If 2020 was good for anything, it was the perfect case study on the importance of proper inventory management for eCommerce businesses.
The tumult of a global pandemic rattled tens of thousands of businesses and undoubtedly cost billions of dollars in inventory management alone.
Even Amazon, the eCommerce behemoth itself, struggled to find a profitable way forward in the wake of COVID-19.
All that to say, there’s never been a better time to examine and optimize your current eCommerce inventory management system.
In this post, we’ll talk about 15 of the most common techniques and best practices for eCommerce inventory management.
In this post, we’ll unpack:
- The differences between techniques and best practices
- The pros and cons of the most popular inventory methodologies
- Best practices that most often predict success in eCommerce inventory management
- How technology can streamline your warehousing workflows
By the end, you’ll have a clear path forward on how to optimize every facet of your eCommerce inventory management.
Let’s dive in.
15 eCommerce Inventory Management Techniques and Best Practices
1. Just-in-time Inventory Management
As the name implies, businesses who utilize this inventory philosophy stock a product each time a customer orders it, such that the volume of inventory is more or less equal to the number of filled orders.
The JIT method was perfected by Toyota and its car manufacturing process. It goes without saying that while it affords significant capital savings, this technique is risky. Case and point, an unexpected parts shortage ended up costing Toyota 180 million yen.
- No risk of revenue tied up in dead stock
- Less inventory to manage in your warehouse
- Less space needed to house product — smaller warehouse means lower storage costs
- Heavily reliant upon buying trends — unexpected surges in demand can cause stock-outs
- Difficult to sustain with growth, multiple warehouses, or lots of product types
2. First In, First Out Inventory Management
First In, First Out (FIFO) means the first products your warehouse receives are the first to be shipped out to the end-users.
This strategy is mostly implemented in food service or food supply industries where businesses are dealing with perishable items.
However, any business can implement FIFO, especially if they don’t want to house products for longer than necessary.
FIFO will not be an appropriate strategy if the materials or goods purchased have fluctuating price patterns. This can cause discrepancies between the cost of goods received and the costs of goods sold.
- Less waste, especially when dealing with perishable items
- Optimized warehouse circulation — no product is stored for longer than necessary
- Can result in inflated profits if production costs fluctuate
Dropshipping could very well be named the “anti-inventory” inventory management strategy. The whole idea is that you, the business owner, never touch the product.
Once a customer places an order, you fulfill it from the manufacturer and send it straight to them. Thus, dropshipping completely cuts out the middleman.
This is helpful for business owners who are trying to break into eCommerce but can’t yet justify the cost of a warehouse or storage space. We wrote a blog with ideas of products to dropship this year to help you get started.
However, there’s no such thing as a free lunch, and these “shortcuts” come at a cost.
Manufacturers have an incentive to give discounts and bonuses to businesses that buy and store their products in bulk. After all, once the product is shipped to a warehouse, the business owner now shoulders the burden of getting it sold.
That incentive is gone with dropshipping, which almost always means higher fulfillment costs. Some business owners simply don’t have a choice. They’re willing to eat the higher costs to get their foot in the eCommerce door.
Another challenge with dropshipping is the complete lack of control you have over the customer experience. Since you’re not physically overseeing how the stored product gets to the end-user, you’re completely dependent upon the manufacturer.
- Eliminates the need for small businesses to purchase warehouse space
- An approachable introduction to the world of eCommerce
- Total lack of visibility and quality control
- Higher fulfillment costs
4. 3PL Fullfilment
Third-party logistics (abbreviated as 3PL) is the practice of businesses handling eCommerce logistics for other businesses.
For an agreed-upon fee, 3PL providers will handle basic logistics for eCommerce clients including (but not limited to) inventory management, warehousing, and fulfillment.
Each 3PL vendor varies in its offerings, expertise, and ability to accommodate more complex supply chain tasks.
3PL is appealing to business owners who fancy themselves more visionaries than detail-oriented people. They’re more than willing to pay a premium to get their precious time back.
If that sounds like you, check out our deep-dive on 3PL fulfillment to see if your eCommerce business can benefit from it.
