Inventory management for electronics best practices guide
According to a study published in 2020, the consumer electronics market has a staggering value of 1 trillion dollars worldwide.
The study projected that this number would increase by 7% between 2020 and 2026. In short, electronics manufacturers and suppliers aren’t going anywhere, despite the implications of a global pandemic.
Electronic components are at the core of almost all our daily activities. They power the smartphones we use to connect to the world, the computers we do business on, and the TVs we use to unwind at the end of a long day. You’re reading this post on an electronic device, and dozens likely surround you at this very moment.
It’s incredible to think that what is now a myriad of life-enhancing devices once started as just capacitors, microchips, and LED components. And those components were manufactured, shipped, stored, assembled, and disseminated to end-users with a logistical chain so complex it’d make your head spin.
The COVID-19 pandemic has arguably hit the consumer electronics industry the hardest. Disruptions in supply chain and logistics, restrictions on trade, and shortage of raw materials have thrown a wrench into the electronics industry.
Electronics manufacturers and distributors are more aware now than ever of the importance of taking control of their logistics chain and mitigating risk as much as possible.
In this post, we’ll survey some of the biggest challenges faced by electronics distributors and inventory management techniques used to overcome them. We’ll also discuss some actionable strategies you can use to future-proof your electronics distribution operation.
Source: Global Market Insights
Types of electronics distributors
Roughly speaking, most electronics ecommerce operations fall into two buckets, with some potential overlap in between for larger organizations. The first is component distributors, and the second is consumer electronics distributors. Let’s review the differences between the two.
Component distributors
Component distributors are organizations that order and carry large amounts of various electronic components. These components are the raw materials used in the assembly of electronic devices, and therefore must be sent to assembly line facilities or other smaller organizations.
Examples of component distributors are Mouser Electronics and Jameco Electronics. These companies often order components in bulk in order and enjoy the benefits of manufacturer discounts. As such, these organizations require a large warehouse space and a robust inventory management system.
These components are ordered by and shipped to assembly line facilities owned by consumer electronics companies. Here, assembly organizations build them into the final product for the end-user.
Other clients include university electronics labs, small businesses that do in-house electronics assembly, or even large-scale medical device assembly plants.
Consumer electronics distributors
Consumer electronics distributors are primarily concerned with sending a finished product to an end-user. These companies operate mostly in the B2C space and include industry behemoths like Sony, LG, and Samsung.
Included in this category is any ecommerce business that utilizes drop shipping or the JIT (just-in-time) fulfillment strategy of electronic devices. These third-party distributors often receive finished products from various brands and sell them through an online marketplace.
Examples of large-scale third-party electronics distributors are:
- BestBuy.com
- B&H photo
- GameStop
- And even Amazon.com
Smaller third-party electronics distributors are companies like Micparts, a company specializing in selling components that end-users use to assemble studio-quality microphones at a fraction of the retail cost.
The overlapping complexity of electronics distribution
I mentioned at the beginning of this section that there’s some overlap between the categories mentioned above. For example, large-scale companies like Sony (valued at $94.3 billion as of Q4 2020) likely keep their components acquisition, assembly, and distribution all in-house.
Managing the entire process in-house cuts costs, allows for better quality control, and affords these companies tighter protection of R&D information.
Best Buy is another example of overlap. They don’t do any assembling (versus a company like Dell), but they assume all the risks and carrying costs of storing finished products. They purchase in bulk and disseminate products to end-users in over 1,200 stores worldwide and online.
Unique challenges faced by electronics distributors
Inventory management in the electronics space is not easy. The industry’s high market capitalization comes at an equally high cost of doing business. After all, if it were simple, we’d all be doing it and grabbing a slice of that sweet $1 trillion pie.
But don’t despair. Whether you’re a seasoned electronics distributor reeling from all of 2020’s curveballs or an emerging enterprise, I’ll offer some actionable strategies for overcoming these challenges later in the post.
Electronics have fragile materials
One of the most apparent challenges to successful inventory management in the electronics space is the fragility of the materials.
If you own an ecommerce store for home decor items, your curtains won’t stop working if you expose them to high temperatures. Your rugs won’t break if someone drops them. A slight electrical current won’t render your farmhouse armoire useless.
Electronics distributors must be hyper-vigilant about these very concerns. The fragile qualities of components trickle down into some other challenges as well, as we’ll explore later throughout this post.
Electronics have stricter quality control requirements
Dovetailing from the previous point is the necessity for electronics manufacturers and distributors to have top-shelf quality control requirements in place.
Think about it: more fragile components mean a higher likelihood of DOA (dead on arrival) shipments.
This means more returns, potential refunds, and poor customer experiences; all things that can sink an otherwise successful ecommerce operation.
Electronics have longer and more complicated product lifecycles
Airtight logistics are non-negotiable with electronics distribution, precisely because of the long sales lifecycle. Consider the following example:
AMD is a leading brand that manufactures high-end computer processors. Let’s say once AMD completes its latest and greatest processor, Dell orders a couple thousand to use in their newest line of gaming PCs.
Assembled and ready to ship, Best Buy places a large order for the new Dell gaming PC to showcase in their stores in time for the holidays.
