The words “inventory management” easily scare beginners in ecommerce. As usual, it means that at the end of the year or other reporting period companies need to calculate their inventories and check the results with the entries in accounting books.
Inventory management helps you to control the flow of your money and track your company’s growth. It’s like an eternal wheel: you pay money for your inventory and get your money back when you sell the inventory.
Let’s take a deeper look at what is inventory management and how to manage inventories to get the maximal benefits for your online store.
What is inventory management and what is its place in your business?
Inventory management gives you information about your store’s stocked goods, their quantity, weight, parameters, and location. Working with inventory, you know when it’s time to replenish the number of your products, what kinds of goods sell better, and what about their expiration date. The centralized inventory management makes your work with products more simpler and convenient.
If you don’t devote time to managing inventories, there can be risks that your online store won’t be able to meet the consumers’ demand. We talk about the loss of money for several reasons: there are not enough products to meet all customer expectations or an excess of goods that are not in demand.
So, how can inventory management save money?
- It helps to avoid spoilage of products: if you sell products with limited expiration dates, they can be spoiled while they are in your storage. When you manage inventories you can take measures to avoid this situation: don’t purchase new products or plan sell-off.
- It helps to prevent dead stock: if you sell goods that can lose their relevance, you need to track their status and quantity in your storage. For example, at the end of the season, you see that there are a lot of unsold items left, you can change your marketing strategy, reduce their cost, start a sell-off and draw conclusions for the future.
- It helps to reduce storage cost: as a rule, it depends on the number of your goods.
When you know the number of products in your storage, you don’t buy more items than you need and control your storage costs.
- It helps to track your money flow: inventory management shows you how many products you can solve to earn money and how many products you can buy to avoid excessive expenses.
- It helps to plan the procuring of goods: when you see in real-time how many products you have, you can forecast the time when they sell out, save a needed amount of money, and don’t lose sales.
What are the most efficient strategies for inventory management?
Every company chooses its method of inventory management, according to its requirements and product specificity. But the first that you should think about is to set up the needed software to manage inventory. Shopify store owners can use its benefits from their first day of work: the platform offers its customers in-build inventory management solutions.
Let’s consider how to customize your software and what inventory management strategies to use to increase your store work.
#1. Set the minimal product amount for your store
In other words, you determine how many items of each of your product should be in your storage, and when this number decreases, it’s a sign for restocking.
The minimal product amount is called the par level. Its number depends on the kind of your product, how much time is needed to sell it and get a new batch for your storage. To set up the par level, you need to research, monitor and analyze stats of sales and customer behavior. This information will help you to figure out the proper par level and allow your employees to order products without your engagement.
Notice that par level isn’t something constant, so update your analytics and make corrections if the situation at the market changes.
Also, you can use the services of Shopify Fulfillment Network to set up a minimal product amount for your store, manage your storage, and check the products.
#2. Firstly sell products from the oldest stocks
This principle is also known as first-in, first-out (FIFO), and if your products have an expiration date, this rule is for you.
It means that you sell the products from your first delivery and then turn to the next delivery. By doing so, you reduce the number of spoilage, and as a result, save your money.
It also works with products that don’t depend on the terms of usage: if they stay a lot of time at the storage, their package can wear out and go out of style. Customers don’t want to purchase such items, and your brand’s reputation can be exposed to risks.
To implement this strategy you need to organize your warehouse, and put new products at the back. If you use the services of a third-party company that keeps the products and fills the orders, they know the FIFO principle, but you can ask them about it to be satisfied.
#3. Build active communication
If you want your business to grow and increase, you should be ready for a lot of communication with your partners and all companies who participate in your working processes. Flexibility, managing skills, and the art of building good relationships are the key moments in ecommerce.
There are a lot of situations where the successful results depend on how quickly you can solve the problem: return unpopular products to suppliers, in short terms make new orders, make decisions about warehousing, production, or delivery. You can make it more easily if you have good relationships with your partners.
