11 Inventory Management Tips for Becoming a More Cost-Efficient Ecommerce Business
For business owners, managing a business on an ecommerce platform can be complicated without having proper inventory management tips.
Profit-making is the end goal of every business owner. You buy items to sell and replace sold items from sales and profit made.
However, not all goods are sold at once. Some are stored (inventory) when some are being sold. Therefore, balancing the scale of what you sell to what you have at every instant brings about the idea of inventory management.
What is Inventory Management?
Inventory management is the continuous practice of monitoring the acquisition process of ecommerce stocked goods (inventory), how they are stored, and the sales of those goods.
It means getting the right type of stock in the right amounts, storing them in an organized manner, and selling them off at the right time and for the right price.
It’s about having the right sales processes for the best possible profits with the lowest risk levels.
Why is Inventory Management Important?
Every business owner’s primary goal is how to increase sales and have the goods that the buyer demands.
While this looks easy, inventory management is a bit more tactical.
Let’s say you buy a set of items; X. Inventory management involves ALWAYS having item X each time a buyer demands it and replacing sold items X with appropriate amounts.
Now, how do you keep selling and restocking at the same time without having excesses or fewer products?
That’s where inventory management comes in.
Inventory management is important to:
- Saves You Money: With good inventory management practices, you can avoid falling into situations where you have products that nobody is demanding for. Such products are bought with money, and until they are sold, the business suffers the financial constraint they impose.
- Maintain Loyal Customers: Bad inventory practices would frequently make you run out of stock. Too many “out of stock” labels can get customers fed up, and they finally switch over to competitors. Right inventory methods require emergency plans to avoid such scenarios.
- Avoid Wastages: This holds for the perishable items. You would want to make sure you are not ordering beyond what would be demanded, or you would have to bear losses from wastages. Only a good inventory can help you achieve that.
11 Inventory management Tips to Boost Your Ecommerce Business Sales
1. Predict Demand Levels
Imagine a certain Mr. A that sells frozen chicken on wholesale demands. Now, someone comes to his store during the third week in December and purchases 70% of his stock. For that day, he struggles with sufficient chicken stock for other customers.
Now, what was Mr. A mistake?
The answer is simple! He failed to forecast the increase in sales due to the festive December celebrations.
That can result in him making an emergency restock that might be expensive because of the urgency in his demand. Or he stays calm and loses potential customers.
Prediction of demand levels is not only for seasonal goods. It applies to all kinds of inventory regardless of the type of goods sold.
To effectively plan, always go through your sales records like last year’s sales for the present period, current market trends, your customers’ growth rate, and verified future bookings.
Another way to guess future demand levels is to track the overall demand for the product or service you render. You would be using tools that help predict the average buyers’ preferences for each particular point in time.
As an example, we used Google Trends to determine the level of market interest in “mountain bikes,” and this is what we got.
Source: Google Trends
The plot explains that over the last 12 months, the interest levels in mountain bikes spiked around May last year and was recently back to almost the same level as that of the start of last year.
That’s based on the searches for just the last 12 months. Depending on how deep you want to research the market, you can go as far as the previous 5 years for more accurate plots.
Understanding the market interests of customers would help you to avoid making the wrong orders.
2. Maintain a Strict Minimum Stock Level
A minimum stock level is that limit beyond which you make the call to order for more supplies. It is a measure to avoid running out of stock.
The rate at which you sell off your products is the primary determinant of this minimum stock level. Once you know how long it takes a particular product to be out of stock, you can set a stock limit for the sales rate. It means you only order for supplies when your inventory levels are approaching that set limit.
If you happen to use an inventory software like Shopify, this minimum stock level can be calculated. The formula for doing so is given as:
Minimum Stock Level = [(Mean Sales/day x Mean Lead Duration in days) + Safety Stock]
Later on in this article, we would use an example to test this formula.
After determining your minimum stock level, it is essential to remember that market trends have patterns. They fluctuate too.
Therefore, you need to keep reassessing your minimum stock levels from time to time.
3. ABC Prioritization of Your Products
Placing priorities on what stock items are more important helps to stay focused and increase sales. Some stock items generate higher revenues than some others. Also, some take longer to be sold and take up inventory space. An excellent way to evaluate this is to use the ABC Analysis scheme.
The basis of the scheme is this:
- A-Products: They are considered to be the most important. Generates most of your income sales (about 80%) because they have the highest per dollar volume ratio. They usually have higher demand too. So, they take just about 20% of inventory space.
- B-Products: Unlike A products that usually sell so fast, B products sell fast (about 15% total sales) but not as much as A. They are regular products. They are more in quantity than A (about 30% of inventory). Hence, they have higher inventory costs than A.
- C-Products: They make up for a larger inventory (could be as much as 50%). The reason for this is that they do not sell as fast as the other products. Most times, they make up for just 5% of total sales.
The plot below illustrates it better.
From the ABC analysis, the A-type products deserve the highest priority as far as inventory management is concerned. Due to the rate of sales and frequency of reordering, they demand more attention.
Therefore, you have to decide which of your products fall under the A, B, or C category for successful inventory management.
4. Observe the First In, First Out Strategy (FIFO)
As the name implies, this strategy places importance on selling off the old stocks before selling the new ones. The application of this principle is more advisable when dealing with perishable items.
The FIFO inventory management method is to avoid having stale or expired items that nobody wants again. With practical FIFO guidelines, wastages that result in losses are avoided. However, proper utilization of this strategy requires that your inventory is well ordered and arranged.
That means your inventory should have an easy arrangement pattern that helps identify the new stock from the old ones.
