Ecommerce Inventory Management: 16 Best Practices in 2023
There are many aspects of running an ecommerce business that change over time. Business models, channels to market, payment gateways, shipping options & services are some examples that have evolved dramatically in recent years.
ecommerce inventory management is another area that has seen a massive transformation.
According to Wasp, 43% of small businesses still employ manual inventory controls. This means that 43% of small companies are prone to errors.
The growth of big data and the development of advanced analytics tools have enabled businesses to make informed decisions, optimize their operations and create new business models.
It’s essential to future-proof your ecommerce inventory management systems to continually deliver the best possible customer experience.
We will look at some ecommerce inventory management best practices that will help you achieve operational excellence and the results that can transform your business.
What is ecommerce Inventory management?
Ecommerce inventory management tracks the quantities, locations, pricing, and products available in your online store.
Items may be produced in-house, obtained from a third-party logistics fulfillment facility (3PL), stored in a separate firm, and purchased through dropshipping.
Businesses use an ecommerce inventory management system to track which goods are overstocked, available, understocked, and unavailable.
Inventory management is closely connected to a business’s finances. In any given big warehouse, perfect inventory management allows you to see the revenue potential from every pallet from a bird’s-eye view.
After collecting this information, e-stores can make more informed decisions about other planning techniques, such as marketing – and adjust future storage or warehousing demand.
Closely related to purchasing and finance, ecommerce inventory management has a significant role.
The quantity of goods in your store tells you about buying patterns, seasonal trends, and changing consumer demand.
There’s a 16 best practices to use to manage your ecommerce Inventory efficiently.
anti-inventory is a form of online retail.
When a consumer places an order, you fulfill it from the manufacturer and send it straight to them. As a result, it eliminates the middleman.
This benefits small businesses looking to get into ecommerce but lack the necessary funding or space. To assist you in getting started.
There is no such thing as a free lunch, and these “shortcuts” come at a cost.
Manufacturers have a financial incentive to offer discounts and incentives to customers who buy in large quantities.
After all, once the goods reach a warehouse, the company owner is left selling them.
Dropshipping is an excellent option for those willing to take the higher fulfillment costs. Dropship businesses don’t have any inventory, so they can drop ship immediately after an order comes in without waiting for the list – this means that you’ll never pay extra because your items are sitting on some shelf somewhere, taking up space!
It’s an excellent way for entrepreneurs without the capital or technical know-how to start an ecommerce store.
You don’t need any upfront investment, as someone else stores and ships all your products! It also means you have no control over how customers receive their orders – you depend entirely on manufacturers.
- Eliminates the need for small businesses to purchase warehouse space. This is because it stores products in its storage area, which takes up much less floor space than traditional warehouses!
- A user-friendly introduction to ecommerce for neophytes.
- Inspection and quality control are lacking.
- Higher fulfillment expenses.
- You will have no control over your shipments.
#2: ABC Analysis as ecommerce inventory Management
It’s time to segment your product line once you’ve created a foundation of an inventory management system, reliable demand forecasts, and data-backed par levels.
An ABC analysis might help you optimize your revenue by tailoring your fulfillment strategy to specific product lines or categories.
A company’s category system is a tool to help classify goods and services in terms of their value and volume.
For example, items that are high in value yet low in quantity would be classified as Category A. B would designate products with a medium weight and moderate amount. C refers to items with a low worth but a significant amount.
This way of bucketing your inventory allows e-stores that provide a range of products to create unique restocking strategies for each category.
It’s crazy to impose the same fulfillment method on both goods if you’re a music producer that sells $2,000 bespoke acoustic guitars and $2 packs of guitar picks on the same site or channel.
How to perform ABC Analysis step-by-step
- The most crucial step in analyzing a product is to collect data on it. This includes the purchases made from various sources over an entire year, including any carrying costs, if possible.
Maintaining this information will allow us to to analyze trends and changes in customer behavior to make more informed decisions with future promotions or marketing campaigns!
- From most excellent to lowest price, rate each inventory item.
- Know the difference between your inventory. In an ABC category, Category A represents 15-20% of all products but costs 80%, while B items account for 30%-35%. Finally, C groupings hold 50% with only 5% of the costs.
- To ensure your categories are accurate, perform monthly or quarterly analyses.
Tip: Don’t overdo it. The point of the system is to help you manage your inventory so you don’t have to spend all day doing manual product breakdowns by hand that are prone to error because they are performed manually!
#3: Fulfillment Centers
With ecommerce sales expected to reach $370 billion by 2022, fulfillment centers will experience greater demand than ever.
Fulfillment centers face unique challenges to ensure optimal inventory management. Sometimes products can get warped and damaged by extreme temperatures, and goods need to be kept clean and sterile to maintain quality.
So dealing with a good fulfillment center will:
- Expand your reach and sell items in countries all over the world.
- Increase space for other commercial activities in your facility
- Customer service assistance is frequently available, so you don’t have to deal with it.
- Due to the customer’s proximity to multiple locations, shipping costs are reduced.
- Customized packaging choices for more prominent branding
Here’s what we recommend:
- ShipBob has multiple fulfillment locations, great UI, and superb Ecommerce Integration.
