Inventory Management: Methods, Tips, & Best Practices

If you have an e-commerce store and haven’t implemented inventory management into your workflow, the time has come to change that. E-commerce inventory management champions a positive customer experience while ensuring that you have accurate and up-to-date inventory information.

Whether you’re just starting in the e-commerce world or need a few pointers on bringing e-commerce inventory management to your storefront, we have the know-how you need.

What Is Inventory Management?

Inventory management refers to the process of ordering, storing, selling, and overall keeping track of inventory from start to finish.

Accurately representing stock levels also ensures your customers can get what they want when they want it. Since inventory management can also speed up the delivery process, you can also count on getting packages into your customer’s hands sooner. When executed properly, inventory management can both help your internal teams work more efficiently and help you deliver a more positive experience to your customers.

There are multiple ways to create a protocol for managing inventory which we break down below.

Common Inventory Management Terms

Understanding the language of inventory management speak is a cornerstone to successfully implementing it in your shop. It will help you communicate with your internal teams and external partners. Here are a few key terms you should know:

SKU: Stock keeping unit, or SKU, is a unique identification number assigned to each product that is used to classify products inside of a warehouse and for the business selling the item to be able to locate it wherever it may be.

Dead Stock: Inventory that is in stock, but can’t be sold anymore, such as expired goods or faulty returned items.

Buffer Stock: Inventory that is purchased and stored to reduce the likelihood of running out of stock of an item with uncertain supply and demand.

Minimum Viable Stock: The minimum amount of stock an business operation needs to fulfill customer demand without delays.

Lead Time: The timeframe between when a product leaves the supplier and arrives at the seller.

Kitting: The process of combining multiple items into one ready-to-ship package called a kit.

UPC: Universal Product Code, or UPC, is a barcode that is used by parties outside of the business selling the item to help them identify what the product is and trace it back to its orgin.

Challenges of Managing Inventory for E-commerce

Although implementing e-commerce inventory management is a simple process, there are a few challenges you should be aware of. Here are our top four:

#1: Overstock/Oversell

It’s not hard to imagine that improperly stocking your e-commerce store can spell trouble for your business. Luckily, inventory management software can be an easy solution to this problem. By executing strategies that accurately monitor stock levels and forecast future stock levels based on seasonality and past data, you can avoid ordering too little (oversell) or too much (overstock) to supply your store.

#2: Seasonality of Business

If your e-commerce store focuses on a particular season, it’s important to tailor inventory management accordingly. You’ll want to keep operating costs low during off-peak times so that you can reserve your resources for when you need them. During the slow months, focus on building relationships with partners, testing new products, and perfecting your marketing plan instead of stocking your store.

#3: Lack of Visibility Across Inventory Channels

Undoubtedly, it can get tricky to sell across multiple platforms like Amazon and eBay. Keeping up with inventory management best practices makes it easy to keep track of the sales and orders that come in on each platform and how they impact your inventory.

#4: Understanding Analytics

If you want your business to grow, you’ll need to focus on the data. Taking time to understand how your stock levels ebb and flow helps you to better forecast for the future, which sets you up for growth success.

What to Do Before You Order Inventory

It can be tempting to jump right into ordering inventory to stock your shiny new e-commerce store. However, you need a solid game plan first if you want to do it right. Luckily, the process is easier than you think.

First, you’ll need to secure the financing needed to purchase inventory. Even if you’re funding inventory acquisition out-of-pocket, you’ll still need to plan how to bridge potential cash flow gaps in the future.

Another important thing you’ll need to pay attention to is forecasting. Have you studied the market trends in your industry to see how the products you plan to sell might perform? Don’t forget to anticipate how your customers’ needs might change seasonally. A great way to do forecasting is by looking at your store’s sales analytic data. Google Analytics can show you which products are getting the most traffic and Google Trends can be another good resource for forecasting.

