07 Jun
Inventory management comprises the processes and activities that take place between the moment you obtain your inventory and the moment you sell it to the final customer. Small tweaks to inventory management can have a big impact on your bottom line for better or for worse.
If done well, inventory management can boost sales. Missed opportunities, on the other hand, can mean lost revenue. Dealing with large quantities of inventory can be a challenge to manage and plan for. Fluctuations in demand, raw material shortages, supply chain delays, and other unpredictable forces can cause a loss or surplus of ecommerce inventory.
What is inventory management?
Inventory is the product stock you own and plan to sell through your business. Inventory management is the process of tracking and storing products to meet customer demand quickly and efficiently. It applies to how you source, store, and process products to get them ready for sale.
Inventory is an investment. The results of poor inventory management may not show up for weeks or months. When they do become apparent, it can be ugly: spoiled products, dead stock, high storage costs or worse, depleted stock and unfulfilled customer orders. Additionally, storage fees and holding costs can decrease your profitability.
Why is inventory management important?
Product stock on hand is a business asset. But inventory can also hurt your business if mismanaged. As your business grows, you may run into issues such as:
- Excess inventory
- Low stock levels
- Stranded or dead stock
- Spoilage
- High storage costs
Let’s explore these common inventory problems and some ways you can avoid them.
1. Excess inventory
Having enough stock to ship out customer orders quickly is a good thing; however, having too much inventory can hurt your business. Excess inventory sucks money out of your business by tying up resources and running up storage costs. There’s an opportunity cost to holding too much stock. Aside from incurring unnecessary fees, you may be unable to respond quickly to shifts in customer demand, while aging inventory could force you to liquidate.
2. Low stock levels
On the flip side, it’s essential to have enough units to meet demand. Low stock levels can hurt your sales and brand. No one likes to order an item only to find it’s out of stock. The right inventory level for your business may depend on seasonality, sales history, or customer demands. Run a demand planning analysis to arrive at the optimum inventory level.
3. Stranded or dead stock
Stranded inventory is sellable inventory that may be in a fulfillment center or warehouse but isn’t listed for sale on your site. It hurts your business because it ties up your cash. You paid for the products, you are paying for storage, yet customers can’t buy it. Stranded inventory is a triple whammy: lost sales, storage costs, and lost storage capacity. The Stranded Inventory Tool within Amazon’s inventory system can help track and fix stranded and dead stock issues.
4. Spoilage
Some items like food products, supplements, or cosmetics have a sell-by or expiration date. When you hold inventory past its sell-by date, your investments go down the drain. Tracking your items through a system can help you avoid spoilage, allowing you to run promotions or discounts on items at risk of spoiling in the near future.
5. High storage costs
Optimizing your storage space can help you lower costs and stock fast-selling items. Not tracking your inventory can lead to higher costs of storage, removal, and liquidation. Even if you use a third-party inventory management system like FBA, you still want to track how much inventory you have in storage to avoid incurring unnecessary fees. Use an inventory system to track info like:
- What you have in stock
- How your inventory is aging
- Optimum inventory levels
This type of tracking will go far to help you avoid high storage costs.
What is inventory optimization?
Inventory optimization is the process of maintaining the right amount of inventory required to meet demand, keep logistics costs low, and avoid common inventory issues such as stockouts, overstocking, and backorders.
Inventory optimization is an ecommerce best practice and strategy that ensures stock control is managed efficiently by implementing tools, technology, processes, and techniques to track inventory in real time, better forecast demand, and optimize storage.
What are the main elements of inventory optimization?
To always have the right amount of product ready to be fulfilled, you need to take into consideration storage capabilities, current inventory levels, supplier lead times and schedules, seasonal trends, and future campaigns. Here is an overview of what’s involved in the inventory optimization process.
1. Demand forecasting
Demand forecasting is the process of using historical data to estimate future demand for your products. Demand forecasting helps you make better-informed supply decisions that aim to predict the total sales and revenue for a future period of time.
Forecasting demand will never be 100% accurate, but it will significantly lower the risk of stockouts and improve customer satisfaction while optimizing inventory levels.
2. Inventory replenishment
Inventory replenishment is the process of moving products from inventory storage to picking shelves, or receiving more inventory from the manufacturer. The inventory replenishment process is important because it helps to ensure there is enough inventory ready to be picked and packed as soon as each order comes in. By restocking on inventory at the right time to meet demand, you can avoid backorders and delayed deliveries.
3. Inventory levels
Stocking too much inventory requires a lot of capital. Meanwhile, too little inventory leads to missed sales opportunities and upset customers. Optimizing inventory levels with the ideal amount of each product in stock can reduce the risk of common inventory issues, from high storage costs to out-of-stock items.
Healthy inventory levels are a clear sign of efficiency and profitability. It improves cash flow, optimizes warehousing capacity, and builds brand loyalty and trust.
4. Inventory storage
Optimizing inventory storage is a necessary part of running any business that sells physical goods. A cost-effective inventory storage system helps you manage your inventory to meet customer expectations, while allowing room for your business to grow.
Keep in mind that storage needs will vary from business to business, based on sales volume, product attributes, and locations shipped to and from. Finding ways to get strategic on storage is a major component of inventory optimization.
Why is inventory optimization important for ecommerce?
The rising popularity of multichannel retailing coupled with the unpredictability caused by natural disasters, raw material shortages, manufacturing closures, and other factors can make it challenging to optimize your supply chain.
Fortunately, with the right tools, technology, and resources in place, you can better plan for the unexpected while still meeting demand and keeping logistics costs low. Here are five reasons why inventory optimization is important for future supply chain planning and growth.
