How to Manage eCommerce Inventory – Process and Methods
Managing inventory is a critical component of a thriving ecommerce business. The only problem? It’s one of the most complex parts of running an ecommerce business.
No one inventory management process or method works for every business. That’s exactly why we created this guide. Let’s discuss why inventory management is important for your ecommerce business, go through a step-by-step inventory management process, and some popular inventory management techniques.
What is eCommerce Inventory Management?
Ecommerce inventory management involves tracking, organising, and optimising stock levels to ensure products are available when customers want them without overstocking.
Think of it as a balancing act between overstocking and understocking. You need reasonably accurate demand forecasts and an integrated software stack that supports workflow automation to manage inventory effectively and efficiently.
Key aspects of inventory management include:
- Inventory tracking: Tracking inventory across warehouses, fulfilment centres, and sales channels.
- Order management: Syncing inventory with sales channels and minimising order-related errors.
- Forecasting demand: Demand forecasting using historical sales data and current market trends.
- Minimising carrying costs: Optimising inventory levels to minimise storage, insurance, and other carrying costs without risking stockouts.
- Managing 3PL (third-party logistics): Coordinating with 3PL providers for warehousing, packaging, and shipping.
How to Manage eCommerce Inventory: Key Takeaways
- Ecommerce inventory management involves tracking inventory levels, placing timely purchase orders, automating the inventory management workflow, and more.
- Inventory management is critical to an ecommerce business’s success, especially ones that sell across multiple channels and regions because it has a major impact on profitability and customer experience.
- The exact inventory management process looks different for every business. It starts with forecasting demand and ends with reporting key inventory management metrics such as stock turnover and shrinkage.
- Popular inventory management techniques include ABC inventory analysis, Economic Order Quantity (EOQ), and the Just-in-Time (JIT) inventory system.
Why is Inventory Management Vital for eCommerce Businesses?
Inventory management is mission-critical for any inventory-heavy business, especially ecommerce because there are plenty of moving parts involved. Here’s why you need inventory management:
- Prevent stockouts and overstocking: Managing inventory to avoid overstocking and stockouts helps save plenty of money— and lowers storage costs.
- More than half of global e-shoppers reported being unable to purchase products due to stockouts. Moreover, according to a McKinsey survey, 71% of consumers said they switched brands when they couldn’t find a desired product in stock. This shows how expensive a stockout can be – both in revenue and reputation.
- Support multichannel selling: Using automated inventory software to sync inventory across multiple platforms (such as Shopify and Amazon) helps prevent overselling.
- Optimise cash flow: Reduces unnecessary spending on overstocked items and storage fees and allows you to allocate funds more effectively.
- Improve order accuracy and fulfilment speed: When you have real-time inventory data, you can ensure faster, error-free order processing and shipping. This helps improve customer retention rates, helping you grow your revenue faster.
- Minimise carrying costs: Maintaining optimal inventory levels reduces storage costs such as warehouse rent, insurance, and the opportunity cost of tying up capital in inventory.
What is the Process for eCommerce Inventory Management?
Defining a structured inventory management process is the first step to avoiding inventory-related mishaps.
Let’s go through a step-by-step inventory management process—remember that this is an example and you can tweak it to suit your needs.
Inventory and Demand Planning
Planning how much inventory you need for the next quarter or year is the first step towards managing inventory.
It’s impossible to get an exact number—demand is generally a moving target. The idea here is to get a reasonably accurate estimate and keep updating it as variables impacting demand change.
Your best bet is to use an inventory management software solution like Unleashed. It helps you analyse historical sales trends to anticipate future needs. Once you have a projection of how much you’re going to sell, define reorder points and a safety stock level to ensure products are available without having to overstock.
