Ecommerce inventory management often seems simple enough on the surface: Make sure that you have enough products to meet demand without being overstocked, and you're good to go — right? Not quite.
In reality, striking this balance is challenging. According to the U.S. Census Bureau, U.S. retailers sit on $1.26 of inventory for every $1.00 of products sold. Of course, even worse than overstocking is not having enough available stock to meet customer demand.
Creating an effective inventory management strategy is key to building a successful ecommerce business and leads to an optimized supply chain.
To help you create an ecommerce inventory management strategy that works for you, we'll take a look at both warehouse management tips as well as the top inventory management solutions.
What is ecommerce inventory management?
Inventory management is the process of ordering, storing, and selling inventory for your company. It also includes tracking amounts, pricing, and location for all your products and your workflow for keeping tabs on it all.
A good inventory management process should ensure that you always have enough inventory on hand to meet customer demand without overstocking.
It may come as a surprise to learn that 43% of small businesses in the United States do not track inventory or do so using a manual system, according to Conveyco Technologies.
If you would like to position your ecommerce store ahead of the competition, identifying your reorder points — the pre-determined level of inventory at which you order a restock — as well as improving inventory forecasting and supply chain management, are great place to start.
5 common types of inventory management
There are several methods for dealing with inventory management for ecommerce businesses. Compare the following types to determine which is best for you.
1) Just-in-time inventory
Also simply called JIT, just-in-time inventory management is like it sounds. Rather than keeping a large inventory on hand, the JIT method is when a business receives goods only as they’re needed.
In ecommerce, for example, that could mean only ordering in a supply of Halloween decorations in time for expected demand in October, rather than stocking them all year.
The goal of JIT inventory management is to keep inventory — and the cost of that inventory — to a minimum. This can be a great benefit for your expenses but the tricky part is being able to accurately predict demand.
Not having enough stock if demand goes up means upset, empty-handed customers. Having too much stock defeats the purpose of the entire method. Therefore, JIT inventory management only works if demand is very predictable.
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2) Just-in-case inventory management
This is the opposite of JIT inventory management. Just-in-case, or JIC, inventory management means keeping more stock on hand than you might need to be able to respond to unpredictable demand.
Also called safety stock, having extra products means it’ll be no sweat if there’s a sudden uptick. Say, for example, an influencer surprises you with a great review and hundreds of orders flood in for a product. It sounds like a dream, but only if you can meet the demand.
The upsides of this type of inventory management are obvious, but so are the downsides. This method can lead to deadstock — items sitting in your inventory that you can’t sell.
3) ABC analysis inventory management
Classifying your stock-keeping units (SKUs) based on ABC analysis is one of the best ways to determine which products deliver the most value to your business, a key inventory management consideration.
Under ABC analysis, three categories of products deliver the highest value to a retail business:
- High-value products with a low sales frequency
- Moderate-value products with a moderate sales frequency
- Low-value products with a high sales frequency
Of course, it's also possible for a product to not fit into any of these categories. For instance, you might have a low-value product with a low frequency of sales. In this case, it might be best to remove this product from your catalog altogether.
ABC analysis is meant to help you manage inventory levels for your ecommerce store’s most important products, and any product that falls under one of the following categories deserves special emphasis in your inventory management strategy.
(A) High-value products with a low sales frequency
Products that yield an especially high profit can be incredibly valuable to a company, even if they have a low frequency of sales. For instance, a product that generates $1,000 of profit offers just as much value as selling 100 products that generate $10 in profit each.
It's recommended that products in this category constitute 10-20% of your total inventory.
(B) Moderate-value products with a moderate sales frequency
The second category of high-importance products is moderate-value products with a moderate frequency of sales.
It's recommended that products within this category constitute 30% of your total inventory.
(C) Low-value products with a high sales frequency
Low-value products with a high frequency of sales is the final ABC analysis product category — and the one that most retail products fall under.
It's recommended that these products constitute 50% of your total inventory.
This is a no-inventory inventory solution. Ecommerce dropshipping is when a business doesn’t hold its own stock. Instead, orders are passed directly to the manufacturer or wholesaler who takes care of fulfilling those orders.
This completely eliminates the cost and space needed for keeping your own inventory or restocking shelves, making it great for first-time operations or for testing a concept.
