Inventory management can be hectic when running your online store, from storage to order tracking and shipping. But what if we told you it could be easy when you learn the right principles? Or that you’ve arrived at the perfect place to learn the most effective inventory management strategies, tips, and techniques? Yes, we just told you that — get ready to learn and implement these strategies to run your online store smoothly.
What is inventory management, and why does it matter?
You own an e-commerce business and have bundles of products waiting to be sold to customers. Your suppliers are delivering more items to replace the ones you’ve recently sold. Some customers have just placed orders, and you need to package and ship them. How do you manage all these without getting confused? That’s the point of inventory management. It entails ordering, storing, tracking, and controlling the flow of products you sell to customers.
When running your online store, you need to understand how many products (or units of inventory) you have, when the inventory needs to be restocked, and the optimal quantity to restock to avoid waste. Efficient inventory management processes help reduce waste from unsold products and let you ship goods faster to customers.
Core inventory management principles
Learning the right inventory management skills begins with understanding the core principles. You need to understand the basic types of inventory, the various inventory policies, and the distinctions between inventory control and optimization. Let’s explore these factors in detail.
Inventory basics
On a basic level, inventory is the stock of goods your business holds for sale. For an e-commerce business, this stock consists mainly of finished goods awaiting sale to customers. However, for manufacturers, raw materials and work-in-process (WIP), i.e., partially finished goods, are also part of inventory.
For an e-commerce business, the basic inventory control tasks are:
- Ordering. Procuring finished goods from suppliers.
- Receiving. Inspecting the finished goods for quality before registering them in your inventory management system.
- Storing. Keeping and organizing the finished goods in your warehouse.
- Tracking. Knowing the precise location and quantity of each item in your inventory.
- Selling. Processing customer orders and shipping the right inventory items.
- Reporting. Analyzing your inventory data to make informed decisions.
Inventory policies
After understanding the basics, you should also understand the key policies that enable efficient inventory control management. They include:
- Reorder points. A reorder point is the stock level at which you need to replenish your inventory by placing new supplier orders. You need to set a specific reorder threshold for your inventory.
- Safety stock. A safety stock is an extra quantity of goods you order to protect against unexpected supplier disruptions. With your safety stock, you can still fulfill customer demand even if your supplier has temporary production problems.
- Lead times. The lead time is the total duration from placing supplier orders to receiving the ordered items. You should aim to reduce lead times to a minimum, as lower lead times translate into faster customer shipments.
Inventory control vs. Optimization
Control and optimization are crucial yet distinct parts of learning how to manage inventory effectively. Control deals with the broad process of placing and receiving orders and organizing the received goods in a warehouse, while optimization focuses on ordering and always having the right amount of goods to fulfill customer demand.
Practical inventory management tips
Now that you’ve learned the key principles, let’s explore the practical tips and best practices for inventory management. Implementing these practices helps you fulfill customer demand efficiently and maximize profits.
1. Prioritize your inventory (ABC analysis, 80/20 rule)
You should prioritize your inventory, with the highest-demand goods arranged closer to the warehouse staff for easy access. The 80-20 rule, or the Pareto Principle, applies in the e-commerce sector, where 80% of your profits will come from roughly 20% of goods. This sub-20% of goods should be prioritized over the others.
The easiest way to prioritize inventory is through the ABC analysis, where you categorize items into A, B, and C.
- A represents the high-value, high-demand items that need very accurate control. This category should be your priority.
- B comprises moderate-value items that require moderate control.
- C represents low-value goods that need low control.
2. Track and centralize product information
An effective inventory management process requires centralizing all products into a single database. Any received items are added to this database, and any items removed for shipment are recorded as well. A centralized system lets you assign unique details, such as stock-keeping units (SKUs) and barcode numbers, to each product and track them in real-time.
You don’t need to stress to centralize product information. You can choose from many inventory management tools that let you do this without hassle. Examples include Zoho Inventory and Katana.
3. Audit and cycle your inventory regularly
You should audit your inventory frequently, reconciling sales data with inventory data and identifying any discrepancies. Depending on your business size, you can comprehensively audit inventory monthly or quarterly (3 months). However, if possible, you can implement a perpetual cycle count to identify discrepancies more quickly.
A perpetual cycle count means auditing a small subset of items at close intervals, rather than waiting a month or quarter to audit everything at once. For example, if you have 1,000 products, you can choose to audit 100 products daily. In that case, you’ll complete a thorough inventory audit in 10 days, spotting discrepancies sooner than waiting a month to conduct a full audit.
