Inventory management is vital to any e-commerce business. If you don’t establish an effective inventory management approach, you risk frustrating customers, losing vital sales or investing in inventory that doesn’t sell. The following article is part of our Inventory Management Blog Series which covers all aspects of developing an effective inventory management strategy so you can optimize your sales and profit.
Inventory is one of the most important parts of running your ecommerce company. When you buy, stock, and sell the right products, revenue goes up, profitability increases, and your business scales.
The problem is managing your inventory is no easy task. It can be complex because securing products and generating sales aren’t the only things you need to focus on. You incur costs for purchasing, transporting, and housing inventory. If you don’t manage your stock properly, these costs can build and cut into your profits.
A key reason many businesses fail when managing their inventory is they haven’t thought about the costs that come with it. Keeping costs down is essential to good inventory management. When costs escalate, they can hit your bottom line big time preventing you from growing your business.
Why might costs go up? Often it is because of basic errors in how data is captured and calculated. Forecasts might be figured inaccurately, staff might enter data incorrectly, or your warehouse might report incorrect inventory levels.
This results in frequent overstocks or low stock levels, which can slow down productivity and sales momentum. Inventory mistakes can also impact other aspects of your business, making it crucial to put inventory controls in place as soon as possible.
Source: Anand Subramaniam, Lean Consultant
In this chapter, we will cover the common inventory management mistakes to avoid and what to do to improve your system so you can meet customer demand and keep your costs low.
- Common Inventory Management Mistakes
- Poor Demand Planning and Forecasting
- Warehouse System Weakness
- Infrequent Inventory Checks
- Human Error
- Strategies for Improving Inventory Management
- Get More Granular With Your Safety Stock Management
- Use Slotting and Warehouse Management
Common Inventory Management Mistakes
Picture it: you’ve got your marketplace and your online store. It’s 2019 and you’re able to offer your products to customers through multiple online channels.
Things are going great, too. Profits are up; customers are happy.
However, you haven’t invested in inventory management software and therefore haven’t automated your system yet. Eventually, this comes back to haunt you.
Imagine one day soon a customer orders an item from your Shopify store. However, just five minutes earlier, another customer bought the last of that item from your Walmart Marketplace.
As a result, the customer who made the order on Shopify is left disappointed because it’s now out of stock and you’re left red-faced. Worse yet, this directly impacts their experience with your online store and might prevent them from purchasing from you again.
This would not have happened if you were automating inventory level updates through a comprehensive inventory management process. Once you start to automate, it mitigates the likelihood you will run into this situation. This means fewer disappointed online shoppers and more integrity in your customer purchasing experience. You’re no longer left dealing with losing a potential loyal customer due to mismanaged inventory.
Overordering is bad news, but again it’s something that can all too easily happen if you don’t have an inventory management software in place.
When we overorder, it’s normally because we are not properly forecasting. We’re playing a guessing game with rough estimates, assuming figures, and trying to predict sales.
It’s a very risky guessing game that can easily land us in trouble.
Let’s imagine you order too much stock. While it’s tempting to think the market might pick up and you’ll sell that stock eventually, sitting stock or dead stock can have its own set of issues you will need to deal with.
For one thing, you’ve got all the holding costs that come with storing the excess stock in your warehouse for an indefinite time. This leads to cash flow issues where most of your profit is spent maintaining and storing the stock instead of investing it in products that are selling. This can cripple your business, forcing you to sell the product at a significant discount to move it.
A lack of cash flow is one of the major contributing problems to why a business might fail. When there’s no cash flow, it’s very hard to keep your company operating properly.
If all your capital is tied up in stock no one wants right now, your business will be in a very tight situation. However, this is something that can be so easily avoided by implementing inventory management software that improves the accuracy of your forecasting.
Poor Demand Planning and Forecasting
Overordering and overselling can both stem from poor demand planning and forecasting.
Overordering and overselling can both stem from poor demand planning (also known as inventory forecasting.
Working with your suppliers is a delicate balancing act. There is a lot of data that must be accounted for when creating purchase orders and estimating how much stock to request. This includes lead time, minimum order quantities, units of measure for inventory items, and pricing information. Having a good purchase order template is critical for keeping things running smoothly.
All of this data must be consistent and accurate to establish an efficient partnership with your suppliers. If it isn’t, you risk delays in receiving new stock, which could cause expectant customers to be left unhappy.
Inventory management software can store this information and use it to automate your reorder process. This simplifies stock replenishment because it can combine your sales data, supplier information, and forecasted sales growth to predict how many units are needed to keep up with consumer orders.
Extensiv Order Manager, for example, has a purchase order module that allows users to create, edit, cancel, and track vendor purchase orders. It also has an “Auto-PO” feature which automatically generates purchase orders using the vendor information, sales data from your sales channels, and inventory data across your warehouses.
How this system calculates this data can be adjusted for each SKU in your product catalog, allowing or in-depth SKU inventory management.
This feature allows Extensiv Order Manager’s software to forecast how many units to order so businesses never run out on a warehouse level.