The downside is that order fulfillment — and all the ways it intersects with the customer experience — are left to a third party. If you want complete control over orders from beginning to end, this isn’t the method for you.
5) First in, first out inventory management
First in, first out, also called FIFO, is an inventory system that prioritizes the products that have been in your inventory the longest to be shipped out first.
FIFO is, of course, a great method for ecommerce businesses selling perishable goods like food or cosmetics. It lowers the risk of a product expiring while still on your inventory shelves, leaving you to eat the cost of unsold goods.
However, this method can be used by any type of business to keep goods moving.
6 steps to create a successful inventory management system
Exactly how you manage your inventory is an important business decision, including which method you choose to implement.
If you would like to create an inventory management strategy that is sure to boost your retail business's bottom line, here are six inventory management optimization tips worth considering.
1) Consider implementing an inventory management tool
Today, many excellent inventory management software solutions are available to business owners. Their useful automation features can help streamline your inventory management process and eliminate human error.
Many also include inventory tracking features that make it easy to follow what flows in and out of your warehouses.
We’ll cover some of the top inventory management software later on. For now, it's important to understand that leveraging inventory management software solutions is one of the simplest ways to optimize an ecommerce store's inventory management process.
2) Conduct product demand research
Understanding product demand is key to effective inventory management. If you place purchase orders for all of your products in equal amounts without considering customer demand, you will likely end up with too much of some products and not enough of others.
Instead of falling into this trap, base your inventory replenishment strategy around in-depth product demand research.
Utilizing a tool such as Google Analytics is a great place to start your product demand research. Under the "product performance" section of Google Analytics, you will find a wealth of metrics on how your various products perform, making it easy to estimate product demand.
However, if your online store is relatively new and does not have a lot of past sales to analyze in this manner, research on product demand might be a little more of a guessing game at first. In this case, estimate product demand based on your best analysis of which products will sell the fastest until you generate more sales.
3) Forecast future demand based on historical data
We've already mentioned that analyzing past sales via a tool such as Google Analytics is the best way to forecast future demand. As you begin to analyze this information on a regular basis, you'll have more data to build your forecasts from.
When forecasting future demand based on historical data, there are several important factors to consider. For one, it's important to identify outliers and anomalies that might lead to inaccurate projections.
For example, let's say that a viral marketing campaign leads to a large number of sales for a particular product. Based on these results, your forecasting demand for next month's sales might lead to overstocking once your marketing campaign winds down.
Similarly, forecasting demand for January based on December sales without considering the holiday season's impact might also lead you to order more products than you should.
As long as you perform a thorough analysis of your inventory data and pinpoint any outliers that might skew your forecast, analyzing historical data is the most effective way to achieve accurate inventory demand projections.
4) Determine reorder points and minimum viable stock levels
The next step is to determine your reorder levels and minimum viable stock levels.
- Reorder points are the pre-determined levels of stock at which you place another order
- Minimum viable stock levels are the minimum amounts of product that your online store needs to have on hand to keep up with customer demand without running out of stock
It's also important to consider production times and order fulfillment times. The lead time for products to arrive at your warehouse and the time it takes to process, prepare, and ship products can both impact your minimum viable stock level calculations.
For example, let’s say you know it takes about six weeks after a purchase order is placed before those products are ready to ship to customers. You will need to place a purchase order for new stock at least six weeks before the date you project you'll run out of inventory.
It's also important to note that meeting minimum viable stock levels does not mean stocking the bare minimum product needed to meet forecasted demand. No matter how much research you conduct or historical data you analyze, no demand forecast is 100% accurate.
Only stocking enough products to just meet forecasted demand means that you will run out of stock if actual demand ends up being higher than what you forecast. To prevent this, companies purchase "safety stock," or extra inventory beyond what they forecast selling.
To calculate how much safety stock you should purchase, you first need to determine your desired service level. Service level indicates the percentage of time a retailer has products in stock.
Using this chart, you can use the desired service level to calculate a service factor. Multiplying this service factor by your demand forecast will tell you how much stock you need to order.
