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Inventory management is a core part of successfully running an online store. Ecommerce business owners have to quickly grasp the value of managing stock and learn how having robust systems in place can save time and improve profitability.
When you’re starting your own shop, recognising that inventory management is critical is one thing – knowing how to properly choose and implement a system that takes care of it is a whole different ball game.
It’s obvious that managing your inventory must be a high priority if you sell products online. However doing this manually isn’t viable due to how much is involved in effective inventory management, such as monitoring stock levels, proactively ordering new products and forecasting sales. Instead, you need an effective inventory management process.
Why are these systems key?
Accurate and efficient inventory management is directly linked to your store’s profits. Research shows that over 70% of shoppers will look elsewhere if their desired product isn’t in stock while reducing out-stocks and overstocks can lower inventory costs by 10%.
Those figures are directly linked to lost sales and cost-saving measures, but the same could be said for time-saving technologies, like inventory management software, which aims to reduce resources spent on manual processes and also aid with forecasting and projections.
You’d be forgiven for thinking: wow, that’s a lot of work! Especially when you’re likely also in charge of all other aspects of running your online store, from sales to marketing and fulfilment. But the reality is that how you manage your inventory will directly impact your sales and reputation, so if you don’t get this right now, you risk falling at the first hurdle.
Feeling overwhelmed? Don’t worry, we’ve got you covered. Whether you’re starting a new ecommerce venture or wondering if you can make your established store more efficient, we’ve got all the info you need. In this guide, we’ll explore ecommerce inventory management, including best practices, proven techniques, and emerging technologies, so you can pick and choose what works for you.
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What is Ecommerce inventory management?
Ecommerce inventory management is the process of managing your stock for your online store.
This includes ordering, rotating, storing stock, and monitoring and forecasting supply and demand. Even for small store owners, this is a hugely time-consuming process that requires close management, as improper or inaccurate inventory can result in lost sales.
Ecommerce businesses face unique challenges in inventory management, as shoppers can spend elsewhere if products aren’t available when they need them. Furthermore, online stores don’t have the same storage space as brick-and-mortar stores unless they invest in warehouse space.
This is a big issue for store owners who start businesses from home and experience significant growth, as they need to balance the cost of warehousing and fulfilment with the convenience of having full stock.
We already know that effective inventory management is directly linked to sales, but did you know that shipment delays, product shortages, and inaccurate inventory data can all be improved through proactive inventory management?
What does that actually look like? Let’s dive into best practices in the next section.
The process of Ecommerce inventory management
Any successful online store owner will tell you the importance of knowing your inventory inside and out. Whether your business is a full-time venture or just a side hustle, you still need to maintain an industry standard. This includes keeping products in stock, ordering new products, and identifying the best and worst sellers within your collections.
Every ecommerce business will have different priorities, but there is a foundational process that you can use as a starting point.
Stage 1: Inventory planning
You know the adage: fail to plan, plan to fail.
This remains true for online store owners wanting to dominate their chosen space. But how does inventory planning work? Here are a few considerations for those starting, or hoping to improve their processes:
Analyse demand patterns: If your business is already established, you will know what sells. Tap into past data to identify patterns, and make informed decisions about buying new stock. If your products change seasonally, consider what sold well last year at the same time.
Track industry trends: If you’re a new brand, you might not have past data to look to. Industry trends can help demonstrate patterns, and this will help you inform stock decisions. Notice a celebrity or influencer sporting your product? Make sure you have good stock to meet the demand this will bring.
Plan sales and promotions carefully: A sale is a great way to get curious customers over the line, it’s also ideal for clearing old stock and making space for new items. But don’t sell yourself short - keep sales minimal and use them to get rid of end-of-season stock, rather than to boost sales all year round. Otherwise, you risk devaluing your brand, as customers will become accustomed to waiting for a sale rather than shopping when the inspiration hits.
Forecast stock needs: Use inventory management software to forecast your stock, and plan for how much to spend and when. This will reduce admin time and allow you to store all-important inventory information in the cloud.
Stage 2: Ordering and replenishment
Now you know what and when you need, it’s time to place your orders. Here are some key considerations for ecommerce companies when ordering and replenishing stock:
Be mindful of key tax dates: Buying stock requires cashflow, so you might be tempted to place big orders when you have a period of good sales. While this is sometimes the right approach, it’s also worth keeping in mind the tax calendar and making smart investments to reduce your tax obligations.
Keep multiple suppliers on hand: This might not be possible for everyone, but it’s best practice to not rely on one supplier for your products. If that supplier cannot fulfil your orders, you risk losing customers to your competitors. Equally, if your sole supplier suddenly hikes their prices up, you won’t have a choice but to pay. Shop around where you can, so you can keep inventory costs low and profit margins high.
