Inventory Management for E-commerce Businesses: A Complete Guide

by | Mar 8, 2023 | Inventory Management

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In today’s era, where online shopping is flourishing, inventory management has become essential in the seamless operation of e-commerce businesses.

Understanding Inventory Management

Inventory management is the process of ordering, keeping, using, and selling a company’s inventory. This includes keeping track of raw materials, parts, and finished goods and storing and working with them.  

One of a business’s most important assets is its inventory. In industries with a lot of inventory, like retail, manufacturing, food services, and others, the main things that a company sells are its raw materials and finished goods. Insufficient stock availability at the required time and location can lead to significant challenges.

On the other hand, inventory can be seen as a debt, though not in a financial sense. If you have a lot of goods, some of them might go bad, be stolen, get damaged, or become less popular. Inventory needs to be protected, and if it doesn’t sell by the due date, it might have to be thrown away at low prices or even destroyed.

How the pandemic has affected the Supply Chain Industry

According to Zippia, the COVID-19 pandemic has created a total shift in the supply industry:

  • Because of the COVID-19 outbreak, 38.8% of small businesses in the U.S. had problems with their supply chains.
  • The global supply chain market is projected to grow at 11.2% per year from 2020 to 2027.
  • There are $15.85 billion worth of supply chain markets around the world.

Despite the outbreak, there are still some noteworthy changes that can impact how the industry operates. This can create more opportunities for inventory management to be more helpful. 

Importance of Inventory Management in E-commerce

E-commerce businesses must go hand in hand with inventory management for plenty of reasons, including: 

  • Helps in optimizing stock levels 
  • Reduces inventory costs
  • Prevents stockouts
  • Ensures timely order fulfillment

benefits of an inventory management system

Adhering to these can result in the following:

  • Improved customer satisfaction
  • Reduced wastage
  • Increased profitability
  • Better working capital for businesses

Challenges of Inventory Management in E-commerce

Keeping track of inventory takes a lot of work. The process and the outcomes have an impact on everything in your challenges of inventory managementHere are a few of the common inventory management challenges every business must watch out for:

  • Inaccurate data – Inventory is something you need to know about all the time. No longer is it possible for everyone to work together to count goods once a year.
  • Changing demand – Customer needs are constantly changing. If you keep too much, you might not be able to sell old stock, and if you keep too little, you might not be able to fill customer orders. Ordering strategies for essential things and the tools to make and carry out an inventory plan can help adapt to changing demand.
  • Manual documentation – Managing supplies using paper forms and other manual methods is time-consuming and unsafe.  Adding more stores with lots of stock is also a lot of work.
  • Insufficient order management – One of the most complex parts of good inventory management is ensuring you sell only a few items and run out of stock. You can correctly guess what customers will order by looking at historical and seasonal data trends.
  • Inconsistent tracking – Keeping track of inventory using different tools and spreadsheets by hand takes a lot of time, is repetitive, and can lead to mistakes. A central method for keeping track of inventory that includes accounting tools can help any business, no matter how small.

This guide will discuss many aspects of managing inventory in e-commerce, from basic ideas like the different kinds of inventory and how to value them to more complex strategies for predicting demand and keeping up with technological advances. 

Fundamentals of E-commerce Inventory Management

As business owners, understanding the basics of e-commerce is vital to achieving seamless operation and success. 

Here are the main ideas and parts that make up good inventory management in the e-commerce industry:

1. Types of inventory?

types of inventory

Understanding these types is essential for managing inventory well. The following are some of the main inventory types:

