If you are a retailer, or a wholesaler, it doesn’t really matter if you work from a brick-and-mortar store or are an online merchant, it’s important to manage your inventory so you have the right merchandise and the right quantity of that merchandise on hand to sell. Once a sale is made, that inventory becomes revenue. If you have too much inventory it’s revenue tied up on the warehouse floor. If you don’t have enough inventory, you’re not earning revenue.
Managing the goods you have for sale is an important part of running a successful business. It’s balancing the amount of inventory you have on hand that helps maximize the profitability of any business. This may be particularly important for online or ecommerce businesses.
Why is Inventory Management Important for Ecommerce?
Generally speaking, it’s important to a company’s health to make sure there is never too much or too little inventory in stock so businesses don’t risk running out of the things they offer for sale and don’t tie up capital that could be better spent elsewhere on inventory sitting on the shelf.
Strategically managing inventory is important for ecommerce businesses because it not only includes the products a retailer has on hand, but the quick availability of products that can be accessible from suppliers to ship to customers. Many ecommerce merchants today drop ship (or ship directly from their suppliers) rather than maintaining inventories that would otherwise be required of a brick-and-mortar store.
Even if your online retail operations include outsourcing your order fulfillment to a third-party logistics (3PL) provider, that doesn’t mean you can afford to ignore the available inventory you have for sale. Fortunately, a 3PL can provide tools that will help you successfully manage inventory in a cost effective way.
Methods of Inventory Management
Although there are a lot of nuanced techniques to successfully managing inventory, there are basically three primary ways to approach inventory management. To understand these three methods, it’s important to think of inventory control in terms of the supply chain and how products move from the manufacturer to the store or warehouse and then to the customer.
The PUSH inventory management method
The PUSH strategy refers to products “pushed” down to the retailer from the manufacturer and then the customer purchases the inventory from stock. This strategy will require the retailer to accurately forecast when specific inventory will be needed and stock what they anticipate they will need to sell.
For example, stocking Christmas decorations in July likely won’t generate sales until closer to the holiday season so the PUSH inventory management strategy works well for merchants who can accurately predict customer demand but not as well for those who can’t.
The PULL inventory management method
The PULL inventory management strategy works in the opposite direction. When a customer orders something, the item is then “pulled” from the manufacturer—instead of moving down the supply chain like the PUSH method, the order for inventory moves up.
Last spring I purchased some lawn furniture from a local furniture retailer. The particular item my wife and I wanted was not kept in stock, but needed to be ordered. This is often the case for specialty products, or more expensive items, because it is more difficult to anticipate demand.
Because there is an associated lead time (the time between when the order is placed and when it is received by the customer), this inventory control strategy doesn’t work for every business.
The Just-In-Time (JIT) inventory management method
The JIT strategy is similar to the PULL strategy but retailers ask manufacturers and suppliers to keep enough inventory on hand to meet customer demand. The JIT strategy pushes the costs of maintaining inventory back on the manufacturer.
For this to be a successful strategy, merchants need manufacturers, suppliers, vendors, and 3PL partners they can rely on. Without good partners, successfully meeting customer demand is at risk.
JIT provides lower inventory costs, less stock on hand, and can even make it easier to manage cash flow. However, with the wrong partners there can be instances when a merchant is unable to meet customer demand.
Inventory Management Software
Inventory management software is designed to help make inventory control easier for just about any management method. This article isn’t intended to be a review of the type of software you should purchase, but rather arm your search with some things you’ll need to know to choose the right software. By the way, Googling “inventory management software” reveals 659 million individual listings, so it’s likely you’ll be able to not only find a good management software, but will likely be able to find one designed specifically for the products you sell.
Before you begin your search though, there are some questions you should be asking yourself that will help guide you to the software that will make the most sense for you:
What do you need the software to do?
Are you managing inventory you keep on hand? For example, does it make sense for your inventory management software to also monitor incoming inventory? A PULL or JIT method might require that you have a handle on inventory you are waiting for. Do you want to be able to barcode everything coming in and going out, or do you not need that functionality?
Make sure you communicate your needs with any software vendor you meet with and ask to speak with current customers who use their software similarly to how you anticipate using it. That way you can get a better idea of how the software does what you need it to do in the real world.
How much does it cost?
In a perfect world, cost wouldn’t matter—but we don’t live in a perfect world. Cost will probably be influenced by a lot of factors, including your requirements. You need to make sure the costs you’re paying are justified. If not, you may need to make compromises.
Remember, you probably want to consider inventory management software that will allow you to grow into it a little. So as you’re evaluating your needs, don’t be afraid to look into the future to anticipate what you might want down the road too.
Do you want something customizable?
On the surface a customizable software might sound appealing, but it also will come with a cost. Many software offers the ability to customize so if that’s what you need, make sure it will allow for that before you sign on the dotted line.
Is the software user friendly?
This is a really important question to ask. I had a software design colleague who used to say, “Is it as easy to use as my smartphone?” Most people don’t get trained on how to use their phone, but they are able to easily and efficiently use it.
This is another thing you’ll want to talk to current customers about. If the software vendor suggests you pay for weeks of training, that should be a red flag that the software is clunky and not very intuitive to use. Enterprise software is famous for being a little less than user friendly.
It doesn’t really matter how powerful the tool is, if it’s difficult to use, it won’t get used. Make sure it will be easy for you (or anyone else responsible for inventory management in your business) to use.
Will it integrate with my accounting system?
I’m of the opinion that in most organizations the buck stops with the accounting team. Integral to understanding profit and loss is understanding inventory. Fortunately, most project management software will integrate with your accounting software. Some will just do it easier than others. Make sure you have a conversation about your accounting package and how easy or difficult it is to integrate.
You’ll also want to confirm that it will integrate with any other systems you’ll need it to.
Is reliable customer support available?
Even the best and most reliable software sometimes experiences a glitch, making customer service an important feature. Make sure that if there is an issue you’ll have recourse to work through it.
Ecommerce Inventory Management Strategies
Building an ecommerce inventory management strategy requires action in a handful of areas you just can’t ignore.
Understand the demand for your product or products
Understand the ebb and flow of demand for your product throughout the year. Even though you might not have a seasonal product, most demand fluctuates over the year. An easy way to do this is to leverage Google Trends to measure the ups and downs of search demand.
Use past sales as a way to forecast future needs
The younger your business is, the more difficult this can be, but if you’ve been in business for at least a year you can look back at the same time period last year to help you anticipate your inventory needs this year.
The longer you’ve been in business the less you’ll need a crystal ball to anticipate demand and the more you’ll be able to accurately forecast.
Determine what you’re minimum viable stock levels should be
Because you don’t want to miss out on any sales (if possible) based on your forecast, determine what the appropriate minimum inventory level is for any of the products you offer for sale and make sure to keep at least that amount of inventory in stock.
Once you understand the ebb and flow of your business and have forecast for the year what your inventory needs will likely be, make sure you are prepared for any seasonality that might impact your business by ensuring you have the right inventory in stock for those times when demand is the highest.
Determine and implement the inventory management strategy that makes the most sense for your business
Whether you use inventory management software or not, make sure you implement the strategy that makes the most sense for you and your customers. Put the partners in place that will help you succeed. Fortunately, your suppliers want you to succeed almost as much as you do because they realize that in real terms, your success is their success.