Ecommerce Stock Management: The essential comprehensive guide
Most of the time when people start a new ecommerce business, they aren’t really thinking about inventory management. They’re trying to break into the market, start a solid ad campaign, and get their name out there. Managing their ecommerce inventory can take a back seat to the flashier needs of their business. However, having your inventory where you need it when you need it is super important.
As an ecommerce business, the name of the game is moving product quickly. In general, the option is that by selling a lot of less expensive goods with a mixture of pricier items, is the best way to make a profit. In any case, you need to have enough inventory in stock to cover your forecasted customer demand at any given time.
Ecommerce stock management is something you need to get right. Most companies invest the majority of their capital into inventory. You need to buy the products, store them, and figure out how much it all will cost. Once that’s done, you’ll need to tweak and tune your inventory management system to fit your needs and operation.
Ecommerce inventory management can make or break an efficient operation.
A lot of times new businesses will start off managing inventory on paper spreadsheets, and in the good ol’ days, it wasn’t uncommon to find rows and rows of shelves dedicated to all the spreadsheets the business used as it grew. The issue is that with paper spreadsheets it’s difficult to scale them as the business grows. They can quickly become confusing and a huge headache to manage.
Because dealing with spreadsheets was so time-consuming, a lot of businesses would update them periodically or weekly. The problem with that is that mistakes made at the beginning of the week would possibly not be noticed until the end. Using this system makes your business more susceptible to confusion and costs more time to locate errors.
Maybe you’ve dealt with these problems, but hopefully, you haven’t. In any case, using an ecommerce inventory management software can eliminate these errors and even prevent them entirely. These ecommerce stock management software systems track the movement of stock in real-time which gives you the power of information and control over your business.
If there is an error, you’ll be able to identify how, where, and when it happened. Having this information will help you correct any mistakes and make any revisions you need to increase efficiency.
Get ecommerce inventory management started
Any great enterprise starts with a strong foundation. When it comes to ecommerce stock management, that starts with a stock keeping unit (SKU) system.
SKUs are usually alphanumeric codes that are placed onto the product for easy identification.
They can be customized to the finest detail so that you can know exactly what product is in what box and where. This really expedites searching and identifying any product on hand, on order, or on an invoice.
Another benefit of the SKU system is that theft is minimized. Often with large operations, missing inventory can go unnoticed because of the amount of product in the warehouse. When items are narrowed down into smaller categories with SKUs, it is much easier to notice when something is out of place or simply gone.
Here are a few things to keep in mind when you’re creating your SKU system:
- Make them simple and easy to understand: Your SKU system is how you can track relevant information about the product, so use simple abbreviations for color, size, style, and other variations.
- Prioritize characteristics by importance: Consider the best way to describe/categorize the product. You can start with broader features such as year/season and narrow the information down from their size, color, etc.
- Avoid letters and numbers that look alike: Using characters that look similar to others such as 8 and B can cause confusion. Keep it simple by making your SKU codes distinct. Doing so will help avoid confusion later on.
A reliable SKU system will show you product trends, so you can know what product style/variation is popular and selling. A straightforward and effective way to track these trends is by using the ABC system. A-list items are the best sellers with the highest consumption value. Next are B-list items which have moderate consumption, and lastly, you have C-list items which have low consumption values.
The ABC system helps you know which items are worth reordering and which are not. Ecommerce stock management software helps in this regard by providing accurate information about the products and sales trends. On the other hand, paper spreadsheets can only give a general idea of what is selling well and what isn’t.
Using that information with the Pareto principle which says 80% of sales comes from 20% of the items can help you quickly identify what your best sellers are and where the majority of profit is coming from. Once you’ve done that, you can make adjustments to your ecommerce stock management in order keep the right inventory stocked. Keep the following in mind:
- As bestsellers, A-list items need more attention through inventory management and sales predictions. Making sure you have regular reorder points and avoiding out of stock situations should be a high priority.
- Don’t neglect C-list items. If you stock too many of these, you’ll lose money on storage/upkeep. A good rule of thumb is to keep only 1 or 2 of these items. Only reorder once a purchase has been made.
- Right between these two is B-list items. You’ll need to play these by ear. They can quickly switch from fast to slow sellers.
Keep in mind the above is more of a guideline than a rule. Don’t take these as definite. A significant factor of the ABC rule to consider is a profit margin. Often A-list items have a smaller margin but sell quickly, while C-list items sell slowly with a much greater margin.
Some of your customers will require both, so you have to give both attention. If you have one without the other, you can send customers to your competition who has the selection the customer is looking for.
Once you’ve figured out which items belong where within the ABC rule, you’ll want to start optimizing your inventory upkeep costs. The core idea is the have just enough inventory to have when you need. This will in turn, help minimize upkeep costs.
These costs include:
- Storage costs: renting the space to store goods and covering personnel and utilities.