- Substantial cost savings on warehouse rent, employees, and shipping materials
- Access to massive warehousing infrastructures which open up new customer bases
- Affords business leaders a surplus of time to focus on high-level tasks
- Physical distance from products means less control over quality assurance and branding
- Products that require complex kitting or assembly may not be eligible
- Many 3PL vendors require an upfront investment
5. Forecast Future Demand by Studying Historical Data
Once you’ve decided on an inventory management strategy and assessed the current demand for your products, it’s time to do some predictive analytics. As a general rule in all disciplines of business, a successful organization is the one that makes the future a little less uncertain.
This is where manual processes fall short. Having immediate, visualized access to past purchasing data is something only an IMS platform like SkuVault can provide.
Even better, SkuVault allows for drill-downs into historical data of particular channels, so you can stock intelligently for the holidays (or any other seasonal trend) on a channel-by-channel basis.
6. Implementing a Scanning System
If there’s a process you can automate humans out of, odds are you should jump on that opportunity.
Barcodes are cheap, and human error can be astronomically expensive.
It’s an inventory management best practice to scan items whenever you receive, move, ship, or alter them in any way. Without a scanning system, that opens you up for lots of human error, mistyped SKU numbers, and garbage inventory data.
This becomes especially pernicious as your eCommerce business grows beyond just a few SKUs in a small warehouse.
7. Set Your Par Levels (minimum viable stock)
Par levels act as a safety net for eCommerce sellers by ensuring a minimum quantity of stock at all times.
Assuming you’re not dealing with food or perishable items, all eCommerce business owners should have a minimum viable stock.
The process of setting par levels depends fundamentally on two variables: your products’ demand patterns and manufacturing timelines.
Some IMS platforms will automatically alert administrators when particular product SKUs fall below the par level threshold, taking into consideration a host of variables.
These include how long it takes to receive a new product, the demand curve for that particular SKU, and your current stock levels.
SkuVault not only intelligently recommends when new products should be ordered for optimal stock levels and revenue, but assembles a purchase order automatically.
This handy feature of SkuVault, known as the Replenishment Report, takes into account all relevant supply, demand, and inventory variables, saving you the tedium of sorting through each product’s par level manually.
Here’s a simple example:
Let’s say you have a product that, on average, sells about one unit per day. You know that it takes 30 days to manufacture and fulfill that product in your warehouse. Therefore, your par level must be over 30 units to avoid stock-outs.
And this is a very simple example. Most purchasing trends aren’t this cut-and-dry and fluctuate greatly throughout the year. Therefore, your par levels must constantly be evolving to accommodate demand.
And all these considerations are just for one particular product! You’ll need to assess each product on a case-by-case basis if you want to stock intelligently.
This is just another reason why an IMS platform — especially one that provides historical data on purchasing patterns — is so crucial for automating the tedium that profitable inventory management requires.
8. Prioritize Products With an ABC Analysis
Once you’ve established a foundation of an inventory management philosophy, accurate demand projections, and data-backed par levels, it’s time to segment your product line.
Performing an ABC analysis helps you maximize your revenue by tailoring your fulfillment strategy to individual product lines or categories.
For example, 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.
Bucketing your inventory this way allows organizations that sell diverse product lines to create bespoke restocking strategies for each product category.
If you’re a music manufacturer that sells $2,000 custom acoustic guitars and $2 packs of guitar picks on the same website or channel, it’d be foolish to impose the same fulfillment strategy for both products.
Here’s the step-by-step process for performing an ABC analysis:
- Collect data on the specific product under analysis — most commonly annual spend per item (including carrying costs, if possible)
- Rank each inventory item from highest to lowest cost
- Divide inventory into ABC categories — usually, Category A items represent 15-20% of your entire product line but 80% of your costs. Likewise, Category B items represent 30%-35% of your inventory and 15% of your costs, and Category C items represent 50% of your inventory and 5% of your costs
- Perform monthly or quarterly analyses to ensure your created categories reflect real purchasing trends
Trying to manage which product should fall into which bucket at what point is an insurmountably challenging task unless you have the support of an IMS platform.
9. Implement Inventory Management Software
We’ve been mentioning this point sporadically throughout this post, but it’s best we just come out and say: every system in business reaches a point where manual processes just don’t cut it anymore.