1. Reduce operational costs
Costs associated with storage, warehousing, and general inventory management are all expenses that are associated with how well you optimize inventory. If your business has poor inventory flow and high carrying costs, inventory optimization can help to identify which items are slow-moving or fast-selling, as well as which warehouse locations makes the most sense to store certain items based on demand to reduce the time they sit on shelves.
2. Boost customer satisfaction
It’s the most direct-to-consumer (DTC) brand’s deepest desire to keep customers satisfied. By optimizing inventory, you can make sure that orders can be fulfilled right away.
It’s tempting to want to overstock inventory just to be on the safe side. But by finding ways to optimize inventory, you can get smart about how much to have of each item and where to store your products geographically. This way, you can consistently meet demand, avoid inventory issues, and minimize storage costs.
3. Gain faster delivery options
Optimizing inventory can help you track SKU performance across your distribution network. This allows you to strategically allocate inventory to warehouse locations where there is the most demand, so you can ensure that a bulk of your orders can be shipped quickly and at a lower cost.
Since inventory levels constantly fluctuate, it’s important to consider technology and automation to track inventory, especially if you store inventory in several locations. A solid inventory allocation strategy that’s tech-enabled and offers valuable insights can make a big impact on your shipping strategy.
4. Balance inventory levels
Knowing exactly which SKUs are available at your warehouse or distribution center at any point in time helps with inventory accounting, profitability, and the ability to meet customer demand. By optimizing inventory, the goal is to balance inventory levels, so you don’t stock up on too much or not enough. Balancing inventory levels can help improve cash flow, optimize warehousing capacity, and enable you to consistently meet customer demand.
5. Prevent overstocking
Without the resources to make better inventory decisions often results in overstocking on inventory to be safe. However, overstocking can lead to not only higher carrying costs but also deadstock, which is caused by items that go unsellable due to seasonality, being past its expiration date, or a decrease in demand over time (e.g., the slowdown of face masks in the US now that millions of people are fully vaccinated).
New features to add to your inventory management
Here are five new features to add to your inventory management practice to help you set yourself up for success.
1. Save time and be more efficient with product organization
It’s often said that a minute spent organizing is an hour earned. Organizing inventory can often be a difficult task, and unorganized inventory can often lead to stockouts that cost retailers an estimated $1 trillion per year—a figure that’s on the rise. But having the right inventory levels and avoiding stock outs is critical to being able to make sales. Product organization is the very first step in optimizing your products for searchability to help you find what they’re looking for faster.
Shopify’s product taxonomy feature helps you categorize all available products, so your organization is standardized and your products become more easily discoverable across channels.
This new machine-learning algorithm works behind the scenes to suggest the most relevant category for your products, and you can accept these recommendations in one click across the places you sell.
TIP: On the Inventory page in Shopify, you can now sort and filter through your products and save your searches to help you find the inventory you’re looking for faster.
2. Insights where you need them for easier decision making
It’s no secret that having insights into inventory performance can help you make smarter decisions on stocking the right inventory, in the right quantities, at the right places. This is exactly why we’ve added analytics on the product page, so you can get the insights you need to make decisions faster.
You’ll see the most relevant and impactful inventory metrics to help analyze your inventory performance and make inventory planning decisions—without having to search through individual reports for them.
TIP: You might not see product analytics because it’s only available on the Shopify Advanced plan (or higher) and requires inventory sales data. However, you can easily get started with ABC analysis by product. It showcases historical sales data and grades your inventory on how well it performs and contributes to revenue.
3. More inventory control with inventory adjustments
Conducting a post-selling season physical inventory count can be a daunting task. It’s repetitive, requires precision, and it takes time to perform accurately. One of the major pain points of an inventory count is reconciling lost, misplaced or damaged inventory, which is an inevitable, common—and frustrating—problem. But what happens when your actual stock is different from what’s in Shopify?
We’ve added inventory adjustment reasons to let you manage and track inventory changes and reconcile discrepancies. You can now provide reasons like “damaged” or “returned” for inventory adjustments, which helps you take control of non-sellable inventory and aids in reporting accuracy and transparency.
TIP: You can view all of the inventory adjustments changes for your products on the inventory history page.
4. Improve inventory accuracy with committed inventory quantities Get more done, faster with the Bulk editor
Whether products are being picked for orders, moved to different locations, or sold to customers, inventory is always on the move. Having visibility into what is in stock and available for sale, and how many are committed to orders or being transferred to other locations, is critical to keeping your inventory count accurate.
Shopify now provides a view into your true inventory numbers with committed inventory quantities. Committed inventory describes inventory sold and paid for (“committed” to an order), but not yet fulfilled. This new inventory quantity provides a more accurate reflection of your inventory count by adding visibility into inventory that has been sold and is on hand but has been committed to an order. This way you can fulfill orders and manage stock count without under- or overselling.
TIP: You can scroll over your committed inventory and get a glance of which orders your inventory is committed to to help with tracking and preparing orders for fulfillment.
5. Get more done, faster with the Bulk Editor tool
Managing inventory and products can often be a tedious task – especially when it comes to making frequent changes across many of the products you sell. With the new Bulk Editor tool updating product information across your products, collections and inventory has never been easier. You can manage more of your products and inventory at once to save you time and improve your efficiency with tasks like adjusting prices, changing SKUs or barcodes and editing tags across multiple products all at once.
Inventory management is difficult to get right and you’ve spent valuable time prepping for the holiday selling season. So keep the momentum going and use this guide as a launchpad to improve and optimize your inventory practices for the year ahead.
Conclusion
The above mentioned new features will help you become more efficient and accurate, and give better control over your inventory to step up your strategies. Getting your inventory management right is difficult, but committing the time during quieter periods will save you time when you’re busy. This guide will help you to improve your inventory management practices.