Inventory Management for E-Commerce
Inventory management is the set of activities involved in ensuring that items needed for the business to run are always available in optimal quantities. This means that there should neither be too much purchased nor too little, but just the amount required with adequate backup.
In this article, we will look: at 1) what is inventory management, 2) tips for managing inventory, 3) mistakes to avoid, and 4) selecting inventory management software.
WHAT IS INVENTORY MANAGEMENT?
Inventory management is the process of ordering, storing and utilization of the raw materials needed during manufacturing and the process of monitoring and controlling the final product that is ready for sale. This inventory is one of the company’s major assets and represents an investment that will not reap returns until the goods are finally sold. For this reason, inventory management is a serious concern for any business, whether it is small scale or large or whether it is an online store or a bricks-and-mortar setup.
Since there is a significant investment in the inventory itself as well as in storage, tracking and insurance of it, mismanaged inventories can cause substantial financial concerns and problems for the business. The ideal inventory management system should create a plan that ensures that there is neither an inventory surplus not a shortage. Companies can use several methods for inventory management such as just-in-time where the items are received as needed for production or materials requirement planning, which bases inventory orders directly on forecasts of sales in a particular period.
Importance of Inventory
As mentioned before, inventory is vital because it allows a business to have what it needs, at the right time in order to continue to do business. Companies will usually aim to minimize required investment in inventory while maintaining operations and controlling both waste and surplus. Inventory has many functions including:
- Providing Supply and Demand Balance: This includes ensuring that consumed items are replaced, and seasonal items are cleared out. For example, ensuring that Christmas related items remain in stock till the season ends and the remaining items liquidated through sales or special offers in the brief period that follows.
- Providing Safety Stock: Though the aim of inventory management is to ensure that there is no excess or shortage of required items, but a related function is also to ensure that safety stock or a buffer exists in case of any unexpected delays in new inventory or more sales than a forecast.
- Providing Geographical Specialization: A company can make use of the particular aspects of a location when it comes to inventory management. Certain areas may have less energy costs or costs of labor and transportation. While others may have a particular material available more readily than others.
TIPS FOR MANAGING INVENTORY
As ways of doing business and the channels to reach the customer evolve, so too do the challenges associated with managing inventory. Especially for e-commerce stores, the need to juggle customers across multiple channels and provide service and updated websites 24 hours a day is a constant challenge. Increasingly businesses feel the need to optimize inventory in order to ensure that no critical sales are missed out. Some best practices for managing inventory across multiple channels are given below:
- Try to Keep Core and Non-Core Products Separate: Simply put, core products are those products that a business absolutely does not want to face a shortage of. Non-core products then form everything else that a business carries or uses. A good example of this is items that are sold during a specific season or a holiday. For example, costumes during Halloween, themed decorations near all major holidays and back to school items near the end of summer vacations. By having a clear distinction between these two types of products, a business can prioritize and organize items better according to expected demand and ensure that no core items runs out on any channel.
- Leverage JIT Inventory Management: JIT or Just-In-Time is an inventory management strategy used to increase efficiency and decrease waster. This is achieved by receiving required goods only when they are needed in the production or sale process. This helps reduce costs of storing inventory. The key to success for this type of technique lies in the company’s ability to accurately predict and forecast sales and demand and foresee potential periods of fluctuation. Through the use of this technique, retailers can be more flexible and dynamic. But to stay on top of things, it becomes vital to use a strong inventory management application or software to ensure that demand and order information is available in real-time. Once the process is streamlined, it allows efficiency and stock remains available across channels where required.
- Improve Forecasting: As mentioned above, accurate forecasting is the key to successful inventory management. When a retailer knows that the customer needs, where it is needed and in what quantity, they will be in a better position to meet the customer’s expectation without needing to stockpile beyond a certain point. To achieve better forecasting, the business needs to be able to conduct market research, observe market demand models, analyze demand patterns and understand required stock levels.
Advice from E-retailers
According to experienced online sellers, there is much more to achieving success then picking a platform, uploading pretty photos and interesting product descriptions and waiting for people to show up with cash in hand. Instead, some behind the scenes key to successes involves the following:
This may seem like an obvious bit of advice. However, it is vital for successful business operations to always know what is available in stock and how it will be found quickly. Katie Hughes owns an accessory business called Slip On Dancers, a product that turns running shoes into dancing shoes. She suggests using the obvious, which is to make sure that the inventory is laid out at the storage location in a visually organized way so that it becomes easy to observe what is placed where.
Of course, this method can apply to smaller stock levels. For larger operations, this method can be replicated by a technology-enabled solution. Layla Colegrove suggests, “Consider implementing a bar-code system to track inventory. These systems are becoming more and more affordable and can streamline inventory management for small businesses.” Layla is the CEO of Flowering Tree Botanicals, an e-commerce store selling special bath products.
Never Run Out of Stock
The second key to running an online store is to make sure that if the website lists it, it is available in stock. Colegrove feels that, “For customers who receive an ‘out of stock’ notice on a page, it is a terrible disappointment. If you’re going to carry a product on your website, make sure you never run out of it.”
Another entrepreneur, Jason Haeger feels that a regular physical inventory count is a good way to track quantities of different products, the founder or the AJ Coffee Company suggests doing a count once a week and for this count to be conducted by the same person. Though applicable to only relatively smaller operations and occasionally tiresome and what feels like a waste of important time, he stresses that done correctly, it becomes an essential element for risk management for the company.
