Inventory Management is not just the combination of handling the stocks, prices and location of a business’s products. The science behind inventory management is more complex than that: you need to take control every minute and everyday of your product stock flux.
Do you know how many items are currently in your warehouse? Is there a correspondence between your stock levels and your online orders? How many products are coming in and out of your warehouse every day?
These questions get more difficult to answer when a business grows and expands to e-commerce, because you need to update the information in real time in several channels. According to some studies, 43% of small business still use manual methods like spreadsheets to track their inventory, and that’s insane. Even if you think you’re not big enough yet, the sooner you introduce some inventory management strategies to your company, the faster your e-commerce will grow.
Here you have the basics:
1. Inventory Management Software
It seems like a no-brainer, but a centralized inventory management system should be your first step when designing an effective inventory management strategy. This kind of software is essential to avoid spreadsheets chaos and have everything at hand when managing your stocks.
An inventory management software system also avoids human error, the most typical problem when it comes to handle stocks and keep track of what products are coming in and out of a warehouse. When a business begins to grow, the volume of products, orders and sales will be impossible to track manually and you will need a central database that receives and sends updated information to all your channels.
It’s important to delegate these tasks in software systems aimed for e-commerce businesses, like a PIM system that can be synchronized with an inventory management software to get all these advantages:
- Save costs: Thanks to a proper inventory management system, you will avoid overstock and out of stock situations, you will make good use of your storage space (as you won’t have dead stock waiting on the shelves), and you will know exactly when to restock products according to seasonal trends.
- Save time: The integrated process allows you to automatize tasks, achieve revisions, checks and orders in less time, synchronize your accounting, and predict sales based on your sales history and analysis data.
- Routine checks: With a software system it's easier to see if your data is accurate and your databases are reflecting the real state of your warehouse. You can find the source of errors faster and perform these checks more often.
2. The FIFO rule
First in, first out. It sounds more like a drinking game rule, but it’s mandatory for any e-commerce business, especially if you sell products with an expiration date, like food or cosmetics.
But it’s not just a rule for trendy vegan bars sellers: non-perishable goods can also rot in your shelves if they don’t get sold on time, and they can get out of date, season or fashion. A software system points out which items got to the warehouse fist and in what order you should sell them to avoid finding dusty boxes at the end of the year.
Also, you can have your stock under control with another couple of rules:
- Par levels: Keeping always a minimum amount of every product in stock.
- JIT (Just in Time): Buying stock just when you need it. This means that you only sell products on demand, or even craft or build them after an order is completed. The process can be slower, depending on the type of item and the production chain, but it’s a way to prevent overstocking, especially for smaller brands or sellers.
3. Selective inventory control
It’s not only the age that counts, but also the quality. You will rapidly notice that you have a few items in your catalog that sell very well, and a lot of them are far less popular. That doesn’t mean that you should only stick to your best sellers, but of course you must prioritize them. And even if they are very demanded, you can’t storage a lot of high valued products because the costs will be enormous and you will face higher storage risks.
This strategy is based on the following product categorization:
- Category A: High valued products in low quantity.
- Category B: Regular products in moderate quantity.
- Category C: Low valued products in high quantity
4. Smart allocation
Once you have all your products well organized in your warehouse, another tricky problem arises: how to distribute them across all your channels.
Of course, if you only use one sales channel you won’t have this problem, but you most probably will end up using more than one.
In order to distribute your stock in a proper way, you can follow one of these two systems:
- Equal allocation: Each channel has the same amount of stock. This means that, for example, you add 10 backpacks to your online store website, 10 backpacks to your Amazon product page and 10 backpacks to your pop up store.
- Trend allocation: A more sophisticated and precise system based on sales trends. Each channel receives a specific amount of items, depending on the level of demand of the given product in each channel. For example, taking the backpack case, if you usually sell more backpacks in your online store and very few in your physical store, you can keep 20 backpacks for the website, 5 for the pop up store and 5 for Amazon (as you don’t want to sell more best sellers there than in your own channel).
5. Outsourcing & Dropshipping
Some people call these strategies the anti-inventory management systems, because this way a business leaves storage and order management in the hands of third party companies.
- Outsourcing means that a third party vendor or company manages all your stock storage and order fulfillment. The most popular system is Amazon FBA: the marketplaces takes charge of everything for you, including warehouse stocking, packing and shipping orders.
- Dropshipping is even more controversial because this way a company reaches for other sellers to obtain some stocks, on a regular basis or just for emergencies like an out of stock situation. The dropshipper would send their stocks to your customers, and of course the benefits will be lower, but it’s a common strategy for businesses that still don’t have their own storage space.