If you were to spend a day or two on our blog, you’d likely come away armed with everything you need to know to manage your ecommerce inventory effectively.
However, not everyone has that time.
That’s why we’ve distilled the essential inventory management best practices from our research and experience into this one post.
We recommend measuring your methods against the methods in this post. Doing so will determine where the holes are in your inventory management strategy and how you can fill them.
All these techniques and best practices fall into one of three categories, delineated in the following ways:
- Warehouse optimization best practices
- Storefront optimization best practices
- Inventory management best practices
Let’s dive in!
Warehouse Optimization Best Practices
These best practices concern the physical layout of your warehouse and the operational procedures that keep things running smoothly.
The warehouse is the heart of any ecommerce operation, so optimizing it first should be a priority.
Conduct regular inventory audits
Audits are probably the most unattractive way to start this list, but I couldn’t look myself in the mirror if I didn’t convey just how critical they are.
Here at SkuVault, one of the biggest pain points we hear from prospects and customers is, “I just don’t know what’s in my warehouse.”
This could be due to a number of factors:
- Unmanaged growth in the business
- A lack of audits and accountability that “snowballed” into warehouse ignorance
- Inadequate or ineffective inventory control practices
- No dedicated “single source of truth” like an inventory management system (IMS)
Whatever the cause, there are many benefits that flow downstream from knowing what’s in your warehouse. It’s the cornerstone of your inventory management strategy.
Conversely, there are significant liabilities that flow downstream from not knowing what’s in your warehouse.
Think of it this way: what CFO would try to make financial decisions without understanding the budget? They’d be making decisions based on assumptions and emotions, not data.
The principle applies similarly to warehouse auditing.
We know that audits can feel like a waste of time, especially when you’re a small business or ecommerce owner with dozens of other tasks on your to-do list.
But warehouse ignorance directly results in poor customer experiences, deadstock, stockouts, and even drops in employee morale.
How to perform a necessary warehouse audit
A warehouse audit can mean many different things. However, we’re primarily concerned with the basics — most notably, an inventory audit.
This means accounting for every single item in your warehouse and reconciling that number with whatever inventory management system or software you’re using.
Here is a 30,000-foot view of a basic warehouse audit:
- Manual inventory count – physically count every piece of inventory in the warehouse and log these numbers in your IMS.
- Operational checkup – there are often many moving parts, technologies, and equipment needed to keep a warehouse going. This phase requires examining all software, machinery, and physical storage structures used in daily inventory operations. Keep an eye out for damaged equipment, unused shelving or storage configurations, and unnecessary clutter or disorganization.
- Risk assessment – working in a warehouse poses significant risks absent from other professions. Machinery like forklifts, balers, or lifts compound risk significantly. This step may involve writing or revising your policies and procedures around safe operational behavior or retraining your employees.
How often should you audit your warehouse?
The more frequently you can audit your warehouse, the better. Aim to do it at least quarterly, if not monthly (if the resources are available to you).
Either way, you’ll want to make it a regular occurrence on the calendar, so there are no surprises, and you’re not tempted to put it off.
Optimize your warehouse for security
Anytime a job requires spending 40+ hours a week handling high-value (often small) items, there will be theft involved.
It’s just the unfortunate reality of human nature, specifically in the world of warehousing and inventory control.
“Shrinkage” is the term that encompasses all inventory that can’t be accounted for, and employee theft is responsible for 42.7% of all shrinkage.
However, while you can’t eliminate employee theft, there are some optimizations you can make to your warehouse to mitigate theft. These include:
1. Install security cameras – security cameras are no longer a multi-thousand dollar investment reserved only for big companies. Security systems are not only cheap, but shockingly high-quality. $200 can get you a high-resolution, motion-triggered security camera setup.
Often the mere presence of security cameras is a sufficient deterrent to theft. However, in the unfortunate case that theft occurs, video evidence is essential to take further action against any bad actors operating in your warehouse.
2. Place high-value items in plain sight – after you perform your ABC analysis (more on that later), you’ll have a firm grasp on your highest value items. These aren’t necessarily the most expensive items, but the ones that bring the most value to your organization based on several variables.
These, plus the high-ticket items, should be placed in a common area in plain sight instead of shelved in a corner somewhere. Keeping them central removes the temptation to steal due to the increase in social accountability.
3. Sign-in sheets – some larger warehouses utilize locked storage structures that require a sign-in (digital or physical) to access. This is a wise choice for organizations with electronics or small, high-ticket items.
Granted, these are just physical optimizations. There’s also the human component.
That is to say, there’s the million-dollar question of, “What causes an employee to steal?” This is a complex and multi-layered issue that deserves a more in-depth treatment than what we have time for here.
However, for a more in-depth look at some more ways to get to the bottom of employee theft and the root issues that cause it, check out our blog post on electronics inventory management here.