- Service costs: insurance, taxes, and the price for inventory management software.
- Shrinkage: any loss of inventory after you’ve purchased it and before you’ve sold it. Damages during transportation can cause shrinkage, as well as clerical errors, theft, and more.
Optimizing inventory upkeep will reduce costs and leave more money available for business growth.
Ecommerce inventory forecasting: it’s not guesswork
If you want to have the right amount of inventory right when you need it, you have to make reliable, educated predictions before you order/reorder. Check out your products’ sales trends. Are there particular seasons where product demand spikes or falls? How long is that season? Are there any recurring indicators for trend spikes? You need to ask these great questions before setting prediction parameters. Also be sure to review past orders and reports for recurring patterns.
A well-known formula for determining order quantity is the Economic Order Quantity (EOQ). It helps to reduce costs while meeting demand. For this formula, you’ll need to know your annual demand, order cost, and annual carrying cost per unit.
Order cost is how much money it takes to acquire stock, and carrying cost is primarily the price of storage and upkeep. You can use free online calculators to save time. The result is your EOQ.
Usually people like to err on the side of caution, however, when it comes to cost estimations, doing so can cause inaccurate and skewed results. These inflated estimates can lead you to make poor decisions in ordering/reordering inventory. It’s best to be as accurate as possible, in this case.
Once you’ve done the calculation for order quantity, you’ll still need to be ready for unforeseen circumstances by having Safety Stock. Safety stock is extra stock in case of a stock-out situation (running out of stock). Perhaps a supplier had an unexpected delay in transit. If so, it’s good to have a little extra stock to cover the gap between orders.
Be careful, though. It can be easy to overthink the strategy of safety stock; try to keep a solid head on your shoulders. Don’t let maybes drive you to order too much. Stay cool.
The EOQ determines how much to order. If you want to know when to reorder, figure out your Reorder Point (ROP). There are a few factors you need to know so that you can calculate that. The basic two are your lead time and estimated demand during said time. Again, there are free online calculators to help determine your ROP.
Your ROP is the point your inventory needs to fall to for you to reorder. For example, if you start with 500 items stocked, and you drop to 200 items in stock, that will be your reorder point (ROP).
How to keep track of multichannel sales
New retail businesses usually start by selling online or by opening a brick and mortar store, not both. As the business grows, the company will want to look into multi-channel sales. Multichannel sales are essentially selling anyway you can but is primarily selling in stores and multiple places online. Regardless of where your business starts, tapping into the Amazon and eBay sales platforms is a solid way to go. Selling on popular online platforms helps to build brand awareness and to increase sales.
When your business starts to use multiple sales channels, one of the biggest problems you’ll run into is synchronizing and tracking inventory across all of your sales platforms.
Ecommerce stock management software is your solution. It will be your central hub for maintaining order in your business. Update the information using your software, and the system will push that information to all of your sales platforms. This way you won’t sell out a product, and you can track inventory movement anywhere.
Using the software will help manage inventory quantities and will also keep track of all of your orders. Because ecommerce inventory management software track and synchronizes all of the orders, you can keep all of your inventory in one location. There’s no need to set items apart for each different sales platform.
You won’t be able to sell out a product for anyone of your sales platforms because all of the inventory is managed by your central hub: your ecommerce inventory management software.
As your software manages your inventory, you’ll begin to reach your predetermined ROPs. Now, instead of manually drafting emails to your suppliers with SKUs and quantities, let your inventory management software automatically draft the reorder documents for you. Once the ROP is reached, the software will draft a reorder email with all the necessary information. All you need to do is spot-check the reorder for accuracy and send it to your supplier.
Ecommerce stock management software versus a default platform system
It’s worth noting that when you sell on some online platforms, there may be a built-in inventory system. These are usually focused on selling the products. For example, if you use the eBay platform, you can create listing templates for how you want to sell your items. So, when you sell multiple products using eBay’s auction-style listing, they will look uniform in their presentation.
If you use Amazon’s platform, you can expect tools such as a “Low Price Match” feature which will help you match current prices for the same items on Amazon.
These large online sales platforms can offer a lot of time-saving tools such as 3PL (3rd Party Logistics).
3PL means you’ll not only be able to sell your product through their platform, but also let them store and manage any inventory you sell through them. Instead of storing all of your inventory in your own facility, you can have your supplier send a portion of the product to the online platform’s facility. They can also set ROP alerts for you when it’s time to reorder.
The online platform will handle all of the storage and shipping processes for you but at a cost. Be sure to get prices and estimates before using this tool.
Some online platforms will even store and ship your product being sold through other online platforms. It’s a good way for them to still get a piece of the logistics/shipping action. 3PL is a great option for businesses that are just getting started and don’t have the time or money to invest and fine-tune an ecommerce inventory management software. If you let a 3PL company handle storage, shipping, etc., you can focus more on brand development and sales.
