been a hot topic in the retail business.

Selling on consignment means that you send your products to other sellers and retailers for them to store and sell for you. Each of these businesses takes an agreed cut of the profits.

Typically, any business can start consignment selling, but this requires accurate inventory from both the consignor and the consignee.

The important things to consider

When you consider selling products on consignment, consider the following factors for successful inventory management:

  • How to communicate inventory levels
  • Possibilities for multi-location inventory management
  • Payments for freight and shipping
  • Who is responsible for damaged or defective items
  • Insurance for the products
  • Handling of returns

Consignment selling can be profitable and beneficial in many ways, but there are also many aspects to consider especially when it comes to inventory.

10. Dropshipping

Dropshipping has also been a discussed topic in the past years. In fact, this method of selling has many benefits.

One of the most important benefits is that the business owner does not need to worry about inventory.

When using dropshipping, the seller handles the marketing and selling of products, whereas the dropshipping company stores the products, packages them, and ships them.

Because the seller does not need to handle inventory management, they can only focus on marketing and sales. 

Dropshipping can be an excellent option for small businesses

This is an excellent alternative, especially for businesses that are only starting out as well as for those who do not have the space or financial possibilities to handle physical inventory.

11. KPI analysis

KPI is short for key performance indicators, and it refers to a quantifiable measure of performance over time for a certain objective.

In fact, there are many retail KPIs you will be able to analyze. Analyzing the KPIs can improve inventory planning.

Also, they are helpful when preventing discrepancies in the storage or warehouse.

12. Returned inventory

Up to 92 % of American consumers say that they would shop from an online store again if the return processes were easy.

Thus, it is essential to ensure that the handling of returns has been taken into account in your inventory management strategy.

There are two main ways to handle returns: automatic/blind returns and authorized returns.

Blind returns

When you offer a return slip and free shipping label to the customer (either within the original package or allowing them to print it from your website), it is called a blind return.

Authorized returns

On the other hand, when customers have to call in or email their return request, it is called an authorized return.

Which is better?

Both of these ways have their ups and downs. For instance, blind returns make the return process easier for the customer and yourself.

Though this means that you will not have any idea about how many orders are getting returned, blind returns can save you time and effort in the long run.

Authorized returns take more time for you and the customer and ultimately make the return process more tedious, but you will get an idea of when to expect returns and how much.

How does inventory management differ from other processes?

Sometimes, people confuse inventory management with other similar practices. The purpose of inventory management is to control all stock that the company owns and that sits in the warehouse ready to be sold.

Other processes integrate with the inventory management

Supply chain management, on the other hand, manages the whole process from the supplier to the customer.

Then again, the purpose of warehouse management is a part of inventory control and it focuses on keeping track of the inventory in a certain location.

All of these processes are important when it comes to controlling the inventory and managing it, but they have some key differences.

Inventory control

Inventory control is an essential part of the whole inventory management process. The purpose of inventory control is to manage the movement of products within a certain warehouse.

Inventory optimization

Inventory optimization, on the other hand, is the process where inventory is used in the most efficient way.

This means minimizing the cash spent on stock and storing it. Inventory optimization is looking at the inventory across all locations and warehouses and seeing how it can fulfill the demand for customer orders.

By optimizing your inventory, you will ensure that you will not have too much stock that may prevent cash flow.

Order management

While inventory management aims to order and track a stock when it arrives at the warehouse, the goal of order management is to process and track customer orders.

Sometimes, the software can handle both of these tasks, which makes the life of a business owner much less stressful.

Order management and inventory management go hand in hand

Inventory management and order management go hand in hand. When orders come in, inventory can be allocated to certain orders. After this, the status in the inventory records for this specific order can be changed to “on hold.”

Then, the order management system can recommend which location should fulfill the order.

This kind of process is essential, especially for bigger businesses that have multiple locations: order management can prevent multiple shipments for one order.

Supply chain management

Supply chain management includes managing relationships outside of the business. The supply chain includes, for instance,  procurement, production, demand planning, quality, fulfillment, warehousing, and customer support. All of this requires the visibility of inventory.

Warehouse management

In short, warehouse management means organizing the warehouse and making sure all stock is easy to find. When the inventory located in the warehouse is meticulously organized, the staff will have an easier time finding, packing, and shipping out the orders.

A well-managed warehouse can even maximize labor efficiency and save time and money.

What is an inventory management system?

Inventory management software combines all different components of inventory processes into one system and it helps the business owner to keep track of everything that goes on with the inventory.

A good inventory management tool optimizes the whole inventory process on all levels and ensures that the product is available. 