You may have been able to get away with a static Excel spreadsheet or even paper-based inventory in the past. But if growth of any kind is on your radar, you need to adopt an IMS.
And (speaking to busy eCommerce business owners here) do you really want to spend your time manually building Excel reports and digging through old files for historical data?
The ability to automate all that tedious (yet important) work is one of the many benefits an IMS brings to your organization.
10. Regularly Audit Your Supply Chain
eCommerce operations that require a lot of kitting or assembly likely have multiple suppliers or manufacturers from which they order products or raw materials.
Common examples include handmade jewelry, proprietary formulas, or electronic components.
However, even if you only have one or two suppliers in your supply chain, this exercise is worth performing.
Set a recurring reminder every six months or so to plot out all the key parts of your supply chain and audit their contributions to your business. This includes things like:
- Measuring lead times against competitors
- Measuring cost against competitors
- Measuring any sort of negative trends (customer returns, defective product) that may necessitate a change
You may realize a supply problem in your eCommerce business isn’t due to any fault of your own, but a faulty link in your supply chain.
11. Conduct Cycle Counts in Your Warehouse
All-hands-on-deck audits that require a complete shutdown of warehouse operations are obsolete, unsafe, and inefficient. Plus, nobody likes them.
Of course, we’re firm believers in frequent, meticulous inventory auditing. So what’s the solution? Cycle counting.
Cycle counting is a way to divide inventory counting responsibilities over the course of several days and employees. You start by prioritizing the highest-value products (those in the A category if you’re already performing an ABC analysis) and have multiple employees (or just you if you’re a solopreneur) work a portion of their shift counting those products.
Then, you move on to the B and C category products, which you count less frequently due to their lesser contributions to your bottom line. The frequency of your cycle counts depends on how conservative you want to be in shoring up inventory problems.
12. Integrate Your Technology Stack Into One “single source of truth”
As your eCommerce business grows, so does your monthly software bill, your list of logins and passwords, and how many browser tabs you have open at any given time.
Think about it, most successful eCommerce business owners have separate software platforms for:
- Inventory management
- Email marketing
- Point-of-sale systems
And this doesn’t even take into consideration your sales channels! On top of managing all these platforms, you need to stay on top of sales from Amazon, eBay, Etsy, and any brick-and-mortar online portals.
It’s enough to make you want to crawl into the fetal position under your desk. Thankfully, many modern inventory management solutions like SkuVault facilitate integration with platforms across the spectrum of business functions.
Whether that’s Quickbooks for accounting, Shopify for point-of-sale, or Salesforce for your CRM, SkuVault integrates with them all.
That means you can have one single source of truth that not only shows you all your essential business data but communicates that data across all your mission-critical platforms.
13. Implement An Intelligent Picking Strategy
We’ve said it many times on our blog, but time in a warehouse is measured in seconds, not minutes. Increasing your profitability often means picking products from your shelves faster and more accurately.
This is why we recommend implementing an intelligent picking strategy that’s a bit more thought out than just printing out a piece of paper and wandering the warehouse aimlessly.
There’s the classic wave picking strategy, which involves planning each day’s orders in advance and batching them by certain criteria. These batches are then released in “waves” that all employees work on simultaneously until the job is done.
However, we’ve developed an even better way forward: Hyper Picking.
Hyper Picking is a digital form of picking similar to wave picking. However, Hyper Picking utilizes an intelligent location system and filters from wave picking sessions to create the most efficient pick route possible.
Managers can automate picking sessions by filtering the highest-priority orders. If you use physical bins, Hyper Picking even allows the option of picking based on the capacity of bins in a cart.
Filters are especially helpful during Hyper Picking because they dramatically decrease fulfillment time. Managers can assign filters to specific employees and immediately populate their pick lists instead of having to manually create them.
14. Create a Quality Control Checkpoint in Your Shipping Workflow
No inventory management technology or fancy processes trump the importance of good customer experiences. Happy customers equal more sales, full stop.
Quality control is that final safety checkpoint; the arbiter of positive customer experiences. At the end of the day, you (and your warehouse employees) are human. Mistakes will happen, incorrect products will be picked and packed, and items will get damaged.
However, if you can eliminate even just 10% of those unforced errors, it could be the difference between a loyal customer and a disgruntled detractor.
