You must learn how to manage inventory in order to build an ecommerce business that’s sustainable, profitable, and scalable. Ecommerce entrepreneurs face the difficult challenge of inventory management regardless of the products they sell, the size of their business, or their target audience.
Inventory management can be incredibly costly if you make the wrong decisions. However, the right decisions can be extremely profitable. In this article, we provide a quick guide to help E-commerce businesses in managing their inventory.
Managing Inventory in E-Commerce Poses Challenges
It is inevitable that ecommerce business owners will experience inventory management issues at some point or another. A good inventory management program distinguishes itself from an okay one by identifying and addressing these challenges ahead of time.
There are several inventory challenges an e-commerce business may face that can have an adverse impact on sales, profitability, and customer loyalty:
1. Excessive inventory & overselling
2. Manually-run management with insufficient scalability
3. Insufficient visibility over multiple channels and warehouses
4. Insufficient insight
How To Get Started
1. Determine the Basic Demand for Products in a Category
For ecommerce shop owners starting up their first online store, understanding how demand fluctuates over time is the first step to better inventory management. Google Trends can be used for this purpose to see how interest in a particular product or its search demand has changed over the past year or even over the past five years.
As another option, you can use Google Analytics to determine which of your audience’s most visited pages and products and how long they spent on those pages. In addition to informing you what type of products your customers prefer, this information can help you determine how popular each product is and which ones need more buffer stock.
2. Analyze Past Sales to Predict Future Demand
An important part of optimizing inventory management is predicting future demand and keeping in mind the seasonal demand within it. Analyzing sales from the past can help you understand when interest and demand were most strong. Look for opportunities to sell your products all year long, including holidays and special events, and make sure you prepare for heightened demand.
To prevent running out of inventory during high demand periods, order and store inventory accordingly. You can refer to your Google Trends and Google Analytics analysis if you don’t have any past sales history.
3. Determine the Level of Minimal Viable Stock or the Initial Minimum Stock Level
In the event that you already have an ecommerce shop running, you should also make sure that you set a minimum viable stock level for each item. Keep in mind that you want to determine what is the minimum level of inventory you can maintain to satisfy demand and avoid delayed fulfillment.
It is important to understand both the demand and the time that is required to replace out-of-stock inventory in order to determine your number. Your manufacturer or wholesaler will place a new order when the quantity dips below your designated number. The exercise can serve as a starting point. If demand from consumers increases or decreases over time, do not be afraid to adjust this number.
4. Use ABC Analysis to Prioritize Products
- A – It is a high-value product with low sales frequency. Sports equipment and workout gear are good examples.
- B – It is a medium-value product with moderate sales frequency. Examples include jewelry and electronics.
- C – Products that are low in value but go on sale frequently. Food and clothing are examples.
The ABC Analysis is derived from the Pareto Principle, according to which 80% of your sales are derived from 20% of your customers. The majority of your revenue comes from these customers, who buy category A products. Consequently, losing these customers leaves your bottom line worse off than losing B and C customers.
An inventory management plan should have the goal of establishing which products have the greatest need for your attention. For instance, it may be necessary to order A category products rather than C category products since the amount you have on hand is much smaller than A category products.
5. Be Prepared for Seasonality
Make sure you’re prepared if you possess an ecommerce store that will benefit from a particular time of year or shopping season — such as the holidays. During slow months, keep your inventory low, but don’t postpone ramping up your supply too long. Promote special offers near the end of a high season so that most of the inventory is sold prior to a holiday.
You should keep your operating costs as low as possible for the duration of slow business, and during this time you should prepare all the components to ensure a smooth and successful sales season – components such as partners, tools, storage area, human resources, etc.
6. Make Use of Inventory Management Software
Today, inventory management software is really necessary for building and scaling an ecommerce business. As previously mentioned, it is possible to carry out some of the tips outlined above manually, but as you can see, it will make scaling your business much more difficult.
A good inventory management system will help you manage inventory, ensure that you’re never overstocking or understocking, sync inventory tracking data across all platforms, gather information in real time, and provide you with valuable insights to boost sales, develop your ecommerce business, and take advantage of opportunities.
Wrapping Up
-Take a Moment to Consider your Inventory Management Plan
Think about how you can improve inventory management in your ecommerce business before you implement any changes. For example, what practices do you have in place for managing inventory? How have you dealt with challenges?
If you could share learnings with other small business owners, what would you share with them?
How you respond to these questions will impact how your business operates, how you manage inventory, and ultimately how you meet your customers’ needs.
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