  • Raw materials: These are the materials used to make things. In the industrial world, raw materials are the parts that are put together or changed during production to make the finished product. 
  • Work-in-Progress: Items in progress that still need to be done are in this type of inventory. The prices of labor and overhead that come up during the manufacturing process can also be recorded in the work-in-progress (WIP) inventory. 
  • Finished goods: This type of inventory is the finished products ready for selling to customers. These products have passed the manufacturing process and are now ready for distribution.  
  • Maintenance, repair, and operations (MRO) supplies: Other than the finished product, MRO inventory includes things that are used in the production process. Tools, maintenance supplies, safety gear, and other items in this area are needed for a business to run every day. 
  • Packing and packaging materials: Different kinds of packing products are available. The product is protected and can be used after primary packaging. It’s the finished product’s secondary packaging, which may include stickers or SKU information. Transportable bulk packaging is tertiary packing.
  • Safety stock and anticipation stock: Safety stock is the extra product that a business buys and keeps on hand in case something goes wrong. Safety stock costs money to keep on hand, but it helps keep customers happy. 
  • Decoupling inventory: Decoupling inventory is the term for extra things or work-in-progress (WIP) kept at each station on the production line so that work doesn’t stop. Safety stock is helpful for all businesses, but separating inventory is only applicable for businesses that make things because it helps when different parts of the line work at different speeds.
  • Cycle inventory: Businesses buy cycle inventory in groups to get the right amount of stock at the best price for keeping.
  • Service inventory: Service inventory is a term used in management accounting to describe how much service a company can offer during a certain time period. Every week, 70 one-night stays are booked at a hotel with 10 rooms, for example.
  • Transit inventory: Transit inventory is stock that is moving from the manufacturer to warehouses and distribution hubs. It is also called pipeline inventory. It could take weeks for transit material to get from one facility to another.
  • Theoretical inventory: This is the least amount of stock that a business needs to finish a process right away. It is also known as “book inventory.” A theoretical inventory is primarily used in manufacturing and the food business. The real versus theoretical formula is used to measure it.
  • Excess inventory: Also called obsolete inventory, refers to products or raw materials that a business still stores but hasn’t used or sold. They don’t plan to use or sell them.

Knowing about these different types of inventory is essential to managing them well, keeping inventory numbers at the best level, cutting costs, and ensuring the supply chain runs smoothly for your business. People with a supply chain management degree online can be reliable in this aspect.

2. Inventory valuation methods

Inventory valuation is an integral part of accounting that affects how a business reports its finances and figures out its taxes. It tells you how much unsold inventory is worth and directly affects the cost of goods sold (COGS), affecting a company’s earnings and taxable income. 

Here are the main ways that businesses figure out how much a product is worth:

  • First-In, First-Out (FIFO) – According to FIFO, the oldest items in stock are sold first. The cost of the first things bought or made is considered when calculating COGS (Cost of Goods Sold) using this method. This method works exceptionally well when prices rise because it lowers the cost of goods sold and raises income (and taxes). It is often used for things that go bad quickly or have a short shelf life to keep inventory from going out of date.
  • Last-In, First-Out (LIFO) – LIFO says that the items bought most recently should be sold first. The first thing charged as COGS is the cost of the newest items. During inflation, this method can lead to higher costs of goods sold (COGS) and lower income (and lower taxes). International Financial Reporting Standards (IFRS) say it can’t be used, and only a few people do it.

3. Weighted Average Cost (WAC)

For the weighted average cost method, the cost of things sold equals the average cost of all the items in stock. This method evens out price changes because it doesn’t look at the order in which each unit was bought. Some businesses use it when they have a lot of similar things in stock and can’t tell the difference between each unit.

There are pros and cons to each of these methods, and the choice relies a lot on the type of business, the inventory it deals with, and the current state of the economy.

4. Key Inventory Metrics

Key inventory metrics are essential for managing inventory well because they show how efficient, profitable, and healthy a business’s inventory system is. 

Here are some critical inventory indicators that companies, especially those that sell things online, should keep an eye on:

  • Inventory turnover rate: This measure tracks how often a company’s stock is bought and returned within a specific time frame, usually a year. A low turnover rate could mean that you have too much inventory or that sales are slow, while a high turnover rate means that you are managing your inventory well and that sales are good. 
  • Carrying inventory cost: This metric covers all the costs of keeping inventory, like storage, insurance, wear and tear, obsolescence, and lost opportunities. Keeping these prices as low as possible without running out of stock is essential. Usually, carrying costs are given as a percentage of the total value of the goods.
  • Order lead time: This metric shows how long it takes to order with a supplier to get the goods. Shorter wait times can make keeping more safety stock on hand unnecessary and can speed up inventory turnover.
  • Stockout rate: A company’s stockout rate shows how often an item is sold out. Regularly running out of stock can cause you to lose sales and make customers unhappy. You understand how thriving tactics for restocking inventory depend on this metric.