If you implement a feature like this, relations between you and your suppliers will improve, turnaround times will be consistent, and your customers will trust your brand and reward you with their loyalty.
Warehouse System Weakness
If issues are plaguing your warehouse, your inventory operations will become inefficient and you’ll lose cash — lots of it. Businesses are estimated to lose an average of $390,000 each year due to picking errors.
Communication is an often overlooked aspect of what makes a warehouse run efficiently. If your team isn’t aligned on how to communicate updates among departments, it can severely impact their productivity or lead to major errors. Messages will be missed, orders won’t be carried out, and problems will mount — and this can all have a serious effect on your fulfillment turnaround time.
Good communication improves the overall performance of your warehouse. This includes establishing a system for how updates are shared, whether it be through email, an internal messaging application, or directly within your inventory management software. This can be improved even further if the software and applications you use are integrated, allowing consistent data to flow between your systems.
Then there’s health and safety. Worker’s safety and health compliance rules need to be followed to the letter to ensure your employees are safe. With less risk and fewer accidents or injuries, your employees can remain healthy and productive.
To this end, have a clear plan regarding where pallets, equipment, and boxes are to be stored, staged, inspected, packed, and so on. Not only will this keep your workers safe, but it will also boost their productivity levels.
Infrequent Inventory Checks
Implementing an inventory management system helps to improve inventory tracking and reconciliation. The system provides real-time inventory and a historical log of all changes that were made to your units, helping you to pinpoint exactly when and why inventory was added or removed. This helps to streamline inventory checks and mitigates the chance of your quantities being captured incorrectly.
While the inventory management software makes it easier to track your units, it is always best practice to manually check inventory. Make sure to perform regular inventory recounts to capture any potential discrepancies in your inventory levels. Be proactive about monitoring and checking in any time there are significant changes to your inventory, like a large shipment out of your warehouse or receiving inventory from your suppliers. When you check your inventory often, you can identify problems before it’s too late.
Bad data in means bad data out. Unfortunately, you cannot fully prevent human error and there are situations when someone might track the wrong information.
The risk of human error increases when you are manually tracking your inventory. Using an automated inventory system helps to reduce this risk by keeping your data consistent from when you place a purchase order with a vendor, to receiving it at your warehouse, and finally shipping units out to a customer.
And although you might think slight inconsistencies in inventory might not be a serious issue, you must also consider the repercussions that can eventually result from it:
- Missed sales opportunities: This can be overselling or showing as out of stock when there is inventory sitting in your warehouse.
- Miscalculations in reorders: Determining how much stock you need to reorder is based on how much inventory is at your warehouse. If your existing stock number is wrong, your reorder estimates will be too.
- Increased storage costs: If you have more stock than anticipated, you will get hit with charges for housing that stock at the warehouse. This can impact your anticipated costs and your expected revenue.
Having your inventory process tracked automatically in one place helps to pinpoint potential errors and prevent these issues from happening.
Strategies for Improving Inventory Management
If you can’t put in place an effective inventory management system, you will lose out to your rivals. Remember that your inventory management approach impacts several aspects of your business, including your sales, customer satisfaction, staff performance, and ultimately your profits. Here are some tips on how to improve your system if you find yourself running into the mistakes listed.
Get More Granular With Your Safety Stock Management
The reason we carry safety stock is to avoid a stockout. Stockouts happen due to unpredictability in supply and demand.
Safety stock also protects you when you’ve miscalculated a forecast, and it ensures customers are kept happy.
But how should you manage your safety stock tactics?
The best thing to do is to get more granular. Use your point of sales data to get more information about how quickly products move. This information lets you optimize your inventory so you can put together an automated replenishment process.
Once you integrate this data into your inventory management process, its accuracy and timeliness will improve your overall flow of inventory so you meet customer demand consistently.
Use Slotting and Warehouse Management
A warehouse management system can help you put in place a slotting strategy that lets you store items in the most appropriate places in your warehouse.
This is a good idea because a well-organized warehouse increases productivity while keeping your costs down.
When slotting, bear in mind the following:
- Rank items by regularity of use.
- Consider how big each slot is.
- Store the items that move fast in the best locations.
A good warehouse management system will let you optimize your slotting tasks based on product history, movement, and velocity. Accordingly, human error is minimized, less time is wasted, and the space in your warehouse is much better managed. For example, instead of staff running around trying to locate an item in your warehouse, fast-moving items will be placed in a strategic location where it’s easy to find and access them.
Another key part of warehouse management is to track your staff performance and rewarding them for good work. The more appreciated staff feel, the better they will perform.
Warehouse management systems can help you here, too. By monitoring worker performance metrics, the system lets you reward your workers instantly according to their high levels of productivity.
Another idea is to implement a performance-based touch base for those workers who need to do better.
All in all, it’s impossible to understate the importance of an effective inventory management system. Mistakes are common, but they can be greatly reduced by automating the whole process.
That’s not to say there won’t still be mistakes. There will be, but your margin for error will be enhanced and the errors you make when forecasting will go down. This will save you money, time, and it could save your entire business.