Inventory management software can help save time and effort, eliminate human error, and even help with shipping, invoicing, returns, and more. 

An inventory management tool can include the following features, depending on the system that is being used.

  • Keeping track of overall inventory
  • Keeping track of inventory in specific warehouses
  • Barcode scanning
  • Order processing, shipping, and returns
  • Multiple location planning
  • Automations for critical processes
  • Inventory counts
  • Open API capabilities
  • Execution boards
  • Communication options
  • Project management tool
  • FBA preparation services
  • Supply chain management
  • Analytics and reports

In other words, an inventory management system is a comprehensive tool that can help you to manage the whole inventory process from the supplier to your warehouse to a customer.

What kind of inventory management system should I choose?

Every business is different, as are the needs and goals. For instance, bigger businesses need different features than smaller ones.

On the other hand, bigger businesses have a bigger budget and may be able to afford to pay for a comprehensive system, whereas a smaller business may need to rely on free options. 

To choose the right inventory management system for your business, you should consider what kind of aspects and elements are important to your business.

For instance, are you looking for a system that only focuses on tracking inventory, or do you need one that effectively integrates with many third-party apps

Before choosing the right inventory management tool for you, you should figure out what it is that your business needs. The next step is to compare available tools and to see which one can serve you the best.

Choosing an inventory management system

There are many excellent and comprehensive inventory management systems out there, and they can all help your business to stay on track.

However, each system has its own features and has been designed with different goals in mind. 

So, choosing the right inventory management tool for your business requires some research. By comparing different options and what they have to offer, you will be able to find a system that works best for you and your business.

There are some key elements you should consider when choosing the right inventory management system.

For instance, by comparing the following elements, you will get a good idea of what to expect from each system.

  • Usability
  • Multiple-locations
  • Analytics and reporting
  • Third-party integrations
  • Customer support
  • Security
  • Pricing

Usability

Usability of the software is one of the most essential elements to consider. After all, the tool should be easy to use and understand. Otherwise, you risk using more time in figuring out how to use the system, and it may burden you more than help you. 

Also, if you are not familiar with how to use your inventory management tool, you risk making mistakes and getting incorrect reports.

Multiple locations

Ensuring that the software supports multiple locations is important especially when the business has multiple warehouses. Most tools allow you to categorize your warehouses and even break them down into subcategories. 

However, if you have a small business with only one warehouse or storage, this feature may not be essential.

Analytics and reporting

Reports and analytics are tools that no business can run without. They can help you to maximize your profits, minimize your losses, optimize your sales, and even get a good idea of how fast your inventory moves. 

A good inventory management system offers comprehensive analytics that you can use to your advantage. Also, having access to digital reports eliminates the need to go old-school and manually enter everything into spreadsheets.

Third-party integrations

Most inventory management systems allow third-party integrations. For instance, you may be able to integrate your inventory tools with CRM tools or invoicing apps, for instance. This can be beneficial because having everything on the same platform saves time and effort. Integrating certain software and apps can also make running a business a lot smoother and easier. 

Customer support

While you always hope that there will be no need to contact customer support, it is always good to know that they are reachable if needed.

Sometimes, you may encounter issues that you simply will not be able to solve yourself, so knowing that the customer service is professional and able to help you quickly can be a big plus.

Security

While most inventory management platforms are safe and secure, there is no harm in double-checking their reviews and reputation. In addition, you should check that the software includes at least encryption and password management. 

Additionally, having cloud-based storage can be a big benefit: if your account gets hacked or you lose your password, your information and reports will still be safe on the cloud.

Pricing

Of course, the pricing makes a big difference, especially for small businesses. The good news is that most inventory management tools are free and you can get started without paying a penny. However, some features may not be available when using a free plan, in which case you may need to open your wallet and pay a small subscription fee. 

By comparing the available options and what each tool has to offer, you will find a solution that works best for your business.

Summary

Inventory management is one of the key elements to success in ecommerce. When there are physical products to be sold, you need to know exactly how much inventory you have in your warehouse, how fast it moves, and when to order more. 

Making sure that your customers will not need to wait for their orders because lack of inventory is essential. Also, making sure that the shelves are stocked makes the order processing and shipping easy when nothing is in backorder. 

Inventory can be seen as an asset from an accounting perspective. While this is a good thing, you should also make sure that there is not too much stock or deadstock, that halters your cash flow. 

Using proper inventory management systems and a proper inventory management technique can help you to easily manage all aspects of inventory and to keep track of your stock, making sure that there is no excess inventory and that the shelves are still well-stocked.

After all, poor inventory management can lead to many issues, such as unhappy customers, low stock, backorders, and more.

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