Whether you’re thinking of selling across multiple online channels or you’re already there, having a strong understanding of your inventory position and a system in place to manage it is absolutely vital to your success. Strong words we know but the importance of inventory management for multi-channel ecommerce businesses can’t be underestimated.
According to IHL Group, overstocks and out-of-stocks cost retailers $1.1 trillion globally. Carrying excess inventory in your business ties up huge amounts of capital and reduces your cash flow. At the opposite end of the spectrum, if you don’t have an item in stock your potential customer will have no problem in going to your competitor – perhaps permanently!
What is Inventory Management?
Let’s start with the basics. Forming part of your supply chain management, inventory management is the process of ordering, storing and controlling your inventory. Done correctly, inventory management ensures you have the right stock available when and where it’s required at a price that meets the market.
Inventory is one of your most important and valuable assets and needs to be managed accordingly.
What are the Benefits of Effective Inventory Management?
- Increased organization –simply having an inventory management system in place (whatever it may be) ensures you have the right processes and procedures that keep you on top of your business and inventory.
- Reduced costs – as your business becomes more efficient overall, you’ll start seeing savings in your operations, storage and less spoilage or out-of-fashion write-offs.
- Improved cash flow – any inventory you have in stock has usually already been paid for. If you’ve managed your inventory correctly, it will move quickly and you’ll enjoy a steady cash flow as a result.
- Improved customer satisfaction – being able to fulfill all orders without delays and backorders is your first step towards keeping your customers happy.
- Improved efficiencies – an effective inventory management system gives you the information you need to order the right stock at the right time and fulfill customer orders. It usually includes tools such as barcode scanners, which improve accuracy and speed in your warehouse operations.
- Increased profits – our research has found that improving your inventory management by just 15% canadd over 30% to your bottom line.
Inventory Management Models
There is a multitude of inventory models and formulas out there but most are a variation of the following three models:
1. Economic Ordering Quantity (EOQ) Model:
This is the lowest amount of stock you need to order so as to meet peak customer demand without going out of stock and without being left with an overstock or obsolete inventory. There is a formula associated with this model and it relies on three variables: demand, relevant ordering costs and relevant carrying costs.
This inventory management model relies on quite a lot of certainty about the timing and amount of sales, and about the reliability of your suppliers to deliver so this model definitely has its limits.
2. ABC Analysis
Otherwise known as Selective Inventory Control, this method sorts your inventory into As, Bs and Cs.
A classified items are very important to your business and are generally fast moving, lower value items but can really make or break your relationship with customers. You want to keep a close eye on your As to ensure you’re never out of stock.
B classified items are somewhat important and mid range in value with less frequency of orders.
C classified items are not of great importance to your business. They’re not often ordered and are high in value. Typically they require less stringent management and you only need to carry low quantities.
3. Inventory Turnover Ratio
This is an accounting ratio, which is basically dividing your cost of goods sold by the average inventory in a year. A high inventory ratio will indicate your fast moving items and a low ratio indicates your slow moving items. You can manage your inventory accordingly by keeping a higher level of stock of fast moving items and slower moving stocks can be maintained at a minimum.
You’ll also want to get familiar with the First in First Out (FIFO) rule which as the name implies, ensures that you’re rotating stock and not being left with expired items at the back of your stock sections. It doesn’t just apply to perishables either, as issues like outdated packaging can give customers the wrong impression about your business.
And always set Contingency Plans in place. Expect the unexpected by anticipating where your risks are and what you can put in place to address them. What happens if sales go through the roof and you sell out of an item? Do you have space to store additional stock during your peak selling season? Can you get access to credit if you’re temporarily short on cash? And a dozen other ‘what if’ questions.
Basic Inventory Management
As with many business processes, very small businesses sometimes start out with tracking inventory in a spreadsheet. When your business is in this phase you’ll generally be able to see your stock, be managing fulfillment yourself or with a small team and you’ll have a good ‘gut-feel’ about when it’s the right time to reorder and how much to order. You’ll probably just be selling through a single channel – maybe a store, a website or an Amazon or eBay store - but once you start selling through multiple channels, you’ll start running into a few issues. This isn’t something we recommend as the benefits of even a very simple inventory management tool outweigh the cost.