SkuVault comes with built-in quality assurance tools that help users take that extra step to avoid mis-picks and shipping defective products.
15. Physically Organize Your Warehouse Layout According to Demand
After performing an ABC analysis, you may be aghast to discover that your most in-demand and high-value products are the farthest away from your processing area.
How much time could you save if you reorganized your warehouse layout to keep your top sellers within arms’ length of where product is processed and shipped?
Further, if you notice trends of customers bundling SKUs as add-ons (DSLR cameras and SD cards, for example), consider orienting your warehouse to keep those products in close proximity.
What is Ecommerce Inventory Management?
Simply put, ecommerce inventory management is the discipline of measuring the amount, location, pricing, and mix of products available from your business.
However, this is just a baseline. Intelligent inventory management does a lot more, such as:
- Help coordinate the delicate balance of supply, demand, and communication with suppliers and end-users
- Give visibility into what products are overstocked, in stock, understocked, and out of stock
- Calculate per-pallet revenue potential
- Analyze and visualize purchasing trends, customer demand, and seasonal variables, allowing you to make intelligent business decisions to maximize revenue
The bottom line is that intelligent inventory management is an essential skill in today’s internet age just like content marketing, lead generation, or SEO.
Managing your inventory properly h trickles into every part of your business. Neglecting this crucial area leaves a lot of money on the table and risks infecting other, seemingly unrelated, aspects of your organization.
Why Should You Care About Ecommerce Inventory Management?
It’s important to have a firm grasp of why intelligent inventory management is important. Without awareness of the risks and rewards involved, you’ll quickly fall into complacency.
Or worse, you’ll do inventory management because “that’s what you’re supposed to do.” While that’s true, having a rock-solid vision for good inventory management will lead to far more success.
Consider the following implications of inventory management. As you read them, do a mental self-assessment of where your business stands in each of these areas.
Good Inventory Management Creates Positive Customer Relations
You don’t need a Harvard MBA to know the customer is king. Fixing anything that sabotages a positive buying experience needs to be a top priority.
How many of the following frustrations have you experienced shopping for things online?
- See an item advertised as in stock when it’s really not
- Inconsistent or outright false shipping expectations
- Excessively long shipping lead times
- Or, worst of all, shipped the wrong product
For better or worse, Amazon has trained the modern consumer to expect things in two days or less with laser-specific shipping expectations.
All it takes is one negative or disappointing experience for customers to bounce off your website and start researching competitors.
On the contrary, a positive buying experience with prompt shipping timelines and clear expectations is much more likely to result in delighted customers. This leads to repeat business and word-of-mouth advocacy — two things you can’t put a price on.
Good Inventory Management Means Precise Inventory Knowledge
A consistent refrain we hear from struggling ecommerce business owners is, “I just don’t know what I have in my warehouse.”
Whether it’s because of an insufficient system, inattention to detail, or some other extenuating factor, a staggering amount of businesses are blind to their inventory.
Imagine how anxiety-inducing it would be to receive daily orders and be unsure as to whether or not you can fulfill them.
Or, if you can fulfill them, imagine the stress of trying to find them amid shelves of overflowing and disorganized products.
For many of you, no imagination is necessary — I’m describing your daily reality. Don’t worry, later in this post, I’ll go over some practical solutions to solve these issues.
Perhaps you’ve gotten away with a hand-written or some other manual system thus far. Maybe you’re even one of those gifted business owners who can keep track of everything in their head.
But if you want to scale your business in any capacity — whether it’s to sell more product, increase your product variety, or develop strategic growth partnerships with other brands — inventory management will grow ten-fold in complexity.
Simply put, without a robust ecommerce inventory management platform, managing multiple warehouses, more employees, and more orders will be an absolute nightmare.
Intelligent inventory management welcomes growth. SkuVault exists to help business owners manage multiple streams of inventory information in one concise, easy-to-use platform.
That way, when it comes time to grow, you’re prepared to handle more channels, employees, and orders because you’ve got a system that can sustain it. Nothing changes from a process standpoint.
We’ll talk more about the power of electronic inventory management solutions later. For now, just know that precise visibility into inventory information is essential for maximizing revenue and a requisite first step for growth.
