What are the best practices for eCommerce inventory management? We dive into all of the ins and outs.
Managing inventory is the most critical part of running a successful eCommerce business. However, it can feel like riding a rollercoaster – you have to make sure you have enough stock so that you don’t run out of product every other day while ensuring that you don’t have a warehouse full of excess inventory that won’t ever sell. All while balancing the ever-present concern of appropriately managing your cash flow.
In our experience, one of the best things you can do to get a better handle on inventory management is having a clear understanding of your finances. When you know your numbers, you can better forecast how much inventory to purchase and when to buy it.
In this post, we’re going to dive into the ins and outs of inventory management, including:
- What is inventory management?
- Why is inventory management important?
- What’s the best process for managing inventory?
- What to consider when choosing eCommerce inventory management software
- How to do inventory forecasting
What is inventory management?
Inventory management is the process of keeping track of all products in your warehouse(s), sales, shipments, deliveries, and returns.
When you are first starting out or only have a handful of SKUs, inventory management is fairly simple. However, when you sell on multiple channels – like Amazon, Shopify, Walmart, and eBay – and/or have hundreds- if not thousands – of SKUs, inventory management is complex.
Pro Tip: In addition, it is important to understand the difference between unit costs and landed costs.
Unit costs are the purchase order amount / quantity of goods ordered.
Landed costs also include freight, insurance fees, customs and duties fees, and more.
Why is inventory management important?
It is simple as this – no inventory equals no sales.
If you don’t have great inventory management systems and processes in place, it is going to affect every aspect of your business, especially sales.
Here’s an example of what can go wrong if you have poor inventory management.
Let’s say you run an eCommerce business selling protein bars.
You don’t have great bookkeeping in place, and you automatically ordered 500 bars six months ago. 4 months later, sales are super slow, and you still have 425 protein bars sitting in your warehouse in California.
You bought 250 bars last time, and they sold out within 90 days. And, you were banking on even more money and quicker sales this time around in order to pay your rent and team.
Now, you are struggling to meet payroll.
You want to do a flash sale to get rid of the remaining inventory before it expires, but because you didn’t look at your numbers regularly, you don’t have any money to run PPC ads.
This might be an extreme example, but when you purchase inventory without consulting accurate and up-to-date books, you are setting yourself up for problems. This includes both losing money from either not being able to handle an unexpected surge in orders to excess inventory from unsold products.
What’s the best process for managing inventory?
There are many different accounting methods for managing inventory. We’ll cover the three more common methods below:
First In, First Out (FIFO) –
This is the most popular inventory accounting method and essentially means that the inventory that was ordered first was sold first. This means that on your balance sheet, you’ll see the last purchased inventory.
Last In, First Out (LIFO)
This is a way of tracking inventory as the last items ordered are the first out. Some old school accountants use this method as a way to save more money on taxes.
Weighted Average Method
This is where you assign costs based on the weighted average. To calculate this, you need to calculate the costs of goods that are for sale by the total number of units.
What to consider when choosing eCommerce inventory management software
With all of the complexities around inventory forecasting and management, it is in your best interest to have systems, processes, and tools.
While it might be tempting to save money, we don’t recommend going the DIY route of managing all of your inventory in spreadsheets or worse paper and pen.
Now, if you only sell on your own website and don’t sell on any marketplaces, you can probably get away with just using the built-in inventory management on an eCommerce platform like Shopify, BigCommerce, or Magento.
However, if you sell across several different marketplaces and channels, using eCommerce inventory management software – such as DEAR or Inventory Planner- will save you a ton of time and money.
How to do inventory forecasting
One of the hardest parts of inventory management is knowing how much product to order and when to order it.
This is where inventory forecasting – a.k.a. demand planning – can come in handy.
Pro Tip: This is another reason to use inventory management software since it makes it easier to do inventory forecasting.
Forecasting allows you to create sophisticated models to forecast future demand based on your sales projections, revenue and profit figures, financial reports, and existing inventory activity.
Pro Tip: To account for seasonality, use your highest month of sales (let’s say it’s December) as the baseline, then build the forecast off the relative percentage of sales against December as the future baseline. So, if you did $100k in December and in January did $93k, we would forecast 93% of December forecast as our January baseline. the 7% delta would be attributed to seasonality.
Avoid these common inventory forecasting mistakes
If you are new to inventory forecasting, here are some of the most common pitfalls that sellers run into, including:
- Not accounting for seasonality in their forecasts
- Using the same forecast for all of their products
- Failing to exclude any big sales or marketing campaigns you ran
- Running forecasts based on inaccurate or not up-to-date revenue numbers
In sum, without proper inventory forecasting and management, you are likely leaving lots of money on the table — be it from having to turn away orders from being out of stock or having excess inventory in a warehouse.
- A detailed guide to eCommerce inventory management - 13 October, 2020
- The 4 Essential Bookkeeping Reports Every eCommerce Business Needs - 6 October, 2020
- eCommerce Bookkeeping: Everything You Need to Know - 10 September, 2020