How to Calculate Reorder Point and Safety Stock
𝑅𝑒𝑜𝑟𝑑𝑒𝑟 𝑃𝑜𝑖𝑛𝑡 = (𝐷𝑎𝑖𝑙𝑦 𝐷𝑒𝑚𝑎𝑛𝑑 𝑥 𝐿𝑒𝑎𝑑 𝑇𝑖𝑚𝑒) + 𝑆𝑎𝑓𝑒𝑡𝑦 𝑆𝑡𝑜𝑐𝑘
Multiplying daily demand by lead time tells you the quantity you’ll need in your inventory until the next delivery arrives from your vendor, calculated based on the average time the vendor takes for deliveries. You also need to maintain a safety stock in case things don’t go as planned — the vendor might delay delivery or there may be a demand surge.
But how do you calculate safety stock? Here’s the formula:
𝑆𝑎𝑓𝑒𝑡𝑦 𝑆𝑡𝑜𝑐𝑘 = (𝑀𝑎𝑥𝑖𝑚𝑢𝑚 𝐷𝑎𝑖𝑙𝑦 𝑈𝑠𝑎𝑔𝑒 𝑥 𝑀𝑎𝑥𝑖𝑚𝑢𝑚 𝐿𝑒𝑎𝑑 𝑇𝑖𝑚𝑒) − (𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝑈𝑠𝑎𝑔𝑒 𝑥 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐿𝑒𝑎𝑑 𝑇𝑖𝑚𝑒)
This formula should be fine in most cases. However, if your demand and lead time variability are high, here’s a more complex formula to factor that in:
𝑆𝑎𝑓𝑒𝑡𝑦 𝑆𝑡𝑜𝑐𝑘 = 𝑍 𝑥 𝜎𝑑 𝑥 𝐿𝑇‾‾‾√
Where:
Z: Service level factor based on the probability of not stocking out (for example, 1.65 for 95% confidence, 2.33 for 99% confidence)
σd: Standard deviation of demand
LT: Average lead time in days
Stock Ordering and Replenishment
The strategy you choose depends on your industry. For example, bulk purchasing might be more cost-efficient for a T-shirt ecommerce business, while a just-in-time (JIT) system makes more sense if you sell personalised items and can source raw materials quickly.
Each time your inventory reaches the reorder point, you plan an order based on your replenishment strategy. You can make this process more efficient with inventory management software.
For example, Unleashed lets you define reorder points and tracks inventory levels in real-time. When inventory hits the reorder point, it prompts you to generates a pre-filled purchase order (PO) to send to a vendor.
Inspecting, Sorting, and Storing Goods
Appoint a person to receive deliveries. This person should inspect received items for defects and verify quantities and mismatches against the PO. Confirm that shipments meet the agreed-upon terms, such as packaging standards and expiration dates (for perishable products).
Next, this person, along with the receiving department team, must sort inventory based on product type, demand, and storage requirements. For example, if you sell ready-to-eat foods, some foods may need to be stored in cold storage while others only need a moisture-free environment.
Take out items that don’t comply with terms for return processing or disposal. Then, add barcodes to all items before sending them off to the warehouse.
Use a structured system to organise your warehouse. You can assign bin locations (specific storage slots for each SKU), group items into a single zone based on order frequency, or give high-turnover items dedicated storage.
Inventory Tracking and Reporting
Barcodes are the best way to track inventory movement using inventory management software. Pulling and storing information in inventory management provides complete, real-time inventory visibility.
There are also other sources of information for inventory management software. For example, integrating it with ecommerce platforms and 3PL providers for stock updates across sales channels.
Inventory management software can use this data to generate insightful reports to support data-driven decisions. This means you can view stock turnover, shrinkage, dead stock, and sales performance at any point to make smart decisions.
How to Manage eCommerce Inventory: Techniques and Methods
The inventory management technique plays a key role in how you design your process.
The best technique for your business depends on factors such as your industry, type of inventory items, and vendor-specific factors like lead times.
Let’s discuss some popular inventory management techniques.
Just-In-Time (JIT) Inventory Management
Just-In-Time (JIT) Inventory Management
Toyota came up with the JIT system in the 1970s to minimise their inventory. The idea behind JIT is to receive parts and materials precisely when needed on the production line.
