Mastering Inventory Management: A Comprehensive Guide for eCommerce Businesses
How do I manage my inventory efficiently?
Inventory management is the backbone of any successful eCommerce business. It’s a delicate balancing act - ensuring you have sufficient stock to meet customer demand, while minimising associated costs. When done right, effective inventory management can boost sales, reduce inventory costs, and enhance customer satisfaction. However, mastering this art is easier said than done. Here are some key techniques that can help you optimise your inventory management.
Inventory management is the backbone of any successful eCommerce business. It’s a delicate balancing act - ensuring you have sufficient stock to meet customer demand, while minimising associated costs. When done right, effective inventory management can boost sales, reduce inventory costs, and enhance customer satisfaction. However, mastering this art is easier said than done. Here are some key techniques that can help you optimise your inventory management.
1. The Power of Demand Forecasting
Every business, regardless of its size or industry, should be engaged in demand forecasting. This involves predicting what products will sell and ensuring you have enough stock to meet this demand. As Steve Jobs once said, “Our job is to figure out what they’re going to want before they do”.
Demand forecasting can guide you in making efficient restocking and reordering decisions, reducing storage costs, and preventing backorders and stockouts. There are numerous ways to approach demand forecasting, all with the same goal: to predict customer demand.
This process can be passive, using previously collected business data and other datasets to identify emerging patterns and trends. Alternatively, it can be active, involving customized assessments tailored to each situation.
With the rise of artificial intelligence and machine learning, we’ve seen an increase in automated forecasting methods, often incorporated into enterprise resource planning (ERP) systems.
Demand forecasting can be based on short-term or long-term predictions, each with varying degrees of accuracy. It can also incorporate micro-level (internal) data collected from and about the customer, or macro-level (external) data considering larger trends such as industry performance or competitive influences.
While demand forecasting is a complex aspect of inventory management, it’s worth investing time in research to find the best approach for your business. Most likely, you’ll end up using a combination of methods.
2. The Safety Net of Safety Stock
One of the worst scenarios for an eCommerce business is running out of stock. This not only disappoints customers but also means potential lost sales. One way to prevent this is by maintaining safety stock - an extra quantity of a popular product to safeguard against sudden demand surges or inaccurate market forecasts.
Safety stock can be a lifesaver during busy periods or festive seasons, and it can provide a buffer if supplier lead times are longer than expected. It can also protect your business against price fluctuations due to unpredictable markets, material scarcity, or new government measures.
However, safety stock comes with its own challenges. It can be costly to hold inventory for extended periods, and there’s the risk of waste if the item doesn’t sell. So, be cautious when stocking up on seasonal items - no one wants a Christmas jumper in January!
3. Prioritising with ABC Analysis
ABC analysis is a popular inventory management technique that categorizes inventory into three groups based on their importance to your business. This can help you prioritize which items to order and store, and which items require more oversight.
By analysing data on sales history, cost, and inventory levels, you can sort items into the following groups:
A items: These are the most important items in your inventory, accounting for 20% of your inventory items and up to 80% of the inventory value.
B items: These are of medium importance, accounting for 30% of the inventory items and about 15% of the inventory value.
C items: These are the least important items, accounting for 50% of the inventory items but only around 5% of the inventory value.
ABC analysis can lead to better decision-making, especially when you’ve identified your “A products”. However, it can be time-consuming to implement and doesn’t account for demand patterns, seasonal demands, or lengthy lead times.
4. The Art of Reorder Points
Reorder points are a crucial part of inventory management. Simply put, it’s the point at which you reorder stock. Knowing when to replenish your stock will prevent stockouts, and ordering when you have zero stock means you’re at the mercy of lead times before you can fulfil a customer order.
Reorder points help you optimize your inventory by ensuring you order in time to meet market demands before running out of stock. It’s important to calculate reorder points accurately, considering lead times, the amount of safety stock, and the daily average usage of an item.
5. The Role of Inventory Management Software
Last but not least, various inventory management software packages on the market can help consolidate and optimise your inventory management, making the whole process more efficient. While they can be expensive and may require some time to familiarise yourself with, they could potentially save you money and time in the long run.
Mastering inventory management is no small feat, at IDShip we utilise or experience to help you manage your stock efficiently. Our software can help you with all the key techniques mentioned above to maximise your return on stock investment. Speak to us today to find out how we can help, and you’ll be well on your way to running a more efficient and profitable eCommerce business.