Omni-Channel Inventory Management
As your business grows in sales channels, inventory management becomes a whole new challenge. You might begin by allocating a certain amount of stock to each channel but imagine the manual shuffling and constant monitoring that’s required just to ensure that some level of stock is always displayed to your potential customers. At some stage you’re always going to have the dreaded out-of stock displaying, even though you’ve probably got plenty available, just not on the right channel.
On the flip side, you might over represent the stock you have available and fall short when you receive orders from multiple channels. Advising customers that you can’t fulfill their order or that there will be a delay is never great for building your customer service reputation. If this does happen, an inventory management system can let customers know prior to ordering when the next batch of stock is due to arrive.
The truth is that without a real time inventory management system, you can’t be an omni-channel retailer (according to PWC) or at the very least, you won’t be maximizing your opportunities or working efficiently. This in turn reduces your profits and will affect your long-term chances of success.
Multi-channel Inventory Management Software
Automation is the key to growing your business. It allows you to scale easily, improve efficiencies and maintain profit margins. And in the case of inventory, an integrated software solution is vital.
Real-time Syncing of Inventory
One of the most vital tools offered by a software solution is the ability to sync inventory across multiple channels. Your stock count is displayed as a total on every platform and when a purchase is made, the stock count is reduced across all platforms as well. Additionally inventory systems also track inventory per warehouse location. This feature comes as standard with the Neto inventory module. You will also be able to track stock in real time across all locations - from stores to warehouses.
Inventory management models such as the ABC Analysis and Turnover Ratio will help you identify your high turnover stock items that are critical to business, and those of lesser importance. Once you have the information at hand you can use your software solution to set par levels. These are the minimum amounts of stock that must be on hand at all times. Your system can then alert you when a stock item is running low and do everything except hit send on an order placement email.
Completing a stocktake shouldn’t just be a once a year EOFY task. An inventory management system is only as accurate as the information it receives and we recommend you perform smaller stocktakes throughout the year. It could be a partial stocktake by location, by brand or by product type and the good thing is that inventory management software can make it a pretty easy process that allows you to continue trading while you count.
With a true end-to-end inventory management system in place, you can even consider becoming a wholesaler. It essentially becomes another sales channel with a separate pricing structure, all tracked within a single platform.
An advanced inventory management system will allow you to update stock on the go whether it’s adjusting for expired or damaged stock or matching to a physical stock count. It will also allow you to raise purchase orders and receipt goods and obviously keep track of what’s going in and out at any given time. And with an added pick and pack feature, you’ll streamline activities in your warehouse so that orders are fulfilled and on their way to customers quickly, and more importantly, accurately. You’ll also be able to manage returns with ease.
| Related reading: Picking and Packing Made (Really) Easy, With Neto’s Pick’n Pack
With most ecommerce platforms you’ll not only have the option to integrate an inventory management system but then also accounting software such as Xero, so that whatever is happening within your inventory system is replicated in your accounting system without needing you to double handle the data.
| Related reading: Which Accounting Software Is Best for Your Ecommerce Business?
This is the exciting part of an inventory management system: gaining transparency and insights into exactly what’s going on within your business. As a perpetual inventory system, it will automatically keep track of costs and sales so at any moment in time, you’ll know exactly what your moving average cost of goods is.
You’ll also be able to anticipate purchasing with demand forecasting and low stock reports. This is a great way to adapt to changing markets and get a feel for what’s popular and how people are responding. Your sales history becomes a vital tool in planning for the future too.
As an ecommerce retailer, inventory management is the lifeblood for your business and once you start selling on multiple sales channels, you’ll need a management system that keeps up with your needs and ensures you’re operating as efficiently as possible.
For a detailed guide to optimizing your back-office processes, download our guide today.