SMBs: The basics of inventory management
Proper inventory management is more difficult than anything else. In fact, 43% rank inventory management as their greatest daily challenge. A third of businesses fail to meet their shipping deadlines because they sell a product they don’t have.
It is safe to say that a well-oiled eCommerce company requires good inventory management.
This guide will show you how to manage your inventory effectively and avoid costly mistakes like storage space being wasted or overselling. You will be able to manage your inventory more confidently and with more money in your wallet.
What is inventory management?
Inventory management is the process of tracking, ordering, storing, and selling stock. This covers everything, from the way you source products to how they are delivered to your shelves.
Inventory management’s main goal is to ensure that stock is in the right places at the right times and control costs so you can make a profit.
Many companies use software to manage inventory. Platforms like Wix have built-in inventory tracking tools, which automatically sync inventory across all sales channels. A unified system is crucial for your success, regardless of whether you are a single-channel seller or a multichannel seller .
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What is inventory management?
Let’s start with the consequences of poor inventory control: delayed shipments. Stockouts. Spoilage. Spoilage.
Poor inventory management can result in disgruntled customers, who will quickly lose faith in your brand and seek out relief from other brands. You might also be suffering from order cancellations or negative reviews. You might also be facing sunken inventory costs and other unrecoverable costs.
Be sure to establish an inventory management strategy before this happens.
It is important to know when and how you intend to acquire new products. Also, how they will be monitored over time. Good Inventory Management will bring you the following:
- Lower costs – We are able to predict demand better and order the rightamount stock. Rather than blindly ordering stock every 30-60, 60, or 90 day, we can accurately forecast demand.
- Happy customers – Keeping stock of popular items and fulfilling your customers’ shipping needs.
- Reduced waste and/or theft by knowing how many stock you have in each warehouse and selling them before they expire. You can also avoid shrinkage caused by theft by keeping an eye on your inventory.
- Higher efficiency – You can identify bottlenecks in the way your product is received and stocked, packed, packed, picked, shipped, and shipped.
- Increased cash flow – This is achieved by not funneling all cash into inventory.
A cheat sheet with key inventory management terms and formulas
Inventory management can be a complex topic. Before we get into the details, let’s review some common terms and formulas you will hear.
|This technique allows inventory to be classified into three groups, each with different priority levels. Category A refers to high-dollar-value items, category B refers to medium-value products and category C refers to low-value products.
|The average inventory held over a given period. Formula: (current inventory + prior inventory) / number period.
|Average inventory cost (AVCO).
|The average inventory cost. The formula: Total cost of inventory / inventory units.
|A request for a product out of stock that will be, presumed, soon available again.
|In case of shortages, extra inventory is kept on hand. Buffer stock is often purchased during times of uncertainty in order to cover for possible downtime (concerning supply chain or price fluctuations).
|Carrying cost, also known as “holding costs”, is the cost you pay to keep inventory in stock. This includes warehousing and production costs as well as other fees.
|Inventory that you own but which is owned by someone else (the consignee), who then helps you to sell your product.
|Cost of goods sold
|The total cost of manufacturing the products you sell, including all labor costs. Formula: Total purchase + previous inventory = current inventory.
|Regularly counting small quantities of inventory in your warehouse. This will ensure that your records are accurate.
|Days of inventory remaining (DIO).
|It takes an average of 365 days for inventory to become sales. Formula: (COGS / average inventory) x 365.
|Stock that is dead
|You have unsold products that are still in your warehouse but are unlikely to sell anytime soon.
|Fulfillment strategy where your supplier ships your order for you. This eliminates the need to store or manage inventory.
|Enterprise resource planning (ERP)
|Software and strategies that are used to manage important business functions, such as finance, supply chain , human resources and many more.
|A strategy for inventory management in which the first product you receive is the first product you sell. This is to prevent spoilage and expiration.
|Inventory Days on Hand (DOH).
|This is the average time it takes to sell inventory. Basic formula: average inventory/ COGS/days in the accounting period.
|It is the science and art of anticipating which products will be restocked when and how much to meet customer demand.
|List of inventory pickers
|Pick list is a document that warehouse workers use to fulfill customer orders. A pick list contains order details like the SKU, quantity and order date.
|If you have less items than your records indicate. You could experience shrinkage due to loss, theft, or spoilage.
|Ratio of inventory turnover
|This is the number of times you sell or replace your products within a certain time period. Basic formula: COGS = average or total inventory.
|Fulfillment strategy that allows you to order stock and get it just in time to ship to your customers. This strategy is designed to reduce storage costs and dead stock.
|From the time you place your order, how long it takes to receive your goods in your warehouse.
|Ord management system (OMS).
|Software to automate order management, inventory management, order fulfillment and reverse logistics.
|Situation in which you have more products than you actually own.
|Reorder point (ROP).
|Minimum stock level to allow you to buy more inventory. The basic formula is: Average daily usage rate x lead-time + safety stock.
|Stock of safety
|To avoid stockouts, keep extra inventory in your warehouse.
|Third-party logistics (3PL).
|A company that handles fulfillment, inventory management, and warehousing for you.
|Warehouse management system (WMS).
|Software that tracks the movement of finished goods within a warehouse.