4. Analyze supplier performance
Effective inventory control management includes analyzing supplier performance to identify which suppliers need improvement or should be dropped completely. Key metrics to analyze include:
- Lead time. How long does it take a supplier to ship your items after you place an order?
- Defect rate. What percentage of products from a supplier are in bad condition? This rate should be as low as possible.
- Reliability. How consistent is a supplier at shipping the right product at optimal times?
You should monitor the above key performance indicators (KPIs) for each supplier. If you aren’t getting optimal performance, you can ask your supplier to improve their service. If issues persist, you may find an alternative supplier to avoid slowing down your business.
5. Optimize your SKUs
Stock-keeping units (SKUs) are unique codes assigned to each product in your inventory. This code enables you to track each product by scanning a barcode or entering the SKU into your inventory management system.
An efficient inventory management process includes thoroughly auditing your SKUs to identify underperforming products. Then, you can invest more in promoting the underperforming SKUs or discard them altogether. Your focus should be on the SKUs that boost sales and profitability, not obsolete ones.
6. Standardize and streamline receiving processes
You should standardize the process of receiving and checking goods into your inventory. This way, all warehouse staff follow the same procedure and avoid checking in defective products into your inventory.
Particularly, standardize the quality control inspection for every product before it’s checked into the inventory. Have a checklist that each product must meet, including weight, clear labeling, functionality, and no visible damage. Train employees on this checklist to ensure they properly inspect inventory.
7. Monitor sales trends and forecast demand
You should continuously monitor sales trends and forecast future sales based on past data. Forecasting helps you determine the optimal amounts of new inventory to order and meet customer demand. It helps you avoid ordering excessive replacements that’ll take a long time to sell.
You don’t suddenly have to become a data scientist. Rather, your inventory management system can handle this task for you. Many inventory management platforms now incorporate artificial intelligence (AI) for better forecasting.
8. Automate replenishment and avoid stockouts
Instead of manually reordering products each time, you can set automatic reorder points in your supply chain software. Once a product’s quantity falls below a specified threshold, the software will automatically place a replacement order with the supplier. This automated reordering ensures you always have sufficient inventory to satisfy your customers’ needs.
9. Minimize shrinkage and prevent losses
Shrinkage refers to losing inventory from theft, damage, vendor fraud, or errors. It can occur in many ways, such as an employee mishandling and breaking an item, a vendor purposely sending the wrong item, or when you mistakenly order the wrong product.
You should take delicate steps to minimize shrinkage, as it can cause sizable financial losses. These steps include training employees to handle fragile products, cross-checking details before sending a final order, and choosing trusted suppliers with a proven track record.
10. Leverage technology and integrated tools
Technology solutions help you manage inventory more productively. For example, you can integrate a barcode system that lets you scan any inventory item and retrieve all its details immediately, rather than waste time constantly typing item names into your software. You can also achieve the same goal with a Radio Frequency Identification (RFID) system instead of barcodes.
Likewise, you can use a cloud-based inventory management system that can be accessed from anywhere. This way, you’ll manage inventory even when not present at the warehouse. Aside from being convenient, a cloud-based solution is also more affordable than an on-premise system hosted on in-house servers.
Modern inventory management methods
With practical inventory management tips covered, you should also know the modern inventory management methods that lead to efficient operations and the proper situations to apply each one. Let’s dive deeper into these methods.
Perpetual vs. periodic inventory counts
Earlier on, we mentioned the need to frequently audit your inventory to spot discrepancies. We advised doing it periodically (monthly or quarterly) or perpetually (at close intervals), with the latter being preferable.
Although a perpetual inventory count is preferred, it would be unnecessary for small stores with low sales volumes. With low sales volume, periodic inventory counts are more efficient.
However, when running a large store with massive inventory, a perpetual inventory count is preferred because it delivers accurate, real-time data to make informed decisions. Little errors can have big consequences for a large inventory, so it’s crucial to spot them earlier with a perpetual inventory count.
FIFO, LIFO, weighted average
When running your e-commerce business, you’ll need to value inventory for tax purposes. FIFO, LIFO, and weighted-average are three standard inventory valuation methods, and your chosen method affects your profit statements and tax obligations.
FIFO means First In, First Out, where older inventory is assumed to be sold first, and the value of the newer inventory will be reflected in financial statements. It’s best used for perishable goods that tend to depreciate over time.