Pick a Customized System
Given the complexity of business operations these days, it becomes vital to select an excellent software program or application that supports all elements involved in the running of the business. Colegrove says that when picking a shopping cart solution for online business, one should look for a system that allows integration of standard inventory management software, bookkeeping applications and other services. She says that, “As your business grows and your e-commerce needs change, this will allow you to move to a new shopping cart solution while minimizing impact to your business operations.”
Katie Hughes uses PayPal and Amazon for tracking in her business setup. Once the initial stock numbers are entered into the system, it automatically subtracts the sold items every time a sale goes through. Reminder emails are sent when stock reaches a low level. Hughes also uses iPad applications during trade shows to help accept payments and keep track of inventory simultaneously.
The learning from all these small business owners is that a successful business is one that knows what to sell, as well as how to manage those sales. The ability to organize inventory and keep track of stock reduces the risk of lost sales and disappointed customers.
There are many systems, programs and applications available that can be used by e-commerce stores to successfully do all this.
MISTAKES TO AVOID
The nature of online businesses is drastically different in scale and operations. As a result, the scale of inventory also ranges from massive, multiple warehouses to stock kept in a home garage. Regardless of the nature of the operation, it is vital to keep accurate records and track of the inventory at all times.
Though easy to say, in the myriad tasks associated with running a business, the important aspects of inventory management can be overlooked. This is can happen even with special programs and spreadsheets available to aid inventory management, for both the big business and the small entrepreneur. Even with rigorous inventory management practices, a mistake can happen, and this one mistake can lead to issues such as a shortage of materials or even dispatch of the wrong shipment to the wrong customer.
To avoid these issues, it is important to be aware of the potential risks in an inventory management process and have plans in place to both avoid mistakes in the first place and to handle them if they end up occurring.
Some common mistakes in inventory management include the following:
Overselling and Over ordering
For any online business, timely and accurate order fulfillment is a key component of success. This means that orders need to be sent out in the shipping time promised. An error in inventory management can lead to an item appearing as available when it has already finished in stock. This can lead to overselling online, and the customer may have to wait weeks while more of the same items are procured or manufactured by the seller. In this sort of situation, the customer may cancel the order and move to a competitor. Worse so than this, in the world of e-commerce, a bad product or seller review on the website itself or independent rating websites such as yelp.com can lead to a negative reputation among potential buyers.
In an opposing situation, a business may be overzealous in ordering stock and end up with excess inventory for a product that ends up being unpopular or slow to sell. In this case, the complete investment made in the inventory will be lost. Both these situations can be avoided by careful updates to the chosen system of inventory management in a timely manner and for these changes to reflect real-time on the online store.
Managing Online Presence Across Platforms
Often, overselling can happen when a seller is listing products across multiple channels online. It is often important for a business to have an online presence on various online marketplaces and platforms in addition to an independent website. The problem can occur when the inventory for all these stores is in one location and the system is not integrated smartly. Since online stores are open 24 hours, sales can occur on one or more platform at any time. When this happens, a product can be sold out on one website while be listed as available on the other. To avoid this, the inventory management system needs to be integrated across all platforms, so that information is updated instantly for all.
Supply Chain Management
When dealing with sales and inventory it is a good idea to keep track of the entire supply chain from materials and raw input to the customer and their buying habits and requirements. If a company focuses only on their small section of the supply chain, they may be caught unprepared if changes happen up or down the chain. This can lead to problems with supply or reliable fulfillment.
Pricing is a very sensitive and complicated matter for any business. There are specialists who determine the right price and keep track of the changes in the environment to ensure that the price adjusts accordingly. Pricing is important because it needs to be in keeping with manufacturing, production, procurement and inventory costs but not be over or underpriced.
Lack of Adequate Staff Training
The inventory management system is only successful if the people who are running it are adequately trained and able to work with it. Even if the system is simple in appearance, a small training program is still a good idea to make sure all the ins and outs are understood. This will help avoid human error, ensure that the system works at an optimal level and is utilized at its full potential.
SELECTING INVENTORY MANAGEMENT SOFTWARE
There are many technology based inventory management solutions available to online business owners these days. It can be overwhelming for someone to select the best amongst these for their business. To make sure that the right solution is selected, it is important to have a clear understanding of the key things that are important for the business. For example, a certain e-commerce seller may want to rely predominantly on email marketing while another may want to offer the best experience on a mobile device. Still another may want to ensure that ordered products are shipped at exactly the time that is specified.
Some important features that all e-retailers should consider before selecting a software solution include:
- Inventory Synchronization across Channels: Most businesses sell across multiple online channels these days. At the backend, most of them have a single inventory stock location. To manage this inventory across all the different channels, the retailer will need an inventory management solution that provides real time synchronization across all these channels and the warehouse or storage location.
- Automated and Real-Time Updates: Another key feature to look for in a software solution is real-time updates. This means a connection between all elements of the supply chain. The real time feature will allow the business to quickly remove out-of-stock items and avoid any potential overselling. The system will also automatically display these items again when new stock arrives.
- Store Integration: The software should also provide a consolidated picture of the inventory being sold on each of online channels including marketplaces such as Amazon, eBay and etsy and the seller’s store. A retailer should be able to look at the status of every individual item from just one screen.
- Warehouse Integration: For some retailers, inventory also needs to be managed across different warehouse locations. The inventory management software should be able to provide integration across all of these individual locations. As with stores, one screen should be able to display inventory status across all inventory locations.
In Redwood City we talked with entrepreneur Steve Bisset about the business model of Terrajoule …
In San Mateo (CA), we meet CEO and Co-Founder of Neo4j, Emil Eifrem. Emil talks about his story how …