Optimizing Inventory Management in Your E-commerce Business

For e-commerce businesses, it’s not enough to just sell great products. Every part of the customer experience matters. 

That includes inventory management. Stockouts, late deliveries, and orders riddled with errors can doom e-commerce businesses with quality products and user-friendly online stores. However, mastering inventory management isn’t easy.

Here are some best practices to follow if you’re hoping to uplevel your inventory management strategy.

1. Become Adept at Inventory Forecasting

Companies that have optimized their inventory management practices never have too much or too little stock on hand at any one time. This ability to strike this balance is usually a sign the company employs sound demand forecasting practices. 

Inventory forecasting attempts to determine the amount of stock your company will need to maintain in its facilities to satisfy customer demand using variables such as changing consumer tastes, historical sales data, and macroeconomic trends. There are four primary inventory forecasting methods:

  • Graphical Forecasting: Creating a line graph using historical sales data to analyze periods of rising and falling demand. 
  • Qualitative Forecasting: Using data from sources such as customer interviews, focus groups, and demographic data to model future customer demand. 
  • Trend Forecasting: Modeling future patterns of demand using historical sales data while excluding outlier data points.
  • Quantitative Forecasting: Using historical sales data to project future sales. 

Accurate forecasts will reduce stockouts and spoilage while enabling your company to save on storage costs. 

2. Maintain a Safety Stock

Your company can spend years compiling sales data and closely monitoring customer trends, but there’s still no way of predicting every spike in customer demand. 

Trends can emerge quickly. Products that were at one time considered out of date can become popular again as consumers seek them out for the sake of nostalgia. In any case, your company needs to be prepared by having some extra stock on hand if even your most optimistic forecast fails to predict an explosion in demand. 

Safety stock offers your company protection against stockouts caused by excessive demand, supplier delays, and other factors. But, as crucial as it is to keep extra items in storage, it can take up space from other items and balloon your storage costs. So, what is the right amount of additional stock to keep in storage?

Supply chain professionals use several complex formulas to decide on the optimal amount of inventory to hold in stock at all times. That said, you can get a rough idea of how much your company has ready by multiplying the average quantity of a product sold each day by the number of days of cushion you hope to create for your company. For instance, if your company sells 200 units of a product each day and wants to have a week’s worth in storage all the time, you would need to have 1,400 units of the product in your warehouse facility at all times. 

3. Routinely Monitor Inventory Levels

Until recently, only a business and its warehouse vendor had visibility into inventory levels. Now, integration between e-commerce platforms and warehouse management systems offer everyone insight into which items are available and which aren’t.

This only increases the importance of always accurately reporting your inventory levels. Mismatches between the reported and actual levels can damage the credibility of your brand. Cycle counts can minimize discrepancies between recorded inventory levels and actual inventory levels by manually counting every unit. 

During cycle counts, warehouse employees physically count items in a facility and adjust records accordingly. Rather than attempting to count every item in the facility at one time, warehouse operators select sections of inventory in advance several times each year. At companies where inventory moves quickly, cycle counts may occur as often as once a day. 

When deciding how to operate a cycle counting program, companies need to assess the number of items included in a count, the number of employees available to perform it, and how often counts should take place. After performing the count and adjusting their records, warehouse managers should assess the degree to which records differed from the actual amounts and use their findings to inform future improvements to their inventory management practices. 

4. Explore Dropshipping

If you’ve recently launched an e-commerce business, it’s important to have an eye on growing sales without breaking the bank. Dropshipping is a popular option for many new business owners. 

With dropshipping, companies are able to ship products to customers without needing to store iventory in a warehouse facility. Instead, after a customer places an order, the business forwards the order to a supplier. The supplier takes it from there by producing the item or retrieving it from storage and then shipping it to the customer. 

In addition to saving companies money by avoiding storage costs, dropshipping also makes it possible for companies to scale by taking on new orders from customers around the world without needing to increase the amount of inventory stored at any one time. 

There are, however, some downsides to dropshipping. By completely outsourcing production and fulfillment, your company relinquishes the ability to monitor the quality of products being shipped to your customers. But, if your business is just getting started, dropshipping is still an option worth researching. 

5. Move Items With Low Demand Through Kitting

Every business has some items they can barely keep on the shelves and others where it seems they couldn’t pay their customers to take them. 

Customer tastes can change quickly. Items that were once the hottest on the market can seemingly become duds overnight. Unfortunately, if your company ordered large quantities of an item when it was popular, you still need to pay ongoing storage costs if demand dries up before all of the units have been sold. 

Kitting is a potential solution for companies with significant quantities of dead stock or slow moving items stored in their warehouse facilities. Kitting involves grouping related products together in a kit before shipping to customers. Companies can include slow moving items in kits with in-demand items. It’s a simple way of freeing up space in an e-commerce company’s warehouse facility while reducing excessive storage costs. 

6. Know Your Reorder Points

Stockouts are always problematic, no matter the situation. A stockout is typically a missed sales opportunity and can permanently damage the relationship between a business and a customer. 

To avoid stockouts, e-commerce companies need to know when to reorder items from their suppliers. This reorder point, or the inventory level at which a business places an order for new items, depending on the company and the item in question. That said, there is a simple formula companies can use to calculate the reorder point for any item in their product line. The inputs for this formula are:

  • Daily Sales Velocity: The average quantity of the individual product sold each day.
  • Lead Time: The amount of time it takes for the supplier to ship the items to your warehouse facility.
  • Safety Stock: The amount of extra stock you keep in storage to avoid stockouts during unforeseen spikes in demand. 

Once you know each of the variables included in the formula, it’s simply a matter of multiplying the daily sales velocity by the lead time and then adding the safety stock. After calculating your reorder point, you can use it to assess inventory levels and decide when it’s time to place a new order.

Get Started Today

Launching an e-commerce business can be challenging. There are a countless number of decisions that need to be made daily, and it can be difficult to prioritize. Make sure nailing inventory management always remains at the top of your to-do list, regardless of whether your company is brand new or has been in business for decades.

Guest article written by: William Powell is a writer and educator who likes to cover marketing and other business industries such as fintech, remote notary services, ecommerce fulfillment services, etc. He enjoys learning about the latest business trends and analyzing how global events impact domestic and international economies.