A Guide to E-Commerce Inventory Management
Brody Hallon May 16, 2022.
E-commerce businesses rely on accurate and up-to-date inventory levels to ensure timely order delivery and avoid costly mistakes. For this reason, inventory management is an integral part of running a successful e-commerce business.
To help you out, here we will provide tips on how to best manage your inventory and stay ahead of the competition.
What Is Inventory Management?
Inventory management is overseeing and regulating the flow of goods and materials in and out of a company. It aims to ensure that the right items are available when needed while also minimizing the cost associated with storing and managing inventory. Several factors go into effective inventory management, including forecasting demand, setting proper stock levels, and coordinating with suppliers.
Inventory Management Techniques
There are several techniques that can help optimize the inventory management of online businesses. The most effective of these include cycle counting and Vendor-managed inventory (VMI).
Cycle counting is a method of inventory management that entails frequently counting items in stock. This allows businesses to keep track of what they have on hand and identify any discrepancies between the physical count and the inventory records. Cycle counting can be done manually or using automated tools, such as barcode scanners.
The frequency of cycle counting depends on the size of the business and the type of inventory. For example, a business that sells seasonal items may need to count its inventory more often than a business that sells everyday items. However, cycle counting should generally be carried out at least once a month.
Vendor-Managed Inventory (VMI)
VMI is a business strategy companies employ to improve stock management and optimize supplier relationships. Under a VMI agreement, the supplier manages the inventory of the customer company and provides regular updates on stock levels and sales trends. In exchange, the customer agrees to pre-purchase a certain amount of products from the supplier at predetermined prices.
This approach allows the supplier to forecast demand better and ensure that it has enough stock on hand to meet customer needs. It also gives the customer a better idea of product availability and pricing, allowing them to plan their orders more effectively.
Another great technique for forecasting demand is through the use of product analytics.
Inventory Management Strategies
There are several strategies that businesses can use to manage their inventory. Two of the most effective strategies are buffer stock and the just-in-time (JIT) inventory system.
Buffer stock is a reserve of goods kept in stock to ensure an adequate supply of materials for production. The purpose of buffer stock is to maintain a consistent production level and avoid shortages or excesses. Buffer stocks can be used to stabilize prices and ensure a steady flow of raw materials and finished products.
Get this right, and you’ll never have to worry about being understocked ever again. Another great method of managing inventory is to use e-commerce analytics data.
Just-In-Time (JIT) Inventory
Another strategy online businesses utilize to manage their stock is just-in-time (JIT) inventory.
JIT inventory is a system where businesses only order or produce products when needed. This system relies on suppliers to deliver products quickly and efficiently so that there is no wasted time or money sitting on inventory that isn't being used.
There are several advantages to using JIT inventory. First, it reduces the amount of money businesses spend on inventory. Second, it eliminates the need to store excess inventory, saving space in the warehouse.
Custom reports can also be used to manage the timing of stock arrival. To see how, visit our custom Google Analytics reports post.
Essential Inventory Management KPIs
Certain key performance indicators (KPIs) can help you track inventory levels and ensure your business is running smoothly.
Inventory turnover measures how often the inventory is sold or used in a given time. It's calculated by dividing the cost of goods sold by the average inventory on hand. A high turnover rate means that the company is selling its products quickly, which is good news. A low turnover rate may indicate that products are sitting on the shelf for too long or that there is insufficient demand for them.
To help you determine your product demand, read our guide to market situation analyses.
Stock-outs are a common problem in inventory management. When stock-outs occur, it can lead to lost sales and increased expenses. To prevent stock-outs, it is important to have an effective inventory management system in place. Several factors can contribute to stock-outs, including inaccurate demand forecasting, poor inventory planning, and inadequate supply chain management.
There are several steps that can help prevent stock-outs:
- Accurate demand forecasting Companies should use historical data and trend analysis to predict future demand.
- Well-defined inventory planning This should consider expected demand and lead times.
- A well-managed supply chain Your supply chain needs to meet the expected demand.
- Inventory reviews Businesses should periodically review their inventory levels to ensure that they are not carrying too much or too little stock.
Average Days to Sell Inventory (DSI)
The average days to sell inventory (DSI) is a metric used to measure how long it takes for a company to sell its entire inventory. This figure can help businesses determine whether they sell their products quickly enough and make necessary changes to improve their sales.
Several factors can affect the DSI, such as the type of product, the season, and the location of the business. For example, products in high demand during the holiday season may take longer to sell than those that are not. Similarly, businesses located in areas with high competition may have a longer DSI than those in less populated areas. You can understand this better by knowing the stages of the consumer buying process.
Despite these variations, some general trends can be observed when measuring the DSI. If you run your e-commerce store using Shopify, you can keep on top of your inventory with Google Analytics. To learn more, check out our Google Analytics with Shopify post.