However, you may want to review 3PL costs versus the cost doing your own inventory management once your business gets going. Doing it yourself with the appropriate software can save you a good chunk of money.
If you plan to sell internationally, 3PL is an excellent way to navigate the red tape of international sales as they will know how to deal with customs, documentation, and international logistics.
When you sell internationally, be sure to look into taxes. Taxes can be very confusing and very different from one country to another. It is important to be careful though, as you can get stuck with the tax bill, so you’ll want to issue disclaimers to international customers about who will pay them. Everyone will need to be on the same page which will help customer loyalty when they see you have your bases covered and run a tight ship.
When your business begins to gain traction and sell through stock, you’ll need a good way to measure your sales in relation to your inventory.
Average inventory value
A good way to do this is to use your average inventory value over a period of time as a standard. A good place to start is over a 1-year period. You can use shorter time periods, but it’s good to include seasonal sales into the measurement period.
To find out your average inventory value, add the value of each month’s inventory together and then divide by 12. Now you know where your business trends in inventory value. As sales increase, you should see this number rise.
One of the best ways to judge progress is by calculating your inventory turnover. To do this for a 1-year period, take your yearly cost of goods and divide by your average inventory value. For example, if your average inventory value is $950 and your annual cost of goods is $9,500, then you will divide 9,500 by 950. (9,500 / 950 = 10) Now you know that you’ve replenished your inventory ten times that year.
The higher your inventory turnover rate is, the better. If you’re turning over your inventory well, then you’ve figured out how to manage inventory effectively. But always keep an eye out for improvement. If you have a very low inventory turnover rate, then you’ll need to rethink some strategies.
If you use ecommerce inventory management software, it can generate sales reports that will give you the information you need to make these calculations.
Another easy way to know if your business is making progress is by figuring out your inventory turnover rate. Figure out how many days it takes to sell your inventory one time. We’ll use the same figures from above.
Take your average inventory value and divide it by the yearly cost of goods. Then multiply that number by 365, days of the year.
(950 / 9500) x 365 = 36.5
Now you know it takes 36.5 days to sell entirely through your average inventory one time.
Knowing this helps makes sure you know how much inventory to keep on hand at any given time. If you’re taking too long to sell through your inventory, you may have too many C-list times stocked. However, if it’s high, make sure you’re stocking enough inventory to keep up with demand.
Another good way to judge success is by knowing your profit margins. Depending on the nature of your business, the optimal profit margin will vary, but the idea is simple. Your profit margin is your cost of goods subtracted from your profit. Once you do that, you’ll want to figure out what percent of return on investment you’re earning. Remember to include carrying costs into the cost of goods because you have to store your product.
Let’s say you sell $15,000 of product in a year. Your yearly inventory cost was $11,000, and it cost $1000 to store it. The equation would look like this:
(15,000 – 12000) / 12000 x %100 = %33. That’s a %33 profit margin.
Keeping track of that margin is a great way to keep tabs on the status of your business’ profitability.
An inventory write-off is stock that has no value. Write-offs are caused by theft, lost goods, damaged/unsellable goods, obsolete goods, and administrative errors. Unfortunately, there is no way to eliminate write-offs, but you should try your best to minimize them with efficiency and order. If a pallet of plates you’re going to sell falls over in the warehouse, figure out why and prevent it from happening again.
If the number or cost of write-offs becomes too high, you may want to audit the area of the company that’s struggling to eliminate the loss of goods and money. The number of write-offs will vary month by month but should never get out of control.
Earlier we used carrying costs in some of our calculations. Now we’re going to go more in-depth and explain everything that carrying costs include.
- Capital inventory cost – The amount of money used to purchase inventory
- Storage cost – The amount spent on storage facilities and upkeep
- Inventory management cost – This can be any cost tied directly to your inventory such as insurance, worker salary, etc.
- Inventory risk cost – Anything can happen such as lost items, unsellable goods, and so on. It’s good to be prepared.
A good rule of thumb is to make sure your total carrying cost is about %25 of your inventory value.
Order fulfillment time
Order fulfillment time is basically how long it takes from the time the sale is made to when the customer receives it.
Keeping track of this will help you know how efficient your supply chain is. Fulfillment time has a huge impact on customer loyalty and satisfaction, so you’ll want to be as quick and effective as possible.
At the end of the day: Global business has taken off to new heights in this day and age, with huge opportunities globally. Someone in Taiwan can order something from the U.S. and expect their product to arrive within a week while they receive location updates about their product. I know because I’ve done it and loved it.
Whether you’re just beginning a new ecommerce business or trying to fine-tune and tweak an existing one, the world of ecommerce is hugely competitive. Making sure your inventory is well managed with this comprehensive guide is a crucial way to ensure you’re ahead of the game.
If you are ready to make the vital step of getting the right software, chat to our guru to find the right fit for your business.