Alright, so once you’ve audited your warehouse and have a confident understanding of your inventory, you can start analyzing if you’re carrying the right inventory.
Optimizing your warehouse for profitability means altering what inventory you carry, when you reorder, and the overall flow of products through your warehouse.
Many of these things are low-hanging fruits that you can accomplish without any additional purchases.
Conduct an ABC analysis of your products
An ABC analysis is essential for ecommerce organizations that sell more than one product type. It involves categorizing your products according to tiers of value to custom-tailor your inventory practices on a per-product level.
We’ve written in-depth on the ABC analysis in this post, but here’s the basic gist. “ABC” represents three separate buckets in which to categorize products.
Category A might include products that are high in value but low in quantity. Category B, products that are moderate in value and moderate in quantity. And Category C, products that are low in value and high in quantity.
Understanding this not only helps you understand when to reorder which SKU and how much safety stock you should have, but it gives you a blueprint on how to structure the physical layout of your warehouse.
Rearrange your warehouse according to your ABC analysis
Often, there will be a clear winner between the A, B, and C categories regarding the level of customer demand.
Demand fluctuates throughout the year, but with some forward-thinking, you can structure your warehouse to meet demand and streamline your product processing.
For example, let’s say you’re a sporting goods retailer that sells snowboards. While snowboards are in the “A” category (high value, low quantity), you know that in summer, you won’t sell many. Therefore, you don’t want to have a lot of your working capital tied up in snowboards.
So, you keep quantity low and the products stored in the back of the warehouse during the hot months.
However, you know that in the wintertime, demand will significantly rise. Therefore, as summer is ending, you can adjust your reordering practices to accommodate that demand.
In addition to this, you can physically move the snowboards closer to the processing area of your warehouse for greater efficiency.
Find your reorder point to avoid stock-outs
Reorder points are essential tools to avoid poor customer experiences. They’re signals on when you should order more stock to prevent stock-outs.
Side note: This is also why we highly recommend an IMS that can help you analyze historical data and customer demand over time. SkuVault will even send you reorder reminders based on customer demand.
There are a few metrics you’ll need to know before you can calculate your reorder point:
- Safety stock number
- Lead time demand
- Average demand
- Service level
- The standard deviation of lead time
Eventually, we want to be able to fill in this formula:
(Average Daily Unit Sales x Average Lead Time in Days) + Safety Stock = Reorder Point.
You may know your average daily sales, but what is “lead time”? What about “safety stock”?
For a step-by-step plan on how to calculate all of these values and find your reorder point, check out our in-depth post on it here.
You’ll want to run these numbers for each one of your product types to avoid stockouts.
Implement intelligent pick routes
When an order comes in, most IMS systems generate a pick list. This comprehensive list of items, quantities, and item locations can be printed or sent to a mobile device.
SkuVault goes a step further. When a customer places an order, not only does SkuVault generate a pick list, but also a recommended pick route to maximize processing time and avoid backtracking.
In the ecommerce world, processing orders is a race against the clock (if you don’t believe me, just search YouTube for a behind-the-scenes look at an Amazon warehouse).
This means going back and forth and retracing steps is a waste of precious seconds, and is sure to frustrate warehouse employees.
SkuVault automatically generates these pick routes and sends them to the warehouse employee’s mobile device.
This means your employees waste less time and orders are processed more efficiently.
Storefront Optimization Best Practices
A storefront is just another name for a channel through which you sell your products. Channels can be brick-and-mortar stores, third-party resellers, or your website.
In this section, we’ll explore some ways you can optimize your storefronts for profitability.
Establish a multi-channel strategy
Having a diversified storefront portfolio is like having a diversified financial portfolio. No financial advisor worth their salt would ever advise putting your life savings into a single stock. The risk is just too high.
The same principle applies to storefronts. For example, it’s no secret that brick-and-mortar storefronts took a massive hit in 2020 due to the COVID-19 pandemic.
For this reason, you’ll want to spread your stock across multiple channels.
How do I know which storefronts to use?
The first and primary storefront you should utilize is your website. There are two main advantages to selling your product on your site:
- Complete control of the buying ecosystem and customer journey
- No fees to third-party resellers (minus standard payment processing fees)
However, the most significant disadvantage of selling on your site is a lack of visibility. Unless you’ve spent months creating keyword-targeted content, ranking in Google (much less ranking on the first page) is going to be a slog.
And as SEOs are fond of saying, “The best place to hide a dead body is on the second page of Google.”
This is where third-party storefronts come into play. Etsy, eBay, Amazon, and many other players are highly authoritative domains with deep name recognition and consumer trust.
The trade-off of using a third-party retailer is as follows: a lack of control and a slice of the profits for greater visibility.
There are dozens and dozens of third-party storefronts across the internet. Thankfully, deciding on which ones to use is as simple as a Google search.