Choosing an Inventory Management System

It’s no secret that the proper inventory management system can do some pretty amazing things for your business. It’s important to note that there is no one-size-fits-all approach. Even the most popular strategies have their pros and cons.

Here’s a quick breakdown of some common inventory management systems:

ABC Analysis

The ABC Analysis inventory management strategy focuses on how profitable each SKU in your inventory is. The three SKU categories are:

Breaking your inventory into these three categories makes it easier to determine where to focus your attention. However, basing inventory activities on dollar amounts can be risky for some businesses, especially those that experience cycles in their sales data.

First In, First Out (FIFO)

The First In, First Out (FIFO) strategy focuses on selling and shipping the items in your inventory that have been around the longest. This strategy is ideal for inventory that has expiration dates or for items like electronics that can become obsolete. However, it can skew financial data since inflation can make costs seem lower and profits seem higher than they are.

Safety Stock

Using the safety stock strategy means you’ll need to order extra inventory to safeguard against going out-of-stock on a popular item. While this process will protect you from fluctuations in demand, there is a risk of getting stuck with excess inventory that you can’t sell. In these instances, you may be able to sell these items for a discounted price and break even or only slightly ahead to avoid eating the cost.

Just-In-Time Inventory

The Just-In-Time inventory (JIT) method involves only ordering products from suppliers as they are needed. This method can minimize overstock and overselling but increases the risk of dealing with backorders and long lead times, which slow the delivery process. This strategy was especially difficult during the Covid-19 pandemic since supply chains everywhere were delayed. While many supply chains have recovered, you’ll want to make sure that the supply chain for your individual store is in a solid place before implementing this strategy.

Dropshipping

Dropshipping involves bypassing your distribution channels in favor of shipping products to customers directly from the manufacturer. Even though this strategy can minimize out-of-pocket costs, you’ll have virtually no control over the fulfillment and shipping process, which can spell trouble for your business. Customers will direct any complaints to your business, so you’ll want to make sure you’re working with the best possible manufacturer in order to keep a positive reputation for your business.

Periodic Inventory System

Using a periodic inventory system involves updating inventory levels at the end of a certain period, such as a quarter. This process can save time, but lacks details and can leave much to be desired when it comes to collecting sales data.

Perpetual Inventory System

A perpetual inventory system updates inventory levels as sales are made. To properly execute this system, you’ll need to invest in expensive technology like barcodes, scanners, and computer software. You’ll also have to factor in training costs and regular updates to your technology.

Best Practices for Managing Inventory

If you want to increase your chances of success when managing your business’s inventory, it’s easier than you think. Simple initiatives like strategically distributing inventory across warehouses and fulfillment centers can make your job easier.

If you’re looking to use e-commerce inventory management to ward off potential losses, protocols like using a pick list and investing in an inventory scanner system for warehouse management can make an impressive impact.

Overall, inventory tracking is your best friend. If you want to simplify the entire process, inventory management software does all the heavy lifting for you in a user-friendly way.

Best Inventory Management Software

Choosing the right e-commerce inventory management software is an important decision for any business owner. You’ll need to consider your business’s individual needs to make a sound decision. Luckily, some of the best overall inventory management software providers partner with Shippo.

#1: Fishbowl

Fishbowl’s inventory management offerings are some of the best in the industry. You can count on reliable service that doesn’t disappoint – it’s what makes them the #1 selling and manufacturing warehouse management solution for Quickbooks! You’ll also be able to integrate the software with CRMs and shippers.

#2:  Fulfil.io

If you’re looking for an easier, faster way to get shipments out, Fufil.io is a great option. Their inventory management software can help you automate fulfillment and keep close tabs on your inventory to eliminate over or underselling.

Overall, investing in inventory management software is a quick and sensible solution for growing and scaling your business. Keeping better track of inventory and automating fulfillment helps your day-to-day operations go more smoothly. At the end of the day, effective inventory management is a powerful way to make a positive change in your customer experience.

For more recommendations on inventory management software that is ideal for your business, contact your Shippo customer success manager.