There are four types of inventory you can track
You can group inventory into four buckets.
- Components or raw materials – The materials required to make your product
- Items in production (WIP)
- Finished Goods These are the products that have been fully manufactured and are ready for sale
- Supplies (like safety equipment), that are used in the production of items, but not part of the product.
All of these should be included in your strategy. You should know where your money, time, and resources are going and where you have bottlenecks. One inventory type can hold up, and the other types will be affected.
Let’s say, for instance, that you sell lotions. To create your lotion, you will need ingredients (oils, liquids and waxes, bottles, labels, stickers, etc.) as well as equipment (machine mixer).
This step can take up to a day, but that is assuming you have all the necessary materials.
Once your products have been finished, you will need a system to ensure that they are quickly transported to your warehouse. It is not easy to get even the most basic products off the ground. And it gets more complex the bigger your business grows.
How to choose the best inventory management software
It’s impossible to keep track all the moving parts around the clock. It’s crucial to have reliable software that keeps you organized right from the beginning.
Wix eCommerce is a multichannel inventory sync platform. Wix eCommerce will automatically update inventory when an order arrives from any channel, even if it’s the same product you sell on Amazon, eBay, or your own site. This allows you to avoid overselling and, consequently, angering customers.
Wix allows you to send purchase orders directly to suppliers and inventory updates to your 3PLs. You can also send orders to your dropshippers and track shipments via Wix if you have a dropshipping company .
Learn how Wix eCommerce can help you manage your online business.
OMS, WMS and ERP systems are just a few of the options available to you. Netsuite and ShipBob are some of the most popular options. When evaluating your options, be sure to ask the following questions:
- What are your current inventory challenges and goals?
- Which channels are you selling on?
- What inventory types do you need?
- Who will use your software?
- Which other systems and apps does the platform need integration with?
- How much do you have to spend?
How to forecast and finance inventory
Cash flow is directly affected by how well you manage your inventory. You need money to buy new inventory, storage space, or other resources. You may need to apply for a loan or crowdsource funds if you plan on investing a lot of money in production.
You can make sure your money is being spent wisely by creating an inventory forecasting system that suits your business. ShipBob’s forecasting tools allow you to determine the best reorder points based upon sales history, profit margins and sales velocity.
You can also create your own formula by focusing on the most important factors to your business. These factors could include seasonality or any planned marketing campaigns. No matter what the situation, it’s important to regularly test, optimize, and check your approach.
Forecasting has been a problem for some of the biggest brands, including Nike. Nike lost millions due to excessive inventory in the 2000s. What is the root cause of this problem? Software bugs and data errors can lead to inaccurate forecasts.
Four techniques to reduce costs and increase efficiency
What can you do to avoid spending a lot of money on inventory and storage? Here are some tips.
01. Get bulk orders
It is no secret that bulk ordering can help reduce shipping costs. This approach does require that you have enough cash in advance to purchase large quantities. It is also important to understand how likely your products are to sell quickly. You don’t want to have too much inventory or stock that isn’t being used.
02. Inventory can be considered just in time (JIT).
JIT inventory is a popular system to reduce inventory and eliminate overstock. It was what enabled Apple to achieve a remarkable inventory turnover rate (“Wow!” Apple Turns Over its Inventory Once Every 5 *Days” is a headline taken from an old The Atlantic article. It’s what keeps the automotive industry afloat (JIT sometimes refers to the “Toyota Production System”.
Fair warning: The JIT system may not be for everyone. It is considered risky and fragile. Your JIT plans can be easily blown apart by disruptive events like the COVID-19 pandemic. It’s worthwhile to explore the possibility for your business but make sure you have a backup plan in place in case of an emergency.
03. Consider dropshipping
This inventory management method eliminates the need to hold inventory. Dropshipping agreements allow you to transfer customer orders and shipping details directly to your wholesaler or manufacturer, who will then ship the goods directly to you.
This is not only for new sellers. This is a popular strategy for established businesses that can reduce shipping and storage costs.
To ensure that quality control is maintained and delivery times are met, it’s essential to establish a strong relationship with dropshippers when you use this approach. Learn more in our guide on how to start a Dropshipping Business.
04. Pre-orders accepted
An great pre-order strategy will help you build excitement around your products, even before they are available. This allows you to gauge demand and test the waters before investing in production. You can think of Kickstarter except that you must have the resources to build your product.