According to SKUVault, most retail companies aim for a service level of 90-95%. Assuming that you would like to achieve a service level of 90% and that you forecast selling 100 units per day over the next month, then your minimum viable stock level calculation will look like this:
Minimum viable stock = 1.282 (the service factor for a 90% service level) x 100 units per day x 30 days
Minimum viable stock = 3,546 units
By plugging your own numbers into this formula, you can determine exactly what your minimum stock level needs to be to achieve your desired service level for a given period.
5) Strategize around seasonality
A company selling pool supplies is likely to see much higher sales during the summer months, while a company selling Christmas ornaments may generate almost all of its sales during the holiday season.
In these two examples, it's easy to determine how seasonality will affect demand. In other cases, strategizing around seasonality isn't always straightforward.
While it's helpful to analyze your products and customer base to determine obvious reasons for seasonal demand fluctuations, the best way to strategize around seasonality is to examine historical inventory data.
Suppose you notice demand trends based on seasonality and determine that these trends are due to the time of year and not some other anomaly. In this case, you should certainly take these seasonality trends into account in your inventory control strategy.
📚Related reading: Our guide to Black Friday logistics (for beginners).
Main challenges to ecommerce inventory management
Here are a few challenges your ecommerce business may face when managing your inventory.
Scaling with a system in place
When you start small, it seems to make sense to simply track everything manually on spreadsheets or even written documents. But if you dream bigger, you need systems in place to match.
As your business scales up, your inventory management process needs to scale with it. Manual management just isn’t going to cut it when you’re processing hundreds, thousands, or even millions of orders and tracking inventory along the way.
Overstocking or overselling
These are two sides of the same coin. Overstocking means having deadstock you can’t sell, which equals wasted money. But overselling without enough inventory means not being able to fulfill orders, or missing out on orders altogether.
Not enough data
Accurate product demanding forecasting requires historical data or at least a trends forecast to give you some insight. Just going with a gut feeling could lead to over or understocking.
Ecommerce inventory management software can help with this, as we’ll discuss later.
Lack of oversight across your whole operation
Keeping an eye on your inventory when you’re running your business out of your garage and selling on a single website is one thing. But as your business gets more complex, so will your inventory management needs.
Having multiple sales channels — such as selling on your own ecommerce website, Amazon, and eBay at one time — means your inventory records need to sync across all those places. If not, you could sell out on one platform, but have plenty available elsewhere.
The same is true if you’re large enough to have multiple warehouses. You need to be able to track inventory across all of them in sync.
Again, inventory management software can help with both these challenges.
Best ecommerce inventory management software
If you would like to improve your inventory management and warehousing processes, using inventory and order management software solutions is one of the best approaches to take.
Several inventory management solutions are offering high-quality tools with exceptional functionality. If you would like to start using inventory software to help you streamline, automate, and improve your overall inventory management process, then here are seven great tools.
📚Read more: 12 Best Software Tools for Ecommerce Stores
QuickBooks Commerce is an inventory management platform that is ideally suited for multi-channel ecommerce businesses.
With QuickBooks Commerce, you can manage product listings across multiple sales channels from a single platform, easily track products from inventory to fulfillment, integrate across multiple ecommerce platforms, and access a wealth of insightful sales data.
- Stores both supplier and customer information in one easy-to-access location
- Offers a native iOS app that enables businesses to manage their inventory on the go
- Comes equipped with inventory automation, warehouse management, supply chain management, wholesale management, and stock-tracking features
Like QuickBooks Commerce, Sellercloud is a comprehensive inventory management platform that enables ecommerce businesses to manage listings across multiple sales channels from a single dashboard.
With Sellercloud, you'll be able to sync inventory across multiple marketplaces and automatically track your inventory from receiving to shipping.
Lastly, Sellercloud's purchasing features make it easy to manage your relationships with vendors by enabling you to manage purchase orders, track the cost of purchased products and raw materials, and stay ahead of customer demand with automated predictive purchasing.
- Purchase order management functions complete with automated predictive reordering and low stock alerts
- Ability to manage listings, customers, and inventory across multiple sales channels
- In-depth reporting module that provides a broad spectrum of insightful analytics
- Robust warehouse management system that enables you to keep an accurate inventory count, track inventory as it moves in and out of your warehouses
ChannelAdvisor is an inventory management platform capable of syncing numerous catalogs of products across multiple marketplaces.