It doesn’t mean a friendship, but clear communication. For example, if you expect to increase the sales of certain products, tell this information to your suppliers: thanks to this, they can adjust their working plan, and prepare products. Vice versa, if they aren’t ready to provide you with the needed amount of goods, they inform you and you have time to change your marketing company.
#4. Prepare a contingency plan
This tip you can use in any situation, not just in business: you should be ready for any occasion and prepare plan B to avoid risks. There are several the most popular unexpected things that can happen with your online store:
- There are no free places at your warehouse when you need to order more goods for seasonal sales.
- You don’t have enough money to buy certain products for your online store.
- The manufacturer stops the production of goods that you sell.
- There were some mistakes in your inventory and now you see that the real number of products is less than you expected.
- The customers make purchases slower or faster than you thought, etc.
When you can forecast your risks, you can eliminate them without any losses or with their minimum amount. In this case, your good relationships with suppliers, manufacturers, and proper inventory management software can be what you need.
#5. Make auditing
Regular auditing is an essential part of ecommerce, just like analysis of marketing campaigns, making research, and other work with metrics. To do auditing and figure out how many products there are in your storage, you can use special software, but it’s not enough. You need to make sure that real information matches the data from your report. So, what should you do?
- Make physical inventory: calculate all your products at the warehouse at the end of a certain period. Don’t be tempted to make an inventory at the end of the year, when you need to fill out the income tax. In this case, it would be difficult to detect the problem and get to know what happened.
- Use spot-checking: it means that you choose a certain product and make inventory just for it. It helps when you face some problems with annual inventory or have a wide range of products. As a rule, spot-checking has ancillary nature, at the same time, physical inventory plays the main role.
- Turn to cycle counting: this method can be used instead of classic physical inventory. You make a plan of inventory for your kinds of products and count them on a given day or month, several times per year. The most valuable products you can count on more often than others.
#6. Use ABC prioritization for inventory
When you know what products give you more income (about 80%) and which ones are less in demand (about 5% of income), you can manage your inventory according to this information. Make sure that A-products always are in the required amount at your warehouse and you can conveniently get them. In that time you can decide something with your C-products to clear a space for more profitable products.
#7. Try to predict customers demand
If you can predict customers’ demand and clients’ behavior, you can be called an inventory management guru. The risks are high and you can’t be sure in your forecasts, but you can try to come closer to the winning combination. For example, consider
- tendencies at the marketplace
- seasonal features
- economic situation
- past-year sales at this period
- the growth rate per year
- future actions and discounts
- advertising budget, etc.
All this information helps to decide on the number of goods to order from a supplier.
#8. Sell new products first
It’s also named “last in, first out”, and this method is the exact opposite of FIFO. The bottom line is that the prices have grown, so your new products’ cost also will be higher than the cost of older products. So, high costs lead to low profit and low tax income. As you see, it’s a complicated strategy with its weak places: by doing so, there are risks to not selling your old products at all, they can become out of trend and lose their presentation.
#9. Сalculate the exact amount of products
This inventory management strategy is named “just in time” (JIT) and works in the case with fast-growing brands and new companies that have a plan for increasing the range of products. It means that thanks to clear calculation and risk forecasting, you work with a minimal number of products in your warehouse. You should keep up to meet customers’ demand and make new orders to your supplier before the goods run out.
#10. Make your safety stock and find a reorder point
Safety stock is about making an emergency fund for your store: you prepare products that can be used in an “extra” situation when your supplier doesn’t keep up with your order delivery or some part of goods is damaged, customers make more purchases than you expect, etc.
You can calculate what is a proper safety stock for your case with the help of a special formula. To do it, you should figure out your maximum daily products usage, maximum lead time of your supplier, and the average meanings:
multiply the numbers in the first group and second, and then subtract the second meaning from the first one.
If you work with a limited number of goods, you can figure out the clear moment to make a new order to your manufacturer/supplier:
put your safety stock and lead time demand.
We hope our detailed guide showed you that proper inventory management can save your money, and achieve good results in work with your customers, suppliers, and manufacturers. Modern inventory management can be clear and convenient with the help of software, and on Shopify, you can find all needs for your business.