Logistical challenges are one of the biggest problems that fast-growing 7 and 8-figure eCommerce businesses face. Sometimes, it is related to hiring and customer service challenges. But more often than not, it is tied to inventory planning (or lack thereof).
This tends to be more apparent leading up to seasonal sales spikes, like the busy Q4 holiday season when a business is facing a cash flow shortage (so they are struggling to meet payroll often due to the needing to spend on both product and ad costs prior to having the opportunity to sell anything)) or has too much or too little inventory on hand for the busy season.
Fortunately, there are things you can do to better plan for seasonal spikes.
In this post, we’ll cover the way you should be thinking about inventory planning and five of the most common issues you’ll face and how to tackle them.
How to think about inventory planning for eCommerce businesses
When it comes to inventory planning, there are a lot of moving parts that you need to factor in.
- Order placed: This is the moment when you place a new inventory or raw material order.
- Goods shipped: You should keep track of when the order is shipped.
- Goods received: This is important since it reflects stocks on cost, which includes any freight or customs fees.
- Goods stored: Now that you’ve placed the order, you need somewhere to store all of that inventory.
- Goods used: Because warehouse storage is expensive and some inventory may be perishable, you need to keep track of your inventory turnover rate. That’s how long are raw materials as well as product SKUs sitting around before they are used or sold.
- Tracking: Do you have reliable methods in place for keeping track of all of your raw materials and goods? This is not only important for operational efficiency, but to protect against theft / fraud.
- Goods reordered: When you know inventory turnover rates, this helps with knowing how often to reorder.
- Forecasting: Inventory forecasting can help you be more proactive with planning throughout the year, especially if you see seasonal spikes in sales.
Pro Tip: Using cloud inventory management software can make this process a lot easier.
You also need to do regular inventory auditing. This is particularly important during the Black Friday holiday season when inventory is likely to be moving faster through your system with increased sales.
Having a firm grasp of the inventory concepts above will help you as you move into mitigating inventory planning issues.
6 most common inventory planning issues
Some matters are out of your control when it comes to inventory management and others can be predicted.
Here are six of the most common inventory planning issues caused by both internal and external forces, plus advice to help you prepare for each one.
Supply chain issues
One of the biggest challenges facing eCommerce businesses today is supply chain issues. From raw material shortages stemming from the pandemic to increased demand for manufacturer goods in Q4, eCommerce owners are feeling it.
Second-order effects, also known as ripple effects, can intensify the impact of supply chain issues. This means that each action within the supply chain sets off a chain reaction that impacts each step. For instance, if your manufacturer has a delay in raw goods arriving at their plant, they’ll be delayed in creating your widgets. Your purchased widgets can’t go to the shipping carrier until the following month, meaning you won’t get your shipment until then. The effects ripple through the supply chain and affect your bottom line.
One of the best ways to combat supply chain issues is to keep close tabs on your inventory and demand. This will help you order well in advance so delayed shipments won’t be as devastating to your operations. Most importantly, over-communicate with your customers. Many shoppers are understanding if you stay in contact with them and let them know the status of their orders.
Inventory shortages and overages
We’re living in an interesting time where eCommerce stores are just as likely to be overstocked as they are to be understocked. During the pandemic, high demand sent business owners scrambling to keep items in stock that were flying off the shelves, leaving many stores with overstock and others without enough to meet demand. A lot of factors contributed to this excess ordering including shipping delays, government loans, and chip shortages. However, these problems are all made worse by insufficient inventory planning.
Both overage and shortage issues can be helped by monitoring inventory levels. Understanding your stock levels will help you know when to reorder, what quantity to purchase, and how long you can afford to keep your stock in a warehouse. This will keep you in a better position when you run into supply chain issues.
Not using inventory management software
Monitoring inventory in real time is critical for accurate inventory planning. If you’re still relying on manual spreadsheets or paper tracking, then it’s time to move to an automated system.
Automated inventory management software with tools like Inventory Planner is more efficient and accurate than manual tracking. It can give you real insights into where your inventory is at any given time, so you’ll know exactly how much inventory you need to purchase and when.
Inventory software also allows you to automate workflows, manage inventory listings, and even reveal previous sales patterns through automated reports to help you predict seasonal demand. Without automated software, deciding how much to stock for the holiday season is similar to a guessing game.
Not monitoring your inventory accounting metrics
Inventory accounting metrics help you make predictions about your inventory that are key for planning purposes.
At the bare minimum, this means keeping track of these three things:
- Turnover: Turnover, or inventory turn, refers to how often your product is sold and replaced, typically on an annual basis. Low turnover can indicate you have too much inventory on hand.
- Average age of inventory: Also known as inventory aging, this metric shows how much time it takes to sell a product. If your inventory has been sitting too long, you may want to consider dropping the price or bundling it with another product to move it out.
- Inventory carrying cost: The carry cost of your inventory includes all costs associated with holding the inventory, such as rent, maintenance, damages, Amazon FBA storage fees, and expirations for perishable items. This metric will often be expressed as a percentage and varies widely by industry. For instance, the carrying cost of selling a pack of gum will be much lower than selling an RV.
However, we recommend taking this a step further and keeping track of all of these inventory accounting metrics.
Understanding these metrics will help you track the health of your business and manage inventory planning. Without them, you could be stocking your store in the dark.
Unreliable vendors and manufacturers
Even careful eCommerce business owners run into unreliable vendors at times. Vendors may drop the ball on a shipment, overpromise what they’re capable of delivering, overcharge for items or shipping, deliver damaged or questionable products, refuse to be held responsible for issues, and more. Some of these problems are out of your control as a buyer.
Vetting your vendors before going into business with them and doing your research can help you avoid some negative situations but not all. The best thing you can do to mitigate your risk of being burned by a bad vendor is to diversify. Look for multiple vendors that you can count on for product and supplies. If one turns out to be a poor company to do business with or is unable to fulfill your order for any reason, you can go to the next supplier on your list. It’s much easier to get a product in a pinch from a supplier you’ve established a relationship with than a brand new one you had to find at the last minute.
Insufficient cash flow
As you know, eCommerce businesses are cash intensive businesses to run.
Even if your sales are up, you can still run into a major cash crunch, where you are out of stock and all of your cash is tied up. So, you can’t order the known quantities you need to meet expected demand.
Pro Tip: If you run into this issue, turning to revenue-based short-term financing like WayFlyer, Settle, and ClearCo may be an option. So, you can get the funds for inventory without having to give up equity in your company.
Inventory planning is crucial year-round, but you’ll feel the difference it makes the most during the busiest sales periods of the year. Take the time to get your inventory in order now so you can reap the benefits in the future.