- Delivery: they have fast fulfillment, multiple Integrations, and transparent pricing
- Redstagfulfillment: they have same-day shipping, experts with bulky Products, and video monitoring
#4: Scanning System
A scanning system will be used to track company inventories.
It’s a practical approach since it allows you to keep track of your physical items without manually entering them into your ecommerce inventory management system.
Remember that this is just one element of the equation; you’ll also need a store for these items.
After collecting this data, stores can make more informed marketing decisions and adjust their future storage or warehousing demands.
It’s a best practice to scan goods as soon as you receive, transport, send, or alter them in any manner. If you don’t have a scanning system, that would expose you to a lot of human error, miswritten SKU numbers, and garbage inventory data.
#5: Just in time for ecommerce Inventory Management
Just-in-time (JIT) is a globally used inventory management system that aims to reduce overstocking and waste.
This approach reduces or eliminates the need for storage, meaning you will always have the items you need on hand.
Theoretically, a business can operate without a warehouse since it’s not necessary when receiving products when they are about to be sold.
A firm that sells office furnishings but does not make it might, for example, place an order with the manufacturer only when a customer orders. The product is directly delivered to the client by the producer. The expense of keeping inventory has been saved by having no stock in store.
- There’s no danger of your business losing money on dead inventory.
- You’ll have less stuff to handle In your warehouse.
- You’ll need less space to store goods,
- Highly reliant on buying trends — spikes in demand may result in stock-outs.
- It’s tough to keep things running smoothly when faced with rapid growth, multiple warehouses, or various product types.
#6: First In, First Out (FIFO) Ecommerce Inventory Management
The FIFO method is one of the most common and straightforward Inventory Management systems.
We assume the first product purchased was also the first product sold, and vice versa.
However, the cost of the first product purchased may not always equal the price of the first product sold.
The main advantage
- It minimizes inventories and helps improve working capital turnover ratios, which improves your business’s liquidity ratios.
- It’s simple to apply, and it dries quickly.
- The balance sheet amount for inventory is likely to approximate the current market value.
The main disadvantages
- It’s not always the most accurate in reflecting the cost basis of an item.
- Results in taxable gains when prices are rising and taxable losses when they are falling.
- Ignores economic realities that may lead to distorted financial statements.
Inventory is assigned costs as items are prepared for sale. This may occur through the purchase of the inventory or production costs, the purchase of materials, and the utilization of labor.
These inventoriable costs are based on the order in which the product was used, and for FIFO, it is based on what arrived first.
To understand the FIFO method better, we’ll look at an example:
A company purchased 100 products for $10, followed by 100 products for $15.
You would record the cost of the first 100 items sold for $10 each. The new price of an item after 100 units have been sold is always set to $15, regardless of whether additional inventory purchases are made.
FIFO is suitable for businesses with a smaller customer base and those wanting to remain agile.
It’s also preferred by businesses that are seeseeking lower taxes and minimizing inventory holdings.
Tip: if you plan to switch from your current inventory costing method to FIFO, do not make the switch all at once because some of your previous purchases may still be in stock.
#7: 3PL Fulfillment
With a third-party logistics provider, you can rely on them to pick, pack and ship your ecommerce inventory from any warehouse.
Inventory management is not easy, especially when you have many clients worldwide. If you don’t accommodate different fulfillment needs for all of them, then there’s a chance that some of your customers will be left out.
For a fee, 3PLs handle basic eCommerce logistics, such as inventory management, warehousing, and fulfillment.
Some 3PLs specialize in a smaller number of products and services than others. Some specialize in a narrower range of items or services, while others expand their product offerings to meet the demands of end users.
The main appeal of the 3PL is to business owners who consider themselves more visionaries than detail-oriented. They’re prepared to pay a premium to reclaim their precious time.
- Cost savings on warehouse rent, personnel, and shipping materials are expected.
- New customers may be found by offering your goods within the vast warehouses available only to businesses.
- Provides executives with more time to concentrate on high-level activities.
- When dealing with physical distance, it’s more challenging to maintain control over quality assurance and branding.
- Some items, such as those that need complex kitting or assembly, may not be qualified.
- Some 3PLs demand a cash deposit.
#8: PAR Levels
What Are Par Levels and Why Should I Care? The par level for a product is the bare minimum amount of that product that a bar must have on hand to satisfy demand until additional inventory arrives. It’s not quite the same as safety stock.
The Ecommerce Sustaining Level is a safety net for eCommerce businesses by ensuring that there is always a minimum quantity of stock available.
Assuming you’re not dealing with food or perishables, all ecommerce store owners should require a minimal viable stock.
Setting par levels is a time-consuming process heavily influenced by your product’s demand patterns and production schedules.
Specific IMS platforms can automatically notify administrators when product SKUs fall below par level threshold, considering various factors.
The shipping parameters, such as their location and price range and your current stock levels, are all factors to consider.
Let’s assume you have a product that sells one unit per day on average. You know it will take 30 days to produce and deliver that item to your warehouse. Your par level must be at least 30 units greater than the preceding period to avoid stock-outs.
