By
Jules Romeo
Proper inventory management is an important part of any eCommerce business. Managers looking to effectively serve their customers, grow their sales, and run an overall successful online store must have a handle on inventory management.
Although its basic concepts may be simple enough, the inventory management process becomes more complex as you grow in platforms and people. Learning how to do it in an efficient way will spare you time, money, and lost business in the future.
It may seem a bit nerve-racking, but don’t worry, when you break down the basic tenets of inventory management into simple categories you begin to get a much clearer idea of this important aspect of running your eCommerce business.
How to Manage eCommerce Inventory—The Big Picture
In simple terms, eCommerce inventory management is how an online business manager keeps track of the purchasing, production, storage, quantity, and pricing of their products. There are a variety of ways to do this; from primitive methods such as counting and keeping lists; to more efficient technology-based methods, such as spreadsheets and inventory management software. Let’s take a closer look at managing inventory to get a better idea.
Choose an Inventory Cost Accounting Method
Choosing accounting practices for inventory management will be the first order of business. There are three common practices to choose from:
First In, First Out (FIFO)
In this practice, the inventory acquired first is the inventory first sold. This assumes that whatever inventory currently exists is the most recently purchased.
Last In, First Out (LIFO)
In this model, the inventory acquired last is the inventory first sold. This means that when the cost of goods sold is calculated, the costs for the most recent products are to be factored in.
Weighted Average Cost (WAC)
This method uses the average cost of all units available for sale in the calculation of ending inventory cost.
Periodic vs. Perpetual Inventory System
There are two different inventory management systems that businesses use: periodic and perpetual.
A periodic inventory system is a method of tracking inventory by taking a physical count periodically, whether that’s every few hours, every few months, or even once a year. A perpetual inventory system is the continuous tracking of inventory, with updates happening automatically as changes in inventory occur.
The periodic inventory method requires less investment in technology, and less work overall, but is only really suitable for small businesses with small inventory. The perpetual inventory method is far more accurate and can help large businesses with large inventories—as well as drop shipping businesses that require highly accurate tracking—safeguard against massive losses due to inventory tracking issues.
Inventory Management Systems
Utilizing technology can make eCommerce inventory management a whole lot easier. Inventory management software can do much of the dirty work for you including:
- Greater organization
- Automating mundane tasks
- Predictive analytics
- Real-time reports
- Providing accurate profit margins
- Simplified scaling
- Combining inventory across locations
It may be a luxury for smaller operations, but if you plan to grow your eCommerce business, it’s only a matter of time before using inventory management software becomes a necessity.
Inventory Management Best Practices
Sometimes it’s best to look at how the most successful companies do things in order to get an idea of how you might want to go about running your eCommerce business. The following are a few best practices for managing inventory.
Supply Chain Management
Effectively managing your flow of goods is vital to securing inventory and fulfilling demand. Not only that, but it can help you reduce costs, increase profits, and mitigate the risk of understocking or overstocking. Maintaining communication with suppliers is one of the keys to successful supply chain management. Keeping in constant contact will help to make sure that you are the first to know when supply is low.
Economic Order Quantity
Economic order quantity, or EOQ, is a way of calculating the best possible order quantities for your inventory. The equation factors in holding costs, annual demand, and order cost, in order to provide an accurate order estimate that will help you minimize costs, control your inventory, and make your eCommerce business a more overall efficient operation.
Cross-Platform Inventory Management
When selling on multiple online platforms, it’s imperative to keep accurate inventory in order to avoid backorders, which can lead to upset customers and lost business. With the help of an inventory management system, you can auto-sync all of your platforms. This way, you can display your inventory on all of them simultaneously without having to worry about overselling.
The last thing and a manager needs is to have to deal with backorders! Learn more about coping with backorders.
Safety Stock/Par Levels
In order to figure out the par level, you need to calculate the amount of inventory needed to ensure that you meet customer demand while also allowing for the possibility of increased demand. Accounting for the possibility of increased demand is done by maintaining extra inventory, otherwise known as safety stock. Safety stock is vital to avoiding backorders.
Inventory Forecasting
Inventory forecasting is the prediction of future inventory needs based on a number of factors including sales trends, growth benchmarks, historic data, and more. Accurate inventory forecasting is vital for avoiding overstocking, understocking, backorders, and stockouts, particularly when your inventory is of seasonal demand.
Inventory Management Strategies
They may seem similar, but strategies and best practices are not entirely the same. A best practice is a standard method by which a certain goal can be achieved, whereas a strategy is a particular action that can be performed in order to reach a goal. The following are some of the most popular inventory management strategies that eCommerce business managers use.
Outsourcing Inventory Management to a Third Party
Some eCommerce business managers looking to save time and money will enlist the help of a third party logistics company, or 3PL. A 3PL can provide warehousing and inventory management for you, so you can focus on the many other things on your plate.
Drop Shipping
Drop shipping manages inventory by removing it entirely. This is done by the merchant having their products shipped from the wholesaler, manufacturer, or even a 3PL, directly to the customer. This can save the seller a ton of money by removing the need for storage space.
Some 3PLs, like Print Bind Ship, can even provide the manufacturing for you depending on the product. Print on demand strategies work well with dropshipping; these can be particularly useful for apparel fulfillment and merch fulfillment.
Just-in-Time
The just-in-time inventory system, or JIT, works on an as-needed basis, meaning that sellers will only stock enough inventory to meet the product’s demand. This can greatly reduce costs and increase efficiency, but it requires highly accurate inventory forecasting. It’s best suited for drop shipping companies, smaller businesses, and boutique businesses.
ABC Analysis
Once you’ve formed your own inventory management philosophy and begun calculating accurate demand projections and data-backed par levels, you’re going to want to segment your product line using ABC analysis. ABC analysis is a categorization technique that prioritizes your inventory based on usage rate and monetary value. This process can help your business become more cost-efficient and profitable.
Inventory Management with Print Bind Ship
If you’re looking for a company to assist you with your inventory, warehousing, and fulfillment, Print Bind Ship can help! Our team of eCommerce experts can take on the complicated task of inventory management for you in order to help you save money and make better business decisions. Contact us today for a free consultation!