Let’s say you’re selling candy with custom-printed messages on it (this is a real example, by the way).
You might do a Google search for “custom candy for sale.” Just on the first page, you’ll be presented with at least three to four potential storefronts to get your gears turning.
Even better, if your business has a competitor, you can do a Google search for where to buy their products and get insight into what third-party storefronts they’re using as well.
Aggregate and analyze your storefront performance
Once you’ve diversified your product across multiple channels, how on earth are you to track performance? Are you expected to log in to each of these storefront back-ends and check your metrics?
This is where an IMS like SkuVault comes into play. Whatever IMS you use, you must find a way to aggregate your storefront data. Otherwise, you can genuinely burn an entire workday just logging into each storefront and trying to decipher your sales metrics.
SkuVault takes all of your channels and consolidates them so you can have at-a-glance insights into your sales.
Furthermore, SkuVault includes the ability to drill-down into specific storefronts. This is crucial when you’re deciding which channels are the most profitable for your business.
These insights then help you know how much stock to reorder on a channel-by-channel basis. This solves the problem of reordering “by faith” and hoping you have enough to cover all of your storefronts’ demands.
With just a few clicks, you can see which storefronts are the most performant and which ones are a waste of time. Visibility into specific sales metrics allows you to double-down on high-performers and reallocate resources accordingly.
Inventory Control Best Practices
The following techniques deal with the art and science of inventory control. Staying on top of your inventory doesn’t need to mean hours of tedium and headaches.
There are concrete ways you can make things easier while also improving your organization’s profitability.
Key performance indicators (KPIs) are the guideposts of any organization. Without them, not only can you not track the health of your company, but you’re unlikely to improve or grow in any meaningful way.
Therefore, if you haven’t done so, it’s critical to set some KPIs for your organization. These include, but aren’t limited to:
1. Revenue – this is the KPI to rule them all. However, increasing revenue starts with addressing the following KPIs first.
2. Expenses – this is the flipside of revenue. Whether you want your costs to rise in tandem with your revenue or you want to stay lean, it’s essential to monitor expenses meticulously.
3. Sales – as an ecommerce business, sales are your guiding light. You’ll want to make sure you have an IMS like SkuVault that aggregates all sales among your many storefronts.
4. Picking and packing time – How efficiently are you processing orders when they come in? Processing speed is one of the few KPIs that directly impacts customer satisfaction.
5. Accidents – As mentioned above, warehouses carry with them certain physical risks that other professions don’t. Hopefully, you’re conducting regular audits to mitigate the risk of accidents. Either way, this is a KPI you should track (and reduce).
6. Shrinkage – For larger warehousing operations, shrinkage is a significant expense. Shrinkage as a KPI is usually measured in a percentage.
7. Carrying costs – What is the total cost of ordering, receiving, processing, and storing the items you’re selling, and how can you reduce it? This may require completely reevaluating your supply chain or fulfillment strategy.
8. Stock-outs – How many times have you not been able to meet customer demand for a particular item due to the item being out of stock? This is a critical KPI, as it directly impacts customer trust and overall user experience.
9. Dead stock – How much capital have you invested in a SKU that isn’t selling as you projected? How can you more accurately predict demand to avoid this in the future?
10. Working capital in inventory – Speaking of your capital, how much of it is tied into inventory? Most businesses have 20-40% invested in inventory. If you’re on the upper edge of that spectrum, it may be time to look into a leaner fulfillment strategy (like JIT or drop shipping).
Set goals based on your KPIs
Once you’ve established your KPIs, you can now begin setting goals based on them. These goals will then translate to the operations and daily actions in your warehouse.
Here are a few example goals based on the above KPIs:
- Reduce working capital tied up in inventory by 10% by the end of Q4 of next year
- Speed up our processing time by 20% by the end of Q2 of next year
- Reduce our carrying costs by 10% by the end of Q3 of next year
See how these begin to paint a clear path forward for your organization? You can now take tangible actions to accomplish these goals. Again, the logic is:
KPIs > Quarterly/Yearly Goals > Daily tactics
Adopt a cloud-based IMS
Here’s the bottom line: without a cloud-based inventory management system, accomplishing your ecommerce goals will be a challenge.
Especially if your goals involve scaling in any way, you need a cloud-based IMS. The complexities of manual inventory management only compound when you add multiple products, warehouses, or employees.
SkuVault exists to equip ecommerce business owners with everything they need to grow and accomplish their goals. We know you’re busy, so let us do the heavy lifting of inventory management.
In addition to integrating seamlessly with your existing technology stack, SkuVault also offers in-depth analytics on customer demand and easy syncing of all your selling channels.
We’d love to show you more about how SkuVault can help you grow your revenue, reduce your liability, and expand your brand.
For more information, contact our sales team for a demo today.