Good Inventory Management Maximizes Revenue Potential
If you were to do a Google search on how to make more money as an ecommerce business owner, you’d likely find articles on marketing, building a sales team, SEO, lead generation, and product development.
Articles on optimizing your warehouse likely wouldn’t even be on Google’s first results page.
This is unfortunate because intelligent inventory management can be a powerful revenue-generating tool. Not only that, but streamlining your inventory management processes can plug up a lot of leaks in your fiscal boat that you may not have even known about.
An Inventory Management System (IMS) like SkuVault offers things like predictive revenue growth based on historical factors. This allows you to make stocking decisions based on data, not hunches.
This also means you can avoid stock-outs and tied up revenue in dead stock (stock that takes up space in your warehouse and doesn’t sell).
This doesn’t even take into consideration the revenue that occurs from positive customer experiences, repeat purchases, and reduced shrinkage.
I hope I’ve convinced you of the importance of intelligent inventory management. Let’s now talk about some practical ways you can implement these benefits into your organization.
Why Implement Inventory Management Software?
We’ve barely scratched the surface of inventory management for ecommerce, but it’s likely that many reading this are already feeling overwhelmed.
The bottom line is that trying to manage anything more than a casual, side hustle ecommerce business without a dedicated IMS platform is a fool’s errand.
Let’s dive into some of the distinct benefits that a tool like SkuVault can provide your business.
Inventory Management Software Enables Rapid Growth
When you have a platform like SkuVault at the center of your inventory management strategy, the headache of scaling your product storage — and ultimately your business — is removed.
While warehouses may grow, product lines may expand, and more employees may be necessary, your inventory workflow stays the same.
SkuVault still aggregates all your channels, warehouse information, and purchasing analytics in one central place. No matter how much your organization scales, the fundamentals of replenishment and inventory management stay the same — and SkuVault keeps it simple.
Real-time Visibility Into All Your Channels
If I asked you about your 2020 sales performance of your flagship product on Amazon vs. brick-and-mortar stores, how quickly could you produce those figures? What about if you wanted to know your per-pallet revenue potential for website sales?
This level of granularity is not only possible but takes seconds to access with a tool like SkuVault. This also helps prevent dead stock by assigning inventory to specific channels as opposed to a haphazard restocking en masse.
Decreased Lead Time Through Intelligent Picklists and Pick Routes
All you need to do is watch a YouTube video on Amazon’s warehouse to understand that inventory management is measured against seconds, not minutes.
To say time is of the essence would be a gross understatement. That’s why SkuVault includes intelligent pick lists and pick routes.
When a customer places an order, SkuVault delivers detailed instructions to the picker. In addition to quantity information and product location, picklists show the most efficient route to gathering the products based on where they are in your warehouse.
These picklists are available in both digital and printable form, helping warehouse employees process orders as quickly as possible.
This decreases the lead time processing and shipping, and makes for a more efficient warehouse and much happier customers.
Data Tracking and Insights
If the sound of data analysis sounds soul-crushing to you, you’re not alone. But data that directly pertains to money going into your pocket? That’s exciting.
IMS platforms like SkuVault offer a wide range of at-a-glance analytics available on all your devices.
This means demand forecasting, inventory vs. demand curves, and replenishment schedules are only a few clicks away. Not only do these reports in SkuVault save a ton of headaches and grunt work, but they give you a clear path forward on how to safeguard against the future.
The analytics available will also help you know when to scale back your fulfillment and how to bypass costly roadblocks in every stage of the ecommerce lifecycle.
With SkuVault, you’ll learn to love data like never before.
Intelligent Replenishment Insights
SkuVault’s Replenishment Report feature expands on the principle of minimum viable stock, creating an automated replenishment schedule based on your unique business needs.
The report takes into consideration your desired par level, along with your customer’s purchasing habits and demand forecasts. The app can generate custom purchase orders for particular products and quantities, too.
Making the most out of each pallet has never been easier with SkuVault.
eCommerce inventory management is anything but simple. Thankfully, we’ve built SkuVault to do all the heavy lifting for you. That way, you can get back to high-level tasks like strategy, growth, and maximizing your revenue.
For more information on how SkuVault can help, contact our team today for a demo.