5. Prepare for Contingencies
Failing to prepare for unforeseen situations is like preparing to fail because such situations are bound to occur. A good inventory management plan is to be always prepared and have adequate back-ups.
Examples of unforeseen contingencies involve the following situations.
- Sudden fall in demand for a product that has taken up much storage space.
- Suppliers are running out of stock.
- The supplier stops selling, and you were not informed early.
- Spike in sales that causes you to run out of stock.
- Error in calculation of the amount of inventory left.
- Your merchandise gets damaged.
The list goes on and on. However, what is essential is understanding that such issues can arise, and the risk measures you already have in place will determine how profound the effects would be.
6. Maintain Good Communication Levels with Supplier & Customers
While contingencies cannot be avoided, some of the effects can be minimized even before occurrence. One of the ways to do this is to have a great relationship with your supplier.
Being honest and straightforward with your supplier increases trust. Whenever an issue occurs with supplies, a good rapport would make the supplier remember to inform you on time. Adequate communication levels also help when negotiating during a price hike.
Maintaining a good relationship with the customer is also an excellent trait. 94% of buyers will likely become loyal customers if they think you are transparent.
7. Have Multiple Suppliers for the same Products
While we recommend that you maintain a great relationship with your supplier, it is advisable to get familiar with other suppliers of the same product.
For those who are just starting their online store, getting a list of suppliers can be challenging but necessary. Oftentimes, these suppliers can run into issues and be unable to supply you promptly. Then, what do you do?
You don’t want to suffer for what happens to your supplier’s business, so it is good to have back-up suppliers if something happens.
Moreover, it is one of the ways to plan for contingencies. For instance, if your main supplier’s machinery gets faulty, your company shows its concerns but does not have to bear the loss with them.
8. Carry out Periodic Auditing of Your Inventory System
Useful inventory management tips suggest that periodic checks should be carried out to ensure everything is according to plan. Having a profitable online store requires that you don’t just set up your inventory and relax.
You have to keep trying to seek improvements. Rise and fall in demand, fluctuations in market trends, and customer preferences changes can generally affect your inventory’s inflow and outflow.
Most companies know this, so they usually carry out scheduled counting of all inventory at the end of the year. While this is good, we will advise monthly or weekly counts if possible. The reason for this is to be able to trace sources of irregularities in existing records easily.
9. Have Reserved Stocks for Emergencies
Imagine a scenario where you run out of your top-selling stock only to hear that almost all the major suppliers have trouble getting supplies for distribution. That brings about the scarcity of the product, which is a market opportunity considering higher demands to the limited/zero resources.
So, what could you have done?
Part of preparing for such contingencies is reserving some items, especially non-perishable stocks. Being a major supplier during a general scarcity would go a long way in positioning your store as a top choice.
Consider these reserved stocks as a top-up of your minimum stock level (MSL). Unlike MSL items, there is no plan to touch these reserved stock items. They are ONLY for emergencies. You only replace them after a while before they get old.
These stocks are called Safety stocks. The appropriate amount of safety stocks to reserve or set aside can be calculated using the formula below:
Safety Stock = [(Maximum sales/day x Maximum Lead Duration in days) – (Mean Sales/day x Mean Lead Duration in days)]
Let’s consider some data pulled from a Shopify store to get this concept better. The sales over time data for 30 days is the first set of data we are considering.
From this data, the store owner has a maximum daily sale of 5 for his top-selling product. That is the Maximum Sales/day.
For the mean sales/day, we would consider the average inventory sold per day record.
We would assume the most prolonged delay in receiving a purchase order was 8 days, but the average delivery date is 4 days.
Therefore, our mean lead duration in days will be equal to (8 divided by 4) days
= 2 days
Hence, our safety stock value would be calculated as:
Safety Stock = (5 x 8) – (4 x 2) = 32 units
10. Have a Pattern of Restocking and Monitor it Yourself
In simpler terms, consistency in the method of restocking your inventory is essential. Your process of accepting new stocks should be uniform among your sales assistant. Except for emergencies, restocking should be done ONLY when the minimum stock level is reached.
As written before, the formula for minimum stock level is given by:
Minimum Stock Level = [(Mean Sales/day x Mean Lead Duration in days) + Safety Stock]
Using the recent illustration,
Minimum Stock Level = [(4 x 2) + 32] = 40 units
That means that orders for restocking will only be made when the stock left approaches 40 units.
During each order for restocking, it is best to carry out proper checks and counts. More importantly, adequate supervision is needed.
Due to familiarity, your supplier might suggest delivering stocks for you to save time. The disadvantage here is that you might be receiving supplies that you do not need at the moment. Hence, it is advisable to monitor the process yourself.
11. Use Proper Inventory Management Software
We decided to save the best tip for the last here. While all the above options would work well for small businesses, they would be stressful to practice for a large inventory. Manually calculating inventory data with pen and paper is not sufficient for the modern market demands.
Besides, manual inventory methods are error-prone. Tracking inventory that can take hours or days can be done faster by using a top tier inventory management software.
With good inventory software, problems of predicting market levels, ordering at the wrong time, and the stress of determining how much inventory needs to be replaced are eliminated. Auditing of your inventory and measures for contingencies are promptly put in place. Altogether, effectiveness is achieved.
Therefore, if you have an online store like a Shopify store, purchasing a good inventory software today would save you from the stress of considering other Shopify alternatives for better sales results.
Becoming a cost-efficient ecommerce business starts with implementing excellent inventory management practices.
By following our inventory management tips, you can be sure to reduce unnecessary inventory costs, avoid wastages, and have increments in overall profits.
Choose the method that works best for you and regularly measure your business metrics to know if you are making progress.