Each metric gives a different picture of how well the inventory is doing, and when used together, they can provide a complete picture of how well the inventory management system is working.

Strategies for Effective Inventory Management

It’s essential to keep track of inventory well to keep costs low and meet customer needs, especially in fast-paced, competitive markets like e-commerce. 

Here are some important things that businesses can do to handle their inventory well:

  • Accurate demand forecasting – To correctly predict demand, look at past sales data, market trends, seasonal changes, and predictive analytics. This helps keep the right amount of goods on hand, so you stay supplied and have enough.
  • Adopt Just-in-Time Inventory – The just-in-time (JIT) inventory plan means ordering goods only when they are needed and keeping stock levels as low as possible. This lowers the cost of storage and transport, but it needs accurate predictions of demand and providers that can be counted on.
  • Dropshipping as an alternative – Products are sent straight from the seller to the customer in a dropshipping model. This eliminates the need to keep much inventory on hand and can reduce storage and shipping costs.

Using these tips, companies can improve how they handle their goods, lowering costs, making customers happier, and helping the company grow.

Advancements in Inventory Management

As technology advances, inventory management stays aligned with the latest software and products. The days of keeping records by hand are over; technology has moved us forward. 

Better technology, shifting customer preferences, and the need for more effective operations are all speeding up this change. Here are some of the latest trends in Inventory Management:

1. Cloud-based Inventory Management

Inventory management tools run in the cloud help companies keep track of their stock. 

Benefits are – 

  • Accessibility: An internet connection can access your inventory details anywhere.
  • Flexibility: You can change cloud-based tools to make them work for you.
  • Scalability: Cloud-based inventory management can keep track of items in more than one place.
  • Real-time working together: The cloud lets people work together right now.
  • Less mistakes: Using cloud-based tools to keep track of your inventory can help you make fewer mistakes.

2. Real-time Analytics and Big Data

Real-time analytics and big data have changed how companies manage their inventory. Businesses can use the power of data to get valuable information about the following:

  • How well the supply chain works
  • What customers want
  • Levels of inventory

It will make things run more smoothly and save money. A business can use information from: 

  • Patterns of how customers act
  • Outside factors
  • Systems for selling things 

Things outside your control, like the weather, can help you get the most out of your goods. It enables you to make changes ahead of time.

Best Practices in E-commerce Inventory Management

For e-commerce businesses to succeed, they need to be able to keep track of their inventory well. Here are some best practices for managing goods effectively and efficiently in an e-commerce setting:

  • Regular inventory audits – Check the accuracy of your inventory by doing regular physical checks. Comparing real stock to database records helps find discrepancies so changes and updates can be made quickly.
  • Efficient warehouse management – Optimize the functionality of your warehouse by organizing it. Create a layout that makes sense, use the right shelves and storage options, and ensure that frequently sold things are easy to get to.
  • Leverage multi-channel inventory management – If you’re selling on multiple sites, ensure all your inventory management is the same and in sync. So, problems like double-selling and running out of stock don’t happen.

Advancing Inventory Management for E-commerce Businesses Can be Helpful for Growth

Today’s continuous growth of e-commerce businesses has opened opportunities for inventory management professionals to step up their game. More and more organizations experience shipping or inventory problems, slowing production.

Thankfully, new technological advancements and trends can level up and create a more seamless operation for any e-commerce business.

Avoid discrepancies by practicing regular inventory audits, promoting efficient warehouse management, and leveraging multi-channel inventory management. Doing so will create a more harmonious workflow for your business.

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