JIT is the most efficient inventory management technique, but also the most difficult. Here’s why:
Dependence on supplier: You need suppliers who can deliver orders fast. If they take a lot of time, your production line halts.
Other costs: JIT doesn’t account for ordering costs. If the supplier charges hundreds of pounds every time you order, JIT could be a terrible option.
If you believe these two factors aren’t a problem for you, either because your vendor can commit to lightning-fast deliveries at near zero or zero ordering costs, JIT might be worth considering.
ABC Inventory Analysis
ABC inventory analysis is perfect if your inventory has hundreds of SKUs. It helps you focus your efforts on the most impactful products rather than treating all of them equally.
The process starts with dividing your SKUs into three categories:
- A-Class (high value, low volume SKUs): Items in this category represent the most valuable SKUs in your inventory. If you go by the Pareto principle, these are roughly 20% of the items in your inventory, generating about 80% of revenue. It’s the most important category and requires tight control, frequent demand forecasting, and strategic stock replenishment.
- B-Class (moderate value, moderate volume): Mid-tier inventory items that contribute moderately to sales and costs go here. These products often have steady demand, so a periodic review and moderate control would offer the best balance between costs and benefits.
- C-Class (low value, high volume): This category includes the least valuable items that generally make up the bulk of your sales volume and contribute only a small portion to your revenue. It’s best to spend efforts on an as-needed basis to optimise storage or reduce costs for this category because the gains from going the extra mile might not be substantial.
Suppose you’re an online electronics store. Here’s what your ABC categories might include:
|
Product |
Annual Sales (£) |
% of Total Sales |
Category |
|
High-end laptops |
500,000 |
60 |
A |
|
Noise-cancelling headphones |
200,000 |
24 |
B |
|
Phone chargers |
50,000 |
6 |
C |
|
Laptop stands and accessories |
50,000 |
6 |
C |
|
Gaming keyboards |
100,000 |
12 |
B |
Most of your revenue (~60%) come from high-end laptops, which makes it an A-category item and your #1 priority. This is where you’ll invest the most in terms of inventory management.
Noise-cancelling headphones and gaming keyboards aren’t the largest contributors to revenue but represent a sizable amount, making them a B-category item.
Phone charges and laptop stands and accessories contribute only 12% combined, likely because they’re low-value products. They’re your C-category items.
Economic Order Quantity and Minimum Order Quantity
ABC analysis tells you how to manage inventory once it’s in your warehouse, but economic order quantity (EOQ) and minimum order quantity tell you how much inventory you should buy in the first place.
Minimum order quantity is just the minimum quantity that a vendor is willing to supply per order. Minimum order quantity is an ideal way to choose order size if:
- The per-order cost (which includes transport, handling, etc.) is zero or negligible
- The minimum order quantity is sufficient to meet demand for a reasonable period of time
For example, if the minimum order quantity is 100 units and you sell 80 units every day, it makes sense to order more than the minimum order quantity. On the other hand, if you expect to sell 10 units a day, order the minimum quantity and reorder whenever your inventory goes to the reorder level.
This minimises the overall costs because:
- The order costs are zero or negligible (assumed)
- Storage costs are minimal because you’re only ordering the quantity you actually need in the short term
Here’s the problem: Ordering costs are rarely zero and ordering too much leads to increased storage costs.
That’s where EOQ comes in. EOQ helps you calculate the order quantity at which your ordering and holding costs will be minimum. Here’s the formula:
Where:
- D: Annual demand
- S: Ordering cost per order
- H: Holding cost per unit per year
Example
Suppose you sell sneakers. You expect to sell 25,000 units next year. Your average annual holding cost per unit is £25, and you pay £250 every time you place an order with your supplier.
To calculate the order quantity at which the sum of holding and ordering costs would be minimum, apply the EOQ formula:
This means ordering 707 units—you can round it off to 700 units—would minimise your holding and storage costs.