Create a landing page that allows you to accept pre-orders. Both options communicate effectively that your products may take some time before they arrive. Some retailers won’t accept pre-orders until they have enough sales to place large orders with suppliers.
How to audit your inventory
The key to inventory management is the establishment of the right process to audit the inventory in your warehouse. Automating is a great way to reconcile your inventory with online orders. However, manual cycle counts are a better option.
You can count a limited amount of inventory every day without needing to take a full stock. This is a temporary alternative to having your warehouse shut down temporarily. This type of sampling allows you to compare your inventory records with the stock you have. It also helps you account for lost, stolen or misplaced inventory.
There are many methods of counting cycles:
- ABC analysis – This technique categorizes products according to their importance. A is the most valuable, and C the least. It is a way to recognize that not all products have equal value. Therefore, it is important to pay more attention to popular products. This approach allows you to choose to count Category A products each month and Category B products each quarter.
- Location-based count – This method counts products according to the location of their product within your warehouse. This means that you might count different sections or shelves in your warehouse at different times. You’ll eventually be able to analyze every inch of your warehouse and continue doing so frequently.
- Opportunity-based count – This is a reactive approach that counts your inventory after a major event or movement. For example, let’s say you have a flash sales. To ensure accuracy, you may take stock after the fact. Another example is when you reorder your product or move it.
- Control group This approach allows you to choose a group of items that you want to count multiple times in a very short time. This will help you to eliminate any errors in your counting method.
You can explore other cycle counting methods. You’ll need to choose the best system for your products, operations, and resources.
11 expert tips on how to manage your warehouse.
It’s important to know when and what to restock. Also, ensure that your warehouse floor runs smoothly. Jake Rheude is the director of marketing at Red Stag fulfillment.
01. Make sure everything is in the right place
You (and us) older warehouse workers need to get out of our shell and belt out a bit of Radiohead’s “Everything In Its Right Place.” This simple mantra is the key to inventory management. It encompasses two key points.
First, every item needs to have a place in your warehouse. “The floor” doesn’t count.
This second refrain reminds us that having a place to put things is only a starting point. Put everything away as if you were cleaning your own room.
This organization will simplify everything, from inventory and goods counting to picking the right items for shipping. You can also use WMS or other tools correctly to count inventory for resupply purposes.
02. Place frequently ordered items near packing stations
Your warehouse can benefit from some inventory management policies. We love the idea of moving bestsellers closer to packing stations. It serves several purposes. The best is that it makes picking and filling orders quicker because your team must move less.
It can make it easy for your team and associates to count the goods as they are used. One example is a colleague who can spot inventory levels that are low and alert you. This could prompt managers to reorder the shipment or verify that it is on its way.
This practice is also popular with managers because it reduces travel time and labor cost. This practice can be applied to products with more time constraints such as perishables and goods that are frequently expedited. You’re eliminating worry and time.
03. You can make gaps between similar items
The key to proper inventory management is understanding your inventory and correctly using it. This means that accurate counting and picking inventory are essential.
Make sure there’s some variation in your products if they are identical or you sell them in different sizes. If you are unable to control the color of boxes, consider adding physical space. This will reduce the chances that someone accidentally grabs the 12-pack of batteries and not the 24-pack.
We have seen that stacking multiple options close together can confuse scanning systems. This is because the picker may scan the correct barcode but grab the wrong item off the shelf. There is always the possibility that products could be incorrectly placed. The risk of similar products stacking on top of one another increases.
04. Multiple times you can check your orders
You can use multiple scanners in a warehouse. However, many eCommerce companies and their warehouse partners prefer barcode scanners. These handheld devices are simple to use and provide direction to teams for their tasks.
Multiple orders are necessary to ensure inventory counts and knowledge. It’s possible to update inventory counts by scanning the order sheet and picking up each product at the pick. Rechecking everything before it goes to the packing station ensures that all orders are accurate and your inventory numbers are correct.
This will help you and your team to get into a rhythm, improve their efficiency, and achieve higher accuracy goals. Once you have this under control, it will be easier to implement advanced inventory processes like just-in time production.
05. Standardize as many processes and procedures as possible
Managers and employees will be able to complete tasks faster and more efficiently if they have a set of standards and routines. This will protect your employees and business and make it easier for you to respond to external factors.
This is essential for stock and people safety in the warehouse. You should consider how you store and label perishable goods. FIFO is a common practice where goods added to your inventory are first sold. This helps to avoid spoilage, which can impact your profitability. LILO (last-in, first-out) allows you to standardize your inventory management.
Standardization is the key. Your team can be trusted to know how to use the software they have, and to spot any mistakes.
06. Repeat training is a good investment
Standardizing a process can help you reduce errors and make it easier for your team to learn. One-time training can be temporary and people may fall back into old habits or bad inventory.