Order before you run out: Even the most efficient suppliers will need time to get your order together and shipped. So, planning ahead and monitoring inventory levels will help you identify top sellers and place your orders early to minimise the time your products are ‘sold out’.
Stage 3: Storage and warehousing
Selling products online is all well and good… but where are you going to store it all? This ties directly into inventory management, as warehousing and fulfilment are expensive. One common approach is to dropship products, meaning your supplier sends them directly to your customers, and you don’t have to handle the items at all.
Dropshipping doesn’t work for all brands, however, so let’s look at some of the storage and warehousing considerations for ecommerce brands that handle their own inventory:
Organise your inventory with a universal system: EOQ, JIT, or FIFO… whichever approach you choose (and we’ll cover them all in detail later), just make sure your stock is organised in a way that all your team understands. The more time it takes them to fulfil an order, the more it costs your business as efficiency is key to ecommerce profitability.
Rotate perishables: If you sell products that are used by date, then stock rotation is paramount. Poor stock management risks products becoming unsellable, and thus acting as a loss for your business.
Calculate buffer stock: This refers to the extra stock you buy when supplier prices are low, for example out of season, or when there is a surplus. By noticing trends and buying cheap you can prepare your brand for long-term success as customers will come to rely on your consistent stock availability.
Identify reorder points: At what stage will you re-order stock? This will likely be dictated by a combination of stock levels and supplier prices, and it may change over time, but it’s still worth having a key reorder point for popular items especially, so as to not risk running out of stock.
Prioritise safety: However you store and transport your stock, health and safety standards should always be at the top of your agenda. Ensure staff who handle products are trained to the appropriate level and are regularly given manual handling training.
Stage 4: Tracking and reporting
This is the point where many busy ecommerce business owners fall down, as tracking and reporting inventory can be pushed aside in favour of other more pressing demands. But it’s critical for brands to prioritise this area of their inventory management system, as here is where you’ll likely find the golden nuggets of data that will make you big savings in the long run.
Embrace inventory management technology: To say ecommerce entrepreneurs are busy would be an understatement. Thankfully, software can help save time and improve productivity across all areas of your online store, not least within the realm of inventory management.
Inventory management software can help with both tracking and reporting, so your team can focus on the daily operations of your store. The data will support you in minimising stockouts, identifying reorder points, calculating buffer stock, spotting emerging trends and forecasting sales, so you can make better decisions based on real-time data.
Keep the stakeholders informed: The benefit of taking a technology-first approach is that you can pull data to build reports that are relevant to different people. For example, the information you give your marketing team might be more detailed than the topline figures required by key stakeholders at the top of the chain.
Advanced inventory management techniques
We mentioned earlier we’d dig into the common stock management processes, so you can work out which works best for your ecommerce business.
Economic Order Quantity (EOQ)
EOQ is the order quantity that keeps storage and ordering costs to a minimum. This is common for ecommerce brands with less space, either a side hustle based at home or just a store with small warehouse space.
Small orders are typically more expensive overall, as suppliers will reduce the cost-per-item with larger orders. However, storing a larger order will be expensive, so ecommerce entrepreneurs need to work out the sweet spot where the costs are the most economical - this is the EOQ.
Just-in-Time (JIT) Inventory
JIT is a similar approach to EOQ, as it is a cost-saving method for storing and managing inventory. JIT minimises inventory levels by aligning orders with demand, so you order the exact amount of products you need, just as you need it.
This relies on strong supplier relationships with efficient shipping, as you don’t want to risk long lead times resulting in stockouts.
ABC Analysis
For brands that sell a wide variety of products, ABC Analysis can work well. This is the method of prioritising inventory based on value, so products are split into three groups: A (high-value items), B (medium-value items), and C (low-value items) Your ordering process then prioritises these based on profitability, order time and storage costs.
FIFO and LIFO Methods
These approaches are common among food brands, as they aim to reduce perishable stock waste. FIFO = First In First Out, which means your stock rotates based on date.
While Last In First Out is when the most recently added products are the first to be sold, this is less common but still worth noting.
COGS (Costs Of Goods Sold)
This is the direct cost incurred in the sale of products in a certain time period.
COGS = The starting inventory + purchases – ending inventory
So, for example, you enter Q1 with £10,000 worth of stock in your inventory. Then you purchase £5,000 additional stock to keep up with demand. At the end of Q1, you have £7,500 of stock left.
£10,000 + £5,000 - £7,500 = £7,500.
So, your COGS for this period is £7,500.
You need to keep track of COGS as it will reduce your tax obligations at the end of the period, and you will also need to include other company expenses such as warehousing and storage in your balance sheet.