Once received and disseminated to their global warehouses, Best Buy coordinates with individual stores to stock the product appropriately.
Just think of how many opportunities for error there are in this logistical chain.
Think of the journey that AMD processor takes from the moment it’s finished in the lab to the moment the proud new PC owner boots up their Christmas present for the first time.
The margin for error in the electronics industry is razor-thin, and quality assurance has to be a top priority at each particular milestone.
Electronics are prone to theft
According to a Cisco-Eagle study published in 2019, freight yards and warehouses are primary theft threat points, where 87% of losses occur. In the U.S. alone, product loss during transit is $10 billion annually.
These numbers are likely even higher in the electronics distribution vertical.
You don’t need to be a behavioral psychologist to understand that when you carry a high-value product that can fit in your pocket, you’re going to be more susceptible to theft.
Inventory that organizations can’t account for is called “shrinkage,” and employee theft is responsible for 42.7% of all shrinkage.
It’s incredibly tempting in consumer electronics distribution centers where boxes full of the hottest new smartphone are within arm’s length. Not to mention that employees can quickly flip these products for cash, unlike most raw components.
You don’t often see people hocking capacitors on Facebook marketplace, but a Samsung Galaxy Note? That’ll net a tidy profit.
Later in this post, we’ll highlight some practical ways to build a culture of integrity in your warehouse staff and loss prevention.
However, until we have amoral robots working in warehouses, shrinkage will always be a problem.
Electronics are more dependent upon international forces
Lastly, the challenge that’s likely on everyone’s mind in 2023 is just how logistically dependent electronics are on overseas markets. For example, China leads the global electronics sector with Hong Kong as a close second. Despite America’s technological development, the U.S. trails in third behind these two countries.
Even before COVID-19, the trillion-dollar electronics supply chain was under stress.
Tariff wars between the US and China caused several large-scale electronics manufacturers like Nintendo and GoPro to relocate their manufacturing operations from China to Southeast Asia.
Of course, this was nothing compared to the impact of the coronavirus pandemic. According to a survey conducted by IPC, an advocacy group in the electronics industry, 69% of respondents said they received warnings from their suppliers about shipment delays.
These delays ranged from three to six weeks. The domino effect of these delays proved detrimental to many organizations’ bottom lines.
For example, Sony had to shut down manufacturing plants in China and the UK.
Not to paint a bleak picture, but these are factors that every electronics distributor must reconcile and do their best to mitigate.
You can’t control the weather or global pandemics, but there are some actionable things you can do to help lessen the impact of the challenges mentioned above.
Strategies and techniques for managing electronics inventory
The following are proven strategies to combat some of the unique challenges faced by electronics ecommerce operations.
Map out your supply chain
Large-scale organizations likely have entire teams dedicated to auditing and optimizing logistical chains, but if you’re a smaller business in the electronics space, you may have overlooked this.
Take thorough stock of the supply chain in the entire lifecycle of your product. This may or may not include:
- Component manufacturing
- Assembly
- Transportation
- Dissemination to end-users
Write out exactly how long each of these steps takes, and you’ll quickly notice areas of opportunity. If you order components from a single manufacturer, for example, consider diversifying your purchasing patterns to offset the potential of delays.
Develop a multichannel strategy
Ecommerce stock is like an investment portfolio. You don’t want to have all your assets in a single volatile stock.
In addition to diversifying your manufacturing purchase patterns, diversify your storefronts as well. This means having multiple channels where your customers can purchase: brick-and-mortar, third-party ecommerce sites, and your website.
When COVID-19 hit America, stores like Best Buy shut down temporarily, with many employees either out sick or quarantining. This likely meant lots of deadstock, delays, and dips in revenue. A robust multichannel strategy (and an IMS platform that can help you manage each channel) is a great way to mitigate this.
Create a standardized reverse logistics procedure
Returns and refunds are a massive logistical challenge for electronics distributors. It’s key to create a standard operating procedure in the form of a flowchart or decision tree for electronics returns.
A returns standard operating procedure (SOP) is especially relevant for consumer electronics distributors, who will likely experience far more returns due to their selling to consumers.
Your SOP should include the following stages (or variations of the following stages):
- Ingest stage. Where do returns go in your warehouse once they’re returned? What does the queue look like for returns? Is any prioritization given to certain returns, or is it “first come, first serve”?
- Testing stage. Personnel must test electronics before the product is either sent back to the manufacturer or reintegrated into stock. Ensure you have a team (or dedicated personnel of some kind) to test units and a detailed procedure for what to do with DOA versus functional units.
- Refurbish stage. If a customer returns a product but, due to your business model or some extenuating circumstance, it can’t be reintegrated into your stock, it may need to be sent back to the manufacturer for refurbishment.
- Reintegration stage. If a unit is ingested correctly, fully functional, and able to be reintegrated into your stock, it’s crucial to account for that in your IMS platform or whatever database you’re using to manage stock levels.
Optimize your warehouse
Lots of benefits flow downstream from optimizing the physical layout of your warehouse. There are profitability benefits and loss prevention benefits. Let’s discuss each of these individually.