ChannelAdvisor makes it easy to streamline and automate your order fulfillment process with support for numerous third-party shipping solutions and warehouse integrations.
This software also automates purchase order management for both wholesale and dropshipping vendors and includes forecasting features to help you determine just how much inventory you need to order.
Along with these inventory management and order fulfillment features, ChannelAdvisor also offers powerful digital marketing features that make it easy to create and manage marketing campaigns for multiple sales channels.
- Demand forecasting features for optimized inventory management
- Automated purchase order management
- Exceptional marketing features complete with advanced automation to streamline campaign creation and management and multi-channel marketing insights
nChannel is a cloud-based SaaS solution that enables ecommerce stores to sync data and automate processes between their ecommerce platforms and ERP, POS, and 3PL systems.
You’re able to integrate with 3PL suppliers and dropshipping vendors for automated purchase order management, sync inventory levels across sales channels, syndicate product catalogs and product listing updates, and eliminate the need for manual data entry.
- A long list of powerful integrations with ecommerce platforms, POS systems, ERP systems, and 3PL systems
- Exceptional 24/7 phone-based customer support
- Offers the ability to split and route orders to optimize fulfillment
DEAR Systems is a cloud-based ERP system designed to help companies connect their sales channels, manage their supply chains, and scale their operations.
The platform gives you instant visibility into stock levels and order status, allows you to create a branded B2B portal for retail and wholesale customers, sync orders and stock levels across multiple marketplaces, and much more.
- Automatically calculates the cost of goods sold (COGS) as inventory is entered
- Offers a broad range of customization options, making it easy to adapt the solution to your unique inventory management needs
- Tracks inventory from the moment a PO is placed to the moment it arrives at the customer's door
Ordoro is a well-known order fulfillment and inventory management solution that provides several noteworthy features.
To start, Ordoro enables online stores to utilize barcode scanning for fast accurate order fulfillment. Ordoro also consolidates inventory and orders across sales channels and makes it easy to set up automated rules to dictate where orders will ship from.
Lastly, Ordoro automatically tracks inventory levels to eliminate the need for spreadsheets and manual data entry.
- Offers the ability to construct product kits and bundles and is capable of accurately adjusting inventory when a kit or bundle is sold
- Simplifies the process of creating purchase orders and offers the ability to set up automated backorder POs for when a customer purchases a product that is out of stock
- Provides support for UPC barcodes and barcode scanning
If you are looking for a multi-channel inventory management solution that offers an especially impressive range of features, you will find a lot to like about Orderhive.
With Orderhive, ecommerce store owners can utilize preset triggers to automate a number of inventory management and order fulfillment tasks.
View and manage inventory across multiple marketplaces from a single dashboard, create automated purchase order triggers, access insightful inventory and order fulfillment insights, and do much more within this platform.
If you are looking for a well-rounded and feature-rich inventory management solution, one of Orderhive's four available plans may be a great option.
- UPC barcode support
- Automated tracking updates for both orders and returns
- Automated low-stock and out-of-stock alerts
Manage your ecommerce business's inventory and customer service with Gorgias
Inventory management and customer service are often two processes that go hand-in-hand.
A clear and executable inventory management process means faster service, fewer fulfillment issues, and higher customer satisfaction. No inventory management solution is complete without a robust customer support solution to back it up.
Gorgias's comprehensive customer support platform allows you to manage customer inquiries regarding order tracking, returns, and order status from a single dashboard — effortlessly keeping your customers looped into your order fulfillment process.
In the help desk itself, you can track inventory numbers across all your products in real time, and even edit orders right withing the helpdesk. Here’s what your product inventories — separated by store, if you have multiple — will look like within a ticket in Gorgias.
This is helpful when making product recommendations, processing returns and exchanges in Gorgias, and more. Plus, when you edit orders within Gorgias, your Shopify (or BigCommerce) inventory levels will automatically reflect the change:
This powerful feature comes in addition to a broad range of other capacities Gorgias provides, including live chat support, rules and macros to automate time-consuming customer support processes, intent and sentiment detection, and much more.
To learn more about how Gorgias can help you optimize your store's inventory management and customer service, check out Gorgias for Shopify stores, Gorgias for Magento stores, or Gorgias for BigCommerce stores.