For inventory management, it is essential to have training on the processes and review of these requirements. This will help you ensure that your warehouse is safe and doesn’t allow for any mis-stacking, mis-labeling, or cutting corners. Repetition of training reduces the risk of injury or accident.
07. Include the entire company
This tip will help you get out of the warehouse quickly. Every employee in your company should be familiar with your inventory management strategy. You should also teach them about the process and what their role is in your strategy. Teams should not only be trained on the concept, but also how they can access real-time information.
Your marketing and sales departments are a good place to start. Marketing and sales departments can let you know if there is anything that isn’t being used, so they can move it at a reduced price. This will help to reduce storage costs.
Your sales team can share warehouse costs such as storage and maintenance to get a better understanding of when they might want things to move and what they are willing to do. Warehouse operations can also be affected by offers such as buy-one, get-one free or giving away products when orders reach a certain value.
Combining these offers with inserts and packaging can help you score big. You will need to coordinate your sales and packaging efforts.
Your warehouse team can also benefit from the insights of sales. Let’s suppose you have a selection of umbrellas, and blue is the most popular color. This trend may be identified by sales before your major selling season. This data can be used to adjust inventory levels and even change the way you stock goods.
08. Track travel time
In a warehouse, everything takes time. Businesses can reduce the time it takes to complete tasks and avoid rushing. This allows your team to take their time and ensure accuracy.
You can control how long your warehouse staff has to travel to pick up orders or complete tasks. You might notice that some of the goods in your average order are too far apart if you track this using orders.
Alternately, warehouse layouts can cause forklifts or workers to reverse and stop being able move forward. Separating racks from shelves that require a cart or forklift can help workers avoid accidents.
This is where your WMS and eCommerce tools are a great help. You should look for solutions that optimize warehouse layouts and the order in which pickers give goods. System-aided picking can reduce the amount of walking that is required for normal picking.
09. Automate par levels
You should be able to establish a par level in your eCommerce software and inventory management software. This is the minimum inventory that you should have at any given time. This threshold will ensure that you are able to fulfill all orders and receive the product you ordered before you can restock.
Par level systems identify the amount and tell you when you are below it to order these products or materials again. Par levels are generally set to allow you to place an order with suppliers and wait for standard freight shipping to arrive.
Your operations can be significantly protected by automating your par levels or reorders. It is possible to have precise inventory counts without having to manually check or spot with an eyeball. Par levels can vary by product so you eliminate the possibility of someone mixing up inventory counts and end up ordering the wrong goods.
Because they can leverage your order history, automation and cloud tools are a standout. The system may be able to detect that August is busy season and tell you to adjust par levels by July. It can also help you identify and respond to any changes that may be occurring this month in comparison to last year.
Par levels have a practical advantage. You don’t have to worry about over-ordering. You can make sure that you have enough space for bestsellers and give the right amount of space to certain products. It is possible to operate your warehouse efficiently without having to rent more space or increase the shelving.
10. When it makes sense, outsource
Many eCommerce businesses, like yours, will outgrow their warehouse space. As you grow, you might have moved to a smaller retail shop or industrial space. Then again, you may need to move.
There are many things to think about when you make the difficult decision to relocate your inventory or order needs.
- Potential turnover and staffing increases if the new site is far
- Costs of space include increased parking, break rooms and bathrooms
- Moving from disruption to fulfillment
- New racks, shelving, sprinkler systems and other items can be expensive.
- Costs for digging ground and building your facility
- Inspections at the new facility
- Installation of electronics, equipment and IT infrastructure
You still have many costs associated with the old site. You will need to move existing inventory, equipment, pallets, boxes and equipment. Additionally, you must end agreements and notify suppliers and carriers about any changes.
These costs can quickly rise and you may find yourself in a situation where you require more space but cannot afford to move or hire additional staff to manage the larger warehouse. Many eCommerce businesses use 3PLs to handle fulfillment.
3PLs are able to design their businesses to be less expensive than most companies expanding. They manage labor, inventory, space rent/mortgages and carrier relationships. The 3PLs negotiate deals that allow you to pay only for what you use and the space you require.
It can be difficult to determine if this is the right choice for you. It is always better to speak with multiple vendors and to use a common system to evaluate their responses.
11. Let data guide you
You can optimize many aspects of your business operations by using data from your company. For example, order tracking and workforce can help you decide the best layout for your warehouse and what equipment you should use. It also helps you figure out how many people you need to pack and pick up orders. You can reduce the chance of running out of stock by keeping inventory counts and limiting your chances of ordering too many.
You can monitor data from all levels of your supply chain to see if one supplier is more late than the others, or where there are great savings. A dimensionalweight calculator can be used to optimize carrier selection or determine when it is cheaper to ship a single order through two boxes.
Make use of the information and tools your platforms offer. Forecasts can be built, spending analysis and audited. You can also quadruple-check inventory.