Optimizing your warehouse for profitability
Here are a few practical ways to optimize your electronics inventory management practices for maximum revenue:
- Conduct regular audits. Nobody likes audits, but they’re essential for a baseline of knowledge of inventory stock, shrinkage, and profit potential.
- Arrange and stock according to an ABC analysis. We’ve written extensively on the value of conducting an ABC analysis in this post. Here’s the gist: arrange your products in three categories based on their value to your organization and average customer demand. Then, prioritize stocking the high-value/high-demand products and physically arrange them in central locations within your warehouse.
- Utilize pick lists and efficient pick routes. Time is the enemy in this business. As soon as an order is received, SkuVault Core generates a scanner-friendly picklist that’s either printable or sent to the picker’s mobile device. In addition to this, the picklist includes the most efficient physical route within the warehouse for picking the individual products. That way, employees aren’t wandering back and forth inefficiently gathering stock for an order.
- Utilize just-in-time (JIT) fulfillment. JIT is a popular methodology for smaller organizations or those looking to save on carrying costs. For a deeper dive into the strategy, check out our post here. The basic idea is that products are fulfilled directly from the manufacturer when a customer places an order. This cuts out the middleman, eliminating carrying costs and the potential of dead stock. However, it comes with two significant trade-offs: lack of control over your logistics chain and being at the mercy of your manufacturer.
- Implement demand forecasting and analytics. As a general rule, any time you can make the future a little less uncertain, you’re going to succeed. Are you capturing historical demand data for your products? Are you able to drill down into each storefront and present metrics on that particular channel’s success? These are all things that are automatically captured and visualized when you invest in a robust IMS like SkuVault Core or Linnworks. That way, instead of spinning your wheels, you’re making data-driven decisions to increase profitability.
Optimizing your warehouse for loss prevention
As mentioned above, one of the biggest hits electronics distributors take on their budget reports is product shrinkage, which primarily originates with employee theft.
Here are some ways you can optimize your warehouse for loss prevention:
- Vet and hire employees thoroughly. “Hire slow and fire fast.” The adage has never been more relevant than in electronics inventory management. This may mean more thorough background checks, an intensive round of in-person interviews, or greater emphasis on referrals. The bottom line is that a bad hire is at the root of every instance of employee theft. Many qualities that lead someone to steal may be imperceptible. Still, electronics ecommerce businesses owe it to themselves and their fellow employees to be rigid and meticulous in the hiring process. Early detection of red flags can save a boatload in the long run.
- Limit access to high-value items. Much like the evidence lockers at police stations, warehouse managers should limit personnel access to high-ticket items. This may mean requiring a sign-in sheet, installing more security cameras and anti-theft devices in that area, or laying out high-value items in a highly visible spot in your warehouse.
- Defend the entrance and exit points. Stealing something is only half the battle. The thief then needs to “escape” the warehouse with the item in his or her possession. This means you’ll need to have a thorough understanding of the entrance and exits points in your facility and install anti-theft devices accordingly. You might even consider a security checkpoint with rotating personnel at each of these access points for an added layer of accountability.
- Prevent driver/employee collusion. According to a 2017 survey on theft in warehousing, 40% of respondent delivery drivers were propositioned to commit conspiracy. Oftentimes, other employees are well-aware of the threat and paid to keep quiet. Research has demonstrated that most collusion and theft occur between employees and outside actors, such as delivery drivers. It makes sense: the product is most vulnerable in the transition point between being checked out of the warehouse and transported to its final location. The Cisco-Eagle study recommends limiting employee/driver fraternization and closely monitoring the sealing, cargo count, and loading process.
- Create a culture of honesty and integrity. Theft is most often a symptom of a deeper problem in the culture of your organization. Misconduct often springs from disgruntled employees who are under-compensated and overworked or from a culture of dishonesty. Culture flows downhill from the leadership, so if employees see dishonest or unethical behaviors in their superiors, it will only encourage thievery. Make it a priority to emphasize a zero-tolerance policy on theft, ensure employee concerns are heard and addressed and make it easy and anonymous to report misconduct. Most importantly, ensure that your practices as a business owner or warehouse manager are ethical and by-the-book. Employees get their cues from the people on top.
Implement a comprehensive IMS system
I couldn’t dream of attempting to manually manage all of the moving parts required in a successful electronics operation by hand. Even with a spreadsheet or other non-dynamic medium, it sounds nearly impossible.
For electronics distributors — both at the B2B and B2C level — an IMS platform like SkuVault Core or Linnworks is a no-brainer. In addition to some of the benefits mentioned above, SkuVault Core offers electronics eCommerce businesses the following inventory management benefits:
- Multichannel integration for at-a-glance looks at your most profitable channels
- Inventory tracking within your warehouse, so no expensive components fall through the cracks.
- Intelligent replenish reports that generate purchase orders based on reorder points and customer demand.
- Integration with all third-party ecommerce tools so all your logistical apps can communicate a single source of truth.
Running an electronics distribution organization in the year of COVID is hard enough. Let SkuVault Core do the heavy lifting of inventory management so you can get back to making high-level business decisions in the name of profitability and sustainability.