LIFO means Last In, First Out, where newer inventory is assumed to be sold first, and the older inventory’s value is recorded in financial statements. It’s best used for non-perishable items that retain stable value over time.
Weighted-average assigns an average production cost to each product, then multiplies this average by the number of available products to get the total value. This method is best used when you have identical products with fluctuating prices. It ensures you place a near-accurate inventory value even as prices fluctuate over a given period.
Just-in-time (JIT) and safety stock
Just-in-time (JIT) is a strategy in which you order only the inventory needed immediately. It helps minimize waste because you’ll only stock goods that are about to be sold, not long-term inventory that sits for a while before being sold.
However, the risk of JIT is that supplier disruption can leave you without enough goods to fulfill customer demand. For example, if your supplier experiences a shipping delay, there won’t be enough inventory to cover orders in the meantime. When following the JIT strategy, you can also maintain some safety stocks to mitigate the risk of supplier disruptions.
Choosing the right inventory management software
You’ll need sophisticated software to implement the inventory management tips and techniques we’ve described. Inventory management software enables easy recording, monitoring, retrieval, and analysis of your inventory data to make well-thought-out decisions. With many options available, you need some key considerations to choose the best software, so let’s explore them.
Key features to look for
- Real-time tracking. Your inventory management system should let you track the real-time status of each product, with every addition or removal recorded immediately.
- Analytics. You should have access to a detailed dashboard to analyze sales and spot trends to leverage for future decisions.
- Automated alerts. You should be able to receive email or SMS alerts when a product’s quantity falls below a specified number.
- Supplier management. The best inventory management platforms provide a centralized dashboard to monitor details about all your suppliers.
- Barcode/RFID scanning. Ideal inventory management tools let you store and retrieve details for each product with a simple barcode or RFID reader scan.
Top software solutions to consider
- Zoho Inventory. Zoho offers one of the most affordable solutions for inventory management. Its key features include end-to-end real-time tracking, detailed analytics, and integration with e-commerce platforms like Shopify and Etsy.
- Fishbowl Inventory. Fishbowl offers a sophisticated inventory management system that enables large online retailers to track massive inventory, manage multiple warehouse locations, and sync real-time inventory data with third-party accounting and ERP tools.
- Katana. If you need a user-friendly, cloud-based inventory management platform, Katana has you covered. It lets you keep regular tabs on your inventory and maintain optimal stock levels to fulfill customer demand.
Your solution to inventory management challenges
Applying well-thought-out inventory management strategies and techniques helps you serve customers better and make more money. However, if these strategies sound like a headache to you, it might just be. In that case, you can choose the dropshipping model, where you’ll outsource inventory management to a trusted third-party and focus more on promoting your store.
Zendrop is your perfect dropshipping partner, offering a catalog of 1 million+ high-quality products at competitive prices and a robust distribution network that enables fast shipping to global customers. Choose Zendrop today to begin your journey to building a successful dropshipping business.
FAQs
What is the inventory management process?
The broad inventory management process begins with ordering products from suppliers, receiving the products, and inspecting their quality before adding them to your inventory management system.
After adding the products, you’ll store them in an optimal layout that allows easy retrieval, then you’ll keep tabs on each product’s location and quantity. When a customer orders a product, you’ll pick it from the warehouse and ship it to the customer. Finally, you’ll monitor your sales data to generate insights that’ll guide future inventory-related decisions.
What is the difference between inventory management and inventory control?
Inventory management deals with managing the flow of goods from your supplier to your inventory and then to the customer. On the other hand, inventory control focuses precisely on monitoring stock levels and ensuring you have enough goods to meet customer demand.
What are the best techniques to optimize inventory?
A proven technique for optimizing inventory is to generate forecasts from past sales data, then use the forecasts to determine which inventory to replace and the optimal quantities to replace it.
You can also automate inventory replacement orders once a product’s quantity falls below a specific figure. Likewise, you can use ABC analysis to classify your inventory into A, B, and C levels based on value and demand, then prioritize the class-A items for quick replenishment.
Where should I start if I’m new to inventory management?
Learning how to control inventory begins with evaluating your inventory size, then choosing the right inventory management software based on your evaluation. With your inventory management software, you can start storing, tracking, and retrieving basic details about every product in your inventory. Over time, you can then implement advanced techniques to optimize inventory for fast shipments.
