In eCommerce, proper inventory planning and management is at the heart of all success. Your inventory is your lifeblood. You’ve paid money up front to carry products, and that money doesn’t come back until you’ve sold them. That means that ensuring that you are buying and storing the right products in the right quantities is critical.
Holding inventory ties up a lot of cash. It is estimated for every $1 sold by retailers, $1.43 is sitting in inventory. Still, the industry is growing and, as a result, companies are storing more products than ever. US-based warehousing has grown 6.8 percent in the last five years. Those products that sit on your shelves for months aren’t doing you any good. In fact, their purchase is limiting your ability to spend money on other areas of your business.
If you sell products that have an expiry date like food or makeup, inventory optimization and management are even more important. Dead stock that can’t be sold post-expiry date not only is a waste of the money that it took to purchase the product but also costs you money to dispose of.
Even products that don’t expire still cost you a lot in storage costs. Warehousing is often leased at variable cost, meaning that the cost can fluctuate based on the products that you store. When you overbuy products or stock products that won’t sell, the storage costs will go up.
Here are a few tips for optimizing your inventory management:
Categorizing Your Inventory
One of the most effective ways to improve your inventory management is to institute policies that help with the categorization of your inventory. By breaking down your inventory into categories, you can improve your warehousing and implement effective shipping practices.
Start by sorting your existing products into three different inventory categories:
- Productive inventory. Productive inventory is comprised of products that are moving quickly. These products should be stored in an area that is easily accessible and close to your staging area.
- Slow moving inventory. These are products that are selling, but not as rapidly. These products may require more analysis to determine if they are worth further investment.
- Dead Inventory. Dead inventory is comprised of products that aren’t moving at all or make very rare sales. These products are unlikely to be purchased again and may even require disposal to make room in storage.
When you have an idea of where all of your different products fit into this framework, you can better organize your warehousing to ensure that your fulfillment operations are effective. The most popular methodology is to keep your most popular products near your staging area.
Here’s an example:
To optimize your inventory and fulfillment practices, you have to have the data on hand to make the decisions that allow you to streamline your operations.
Implement First-In, First-Out
If you haven’t already, it is absolutely critical that you implement “first-in, first-out” as a standardized practice in your fulfillment and inventory management operations. This refers to ensuring that your oldest stock is always shipped first, not the newest stock. Obviously, this is most important when we are talking about perishable products or any product with an expiration date.
First-in, first-out is also important for non-perishable products as well. Over time, unsold items will have wear and tear from being jostled around in storage. The packaging and design can fade or change over time. You don’t want to end up with products that have been sitting in the back of storage for so long that they are unsellable.
Of course, if you are already working with a warehousing and fulfillment company, they should already practice first-in, first-out. If you aren’t sure, you should get confirmation.
Data-Backed Contingency Planning
Inventory management is tough. There are always going to be unforeseen situations that can make proper inventory management difficult. For instance, if you were to see an unexpected spike in sales for a particular product and incidentally oversell your stock, do you have a plan in place? What happens if you miscalculate the inventory of a particular product? What happens when a manufacturer runs out of a product while you still have a list of orders to fill?
These are the types of scenarios that seasoned eCommerce professionals are used to dealing with. The unexpected. The best thing that you can do for your business is to try to plan for these scenarios by implementing contingency plans for as many possible scenarios as you can.
Evaluate the risks of different events. For instance, a manufacturer discontinuing one of your most popular products unexpectedly presents a much larger risk to your business than a sudden slowdown in sales. To mitigate this risk, you should always have contingent suppliers ready to fill the gap. Identify the products and partnerships that are most vital to the ongoing success of your business and start there.
The Importance of Regular Inventory Auditing
Regular auditing of your inventory is necessary to have confidence in your operations and use data to make smart purchasing decisions. Most eCommerce companies rely on a combination of software solutions and warehouse reporting to know how much product that they have in stock. But, mistakes can be made. Larger eCommerce operations are more at risk than smaller companies and should institute policies to ensure the accuracy of their data and protect themselves against the risks we spoke about earlier. According to a study from GS1 US, retail inventories are accurate just 63 percent of the time.
A few steps that any company can take to improve their inventory auditing include:
Physical Inventory Auditing
The practice of physically auditing all of your inventory at once. If you’ve ever worked in retail, there is a good chance that you have been asked to help audit the stock within a store or storage facility at some point during your tenure. At least once per year, all eCommerce companies should to a full physical audit of their current inventory. Of course, this is disruptive to business and tedious, but it is impossible to make the right decisions if don’t have confidence in your inventory data. The only way to be certain of your data is to count your stock.
Spot checks are an excellent, less disruptive way to make sure that your data is accurate. Many eCommerce companies do inventory spot checks on a quarterly or bi-annual basis for their most popular items. A spot check is simply choosing a product, counting your stock, and comparing that number to what you have on file. Spot checks can be a great way to evaluate the accuracy of your data and effectiveness of your systems throughout the year without having to disrupt business for a full physical audit.
Some eCommerce companies opt for cycle counting instead of a full physical inventory audit. In cycle counting, rather than a full count at the end of the year, the process is spread throughout the year. On a daily, weekly, or monthly basis a different product is checked on a rotating schedule to ensure that the data is accurate. Higher value items can be checked several times throughout the year as mistakes in their data for these items present a larger risk to the business.
Accurate Demand Forecasting
Ultimately, effective inventory management relies on accurate demand predictions. You can’t know how much of an item you need to stock without having some idea of how many sales you can expect in the future. In some cases, accurate demand forecasting can be very difficult. In others, like seasonal items, a rise in demand can be reasonably predicted and prepared for.
There are many aspects of a business that affect the future sales of a given product. The trends within the market itself play a large role. The growth of your company also provides insight into future sales. But, there are many decisions that are made on a day-to-day basis that can result in fluctuating sales. For instance, something as small as deciding to list a product on your homepage can result in a sharp spike in sales. Promotions and discounts need to be coordinated with warehousing and inventory management staff.
Product advertising tools can give you a further boost. Giving your Product Marketing team access to inventory turnover rates and stock levels allows them to apply advertising pressure to the products that need it—things that are selling too slowly, or which are close to an expiry date.
Coupling your product advertising and inventory management makes sense. Why? Because you can focus on advertising products that have the biggest positive impact on the business as a whole, rather than just the products that are easiest to sell.
Companies that take this into account can expect their inventory management to be more efficient. Product advertising should take stock levels and turnover rates into account. At the very least, companies should open the lines of communication between the two departments—so that they can begin working together to find optimal inventory balance.
Today there are more tools than ever before to help eCommerce companies with demand forecasting and inventory turnover management. In fact, many choose to automate the process entirely as automation can provide more accurate results than trying to establish it by hand. Most companies use a combination of automated software solutions and traditional techniques to forecast the demand for their products.
Inventory Optimization is at the Heart of eCommerce Success
Ultimately, the success of any eCommerce company comes down to how effectively they can store, sell, and ship their products. The largest eCommerce company in the world, Amazon, places a lot of focus on streamlining their inventory management and warehousing practices. 79 percent of companies with high-performing supply chains grow faster than their industry average.
Effective inventory management and optimization helps eCommerce companies ship products more quickly, save money, and free up funds for investments in other areas of their business. Taking the time to refine your fulfillment and tracking practices can help your whole operation to run smoothly and be more effective. In addition, coordinating inventory clearance efforts with your marketing department can help you manage the flow of goods through your warehouse.
At Crealytics, our team of retail experts help companies break down the data silos between Inventory and Marketing, resulting in a smoother to path to inventory management and increased profitability.