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? However, in reality, striking this balance is much more challenging than it seems at first. In fact, according to the U.S. Census Bureau, U.S. retailers are sitting on $1.26 of inventory for every $1.00 of products sold, highlighting the fact that preventing overstocking isn't always so simple. Of course, even worse than overstocking inventory is letting your stock levels get too low to meet customer demand.
For these reasons, creating an effective inventory management strategy is key to building a successful ecommerce business. To help you create an ecommerce inventory management strategy that will lead to an optimized supply chain, we'll take a look at both warehouse management tips as well as the top inventory management solutions available on the market today.
What is ecommerce inventory management?
Inventory management is the process of ordering, storing, and selling inventory for your company. A good inventory management process should ensure that you always have enough inventory on hand to meet customer demand without overstocking.
Solid inventory management is essential for helping online retailers maximize their bottom line and improve their customer experience. In light of this, 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, improving inventory forecasting and supply chain management is a great place to start.
6 steps to create a successful inventory management system
There are several effective ways to create an optimized inventory system that don't require significant investments of time or money. 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. In a later section, we will cover some of the top inventory management tools on the market today and their offerings. For now, though, 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 one of the most important keys to effective inventory management. If you sell multiple products across various sales channels, it's almost guaranteed that some products will be in higher demand than others. So, 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 data 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 enough sales to make more accurate projections.
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 and ensure that you always have an optimum amount of stock on hand.
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 minimum viable stock levels
Once you have developed an accurate forecast for future demand based on historical inventory data, the next step is to determine your minimum viable stock levels. This is defined as the minimum amount of product that your online store needs to have on hand to keep up with customer demand without running out of stock.
Besides considering customer demand, it's also important to consider production times and order fulfillment times when determining minimum viable stock levels. The lead time for products to arrive at your warehouse and the time it takes for you to process, prepare, and ship those products can both impact your minimum viable stock level calculations.
For example, suppose you know that it takes about six weeks of lead time after a purchase order is placed before those products are ready to ship to customers. In that case, you will need to place a purchase order for new stock at least six weeks before the date you project that 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, most 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) Categorize products utilizing ABC analysis
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 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, selling one product that generates $1,000 of profit for your company offers just as much value as selling 100 products that generate $10 in profit each, so you should prioritize the two equally. 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.
6) Strategize around seasonality
Depending on the specific products you sell, seasonality can often significantly impact customer demand. For example, 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.
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. Today, several inventory management solutions are offering high-quality tools with exceptional functionality. If you would like to start using software to help you streamline, automate, and improve your overall inventory management process, then here are seven great tools worth considering.
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 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. If you are looking for an all-in-one solution to manage your inventory across multiple marketplaces, then you can't go wrong with QuickBooks Commerce.
- 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 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. Sellercloud also features a robust warehouse management system that enables you to keep an accurate inventory count, track inventory as it moves in and out of your warehouses, seamlessly process returns, and much more. 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
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. ChannelAdvisor 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. With nChannel, you will be able to integrate with 3PL suppliers and dropshipping vendors for simplified and 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 across your eCommerce, POS, ERP, and 3PL systems.
- 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. With DEAR Systems, you will be able to manage purchase orders from a single, user-friendly dashboard. 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, and 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.
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.