The majority of purchasing patterns are not as straightforward, and they vary significantly throughout the year. As a result, your par levels must be constantly adjusted to meet consumer demand.
All of this must be taken into account for only one product! If you want to stock intelligently, you’ll have to evaluate each item on a case-by-case basis.
#9: Forecast Future Demand
Forecasting can be done in a variety of ways by studying historical data.
The most basic method of estimating demand is creating a sales data graph. Based on the chart, you can draw linear lines to find out if there are any patterns in your company’s growth rate.
The main disadvantage is it requires some knowledge of statistics. It is easy to use but will require experienced analysts with relevant knowledge.
Using the moving average, the demand forecast is calculated as follows:
Demand forecast = (demand + actual item issue/seasonal factor [for the relevant periods])/number of periods
If you find it hard to do it manually, you can use software like Increff.
#10: Use a third-party inventory management software
We’ve been emphasizing this point here and there throughout the post, but it’s best to express it plainly: every business must abandon manual processes at some point.
It is easy and inexpensive to purchase a third-party inventory management system. This kind of software will cover all the basics of stock management with some additional features for more complex situations.
You can also purchase programs tailored to your needs, giving you total control over the layout, look, and feel. One problem is that once you have it set up, you will have to train staff members on how to use it.
And, if you’re a busy ecommerce store owner, why would you waste time constructing Excel reports and scouring through old files for historical information?
I recommend using software like Quickbooks, Xero, odoo.
#11: Audit Your Supply Chain Regularly
Small businesses that use Shopify to sell commodities are more likely to have multiple suppliers or producers from which they acquire items or raw materials.
Handmade jewelry, unique formulations, or electronic components are all examples of goods that may be considered rare.
Even if you only have one or two suppliers in your supply chain, performing this exercise is beneficial.
Set a monthly or biannual reminder to plan your supply chain’s key components and assess their impact on your business. This entails things like:
- Comparing lead times to those of rivals.
- Cost comparison against rivals
- Any negative trends (customer returns, faulty merchandise) that may necessitate a modification should be quantified.
Regarding ecommerce businesses, you may discover a supply problem isn’t due to any mistakes on your part. It might be that a faulty link in your supply chain is to blame for the issue.
#12: All the sources of data should be in one place
As your eCommerce business expands, so does the cost of monthly software fees, a list of logins and passwords, and how many browser tabs you have open at once.
Consider this. The majority of successful ecommerce store owners have distinct software platforms for:
- Inventory management
- Email marketing
And this is just for starters! Not to mention your sales channels! On top of everything else, you must keep track of Amazon, eBay, Etsy, and other brick-and-mortar online avenues.
I recommend hiring an ecommerce accounting agency that can handle this for you.
That’s why you may now have one single source of truth that shows you all your essential business data and communicates that information across all of your mission-critical platforms.
#13: Conduct the Cycle Counts
Traditional all-hands-on-deck audits that demand a complete shutdown of warehouse activities are antiquated, hazardous, and ineffective. Furthermore, they are highly unpopular.
We also believe in regular, meticulous inventory audits. So, what’s the answer? Cycle counting is the solution.
Cycle counting is a method of spreading out inventory accounting chores over several days, with the goal being to improve efficiency. You prioritize the most valuable items (those in the A category if you’re already doing an ABC analysis) and have numerous people (or just you if you’re a solo entrepreneur) work for portions of their shifts, counting those goods.
This is where you start to look at the B and C category items, which you count less frequently due to their more minor financial contribution. The frequency of your cycle counting is determined by how conservative you want to be in addressing inventory shortages.
#14: Quality Control Checkpoint in Your Shipping Workflow
The importance of excellent client experiences cannot be overstated, and no inventory management technology or sophisticated methods can replace correct customer service. Satisfied customers equal more sales, period.
The ultimate safety checkpoint is quality control, which serves as the judge of good customer experiences. You and your warehouse staff are human. Mistakes will be made, faulty items will be chosen and packed, and products will incur damage.
If you can reduce by 10% the number of unforced errors, it may be enough to convert a detractor into a loyal consumer.
#15: Organize Your Warehouse Layout
When conducting an ABC analysis, you may be shocked to learn that the most in-demand and high-value products are far from your processing area.
How much time might you save if you changed how your warehouse is organized so that your top sellers may be close to where the product is handled and sent?
Keep in mind that price elasticity is influenced by the size of your bundle, as well as the number of options included. If you see particular SKUs bundled as add-ons (e.g., DSLR cameras and SD cards), consider organizing your warehouse to keep those items close together.
#16: Ecommerce Inventory Management Safety Stock Inventory
The idea is that you’ll keep more items on hand in case additional stock is needed. It’s always tricky to predict what product demand will be, and having safety stock protects you from running out of your top sellers. However, you don’t want to overstock yourself since it will increase the cost of keeping your goods.
What is the purpose of safety stock inventory?
The best-laid schemes of mice and men frequently go astray. Even if you’re using other methods to maintain your inventory under control, having a safety stock ensures that you’re covered in case of an unexpected twist of fate. Determining the optimum time to reorder is also a crucial indicator.