Your accounting software will help simplify this, and Crunch’s cloud accounting platform is specifically designed with the needs of ecommerce businesses in mind. Learn more about Crunch’s ecommerce solution, and book a chat with our expert team today.
Now let’s dive into the software side of stock management, and how tech can help save you time and money.
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Ecommerce inventory management software and tools
It goes without saying that technology is key to making your online store more efficient and, ultimately, boosting your profits. Finding the right technology is time-consuming, however, and the last thing you want is to lose money by investing in the wrong software for your business.
So, let’s explore some of the inventory management software on the market, so you can feel better informed about which tech will work for you.
InFlow
This platform allows you to track inventory and orders, manage stock from your phone and reorder ahead of time. InFlow also provides hardware that works in line with their software, so you can tag and track items in your inventory easily.
Ordero
Promising to ‘conquer ecommerce complexities’, Ordero is a big player in the world of inventory management software. The software auto-syncs with stock levels, provides real-time data, provides low-stock alerts and boasts an open API for platform integration.
Veeqo
Owned by Amazon, Veeqo is one of the world’s biggest inventory management systems. It’s not unique to Amazon, however, as ecommerce stores on eBay, Etsy and Shopify can also use this software to manage, track and report on their stock.
Extensiv (previously Skubana)
The omnichannel software connects brands with 3PLs (third-party logistics, or order fulfilment facilities), so they can oversee stock levels, audit inventory and reporting. Extensiv is a large organisation providing a wide selection of services, both for brands and 3PLs, with inventory management being just a part of this offering.
What about AI and machine learning?
Many of the tech companies we mentioned above are already investing in these key areas. AI and machine learning promises to save time and money for ecommerce store owners, not least in the world of marketing and customer service, but also when it comes to inventory management.
Amazon, for example, promotes an AI-powered consultancy offer, which aims to “take the guesswork out of inventory management” by combining machine learning with real-time data to predict stock levels and identify reorder points earlier more accurately.
Another platform bringing AI to the forefront is Akkio, which supports the automation of many time-consuming tasks within inventory management, such as data tagging, to reduce labour time by up to 70%.
Platform Integration
Remember, you’ll need to find a product that works with what you already have. So, if you sell on Amazon, then your chosen technology might differ from a brand with its own Shopify site. And if you, like many online retailers, sell your products in several different places, it’s even more important to consolidate your inventory management into one coherent system.
Tracking Systems
Many software platforms, like InFlow, will also provide you with scanners, printers, and even RFID tags to manage your inventory. Whichever system you choose, just make sure you follow it closely, and your staff are adequately trained in all areas required, otherwise you risk losing the time you save in keeping your staff right.
Common Challenges in Ecommerce Inventory Management
Even if you’re new to the world of ecommerce, these issues probably won’t be unfamiliar to you. It’s still worth reading through the list of challenges, and identifying which are most likely to affect you (or already do) so you can prioritise finding a solution.
Overstocking and stockouts
The biggest issues are often the easiest to solve. Overstocking and stockouts are two sides of a very familiar coin for ecommerce businesses, but the right software and forecasting processes will help you to identify the causes and keep projections accurate. This means you only buy what you need and can afford to store it.
Inaccurate inventory data
It might surprise you how often inaccurate data causes problems for brands, especially as it’s almost always a result of human error in the warehouse. Software, automation and even AI can help negate these risks, and keep data as accurate as possible to keep your store ticking and products on your shelves.
Managing multiple sales channels
Selling online is competitive, and you have to be everywhere. So, many brands will choose to sell on Amazon, while also having an eBay store and even their own domain using WordPress and WooCommerce software, for example. All of these sale channels need to speak to each other, so you can keep track of stock and not accidentally stockout when demand is high.
A centralised inventory management strategy will ensure everything is in the right place, and accessible to every member of the team, regardless of which storefront they’re in charge of.
Logistics and warehousing issues
These can be tricky, as it’s different for every business. But, in general, you’ll find that a unified technology-first approach to inventory management will only improve any logistics issues, and keep your warehouse running smoothly.
Great inventory management leads to ecommerce success
Now you’re well-equipped to improve your inventory management, from understanding why it matters to choosing technology and systems that make it easier, you’re ready to jump right in.
It might seem daunting, but the best advice we can give is to start as you mean to go on: prioritise accuracy, embrace technology and don’t cut corners. Take the time to learn how your customers shop, identify patterns and make intuitive decisions based on buyer activity.
If you’re concerned about the numbers, or simply need to speak to someone who understands COGS, profit margins, cashflow and forecasting, then book a call with Crunch to trial our cloud accounting platform– many ecommerce entrepreneurs already rely on Crunch for their online selling success.
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