When inventory is managed well, it can drive the success of any e-commerce business.
However, mismanaging your inventory has some dire consequences, on your customers, your operations, your balance sheet, and your sleep.
Some of the common causes of mishandling your inventory include failure to plan properly, failure to keep track of your inventory, buying too much, failing to monitor your vendors and losing touch with what's in demand.
If you think any of these apply to you - and even if they don't - then this article can help. Follow the inventory management techniques below to avoid the consequences of mishandled inventory.
- First In, First Out (FIFO)
- Minimum Product Levels
- Understocking
- Overstocking
- Inventory KPIs
- Regular Audits
- ABCs
- Forecast Upcoming Sales
- Use an Inventory Management System
Easily track and manage your inventory - and automate tedious steps and processes by using SkuNexus.
First In, First Out
First In First Out, or FIFO, is a way to value inventory. FIFO use the oldest items purchased to calculate the profit on items sold. It works well for businesses that sell perishable goods that have an expiration date.
For example, a grocery store receives 100 units of eggs on Monday and Fridays. If a customer buys a dozen eggs on Friday, it probably came from the Monday delivery, since that's put out to sell first.
Using FIFO, the store correlates all egg sales with the Monday shipment until 100 units are gone, even if a customer reaches back to take a fresher carton. This must seem puzzling, but it's important when prices from a supplier jump around. For example, Friday's shipment might cost more than Monday's due to various economic conditions.
The bottom line is that FIFO moves inventory through the warehouse in a way that's easy to track and understand. Meanwhile, it also accounts for price fluctuations so that you can adjust prices in a way that tracks closely with actual expenses.
Minimum Product Levels
When you set minimum product levels, or par levels, it makes inventory management much easier. After inventory reaches a set amount, the item is automatically ordered so that you have it on hand at all times. This reduces your risk of running out of stock and gives the vendor enough time to deliver the order.
Understocking and Overstocking
Two important inventory management techniques involve knowing and avoiding understocking and overstocking.
Understocking includes going out of stock or having insufficient inventory to fulfill existing orders, and it has huge consequences with your relationships with both consumers and vendors.
When you are understocked you can lose favorable pricing, missed discounts, missed sales opportunities and loss of consumer loyalty.
Rather than lose the trust and faith you have worked hard to build up, implement FIFO, minimum product level re-ordering and forecast cyclical demand, so you can buy more or less depending on the ebb and flow of your business.
Overstocking is caused by ordering too much or keeping items that are no longer selling.
To avoid overstocking, set maximum order levels in your inventory management software. You can also since maximum levels, which are harder to come up with because they're dependent on seasonality and sales.
Use a single system of record for your inventory so that you can keep the right amount of inventory. If you use just one inventory management system for everything impacting your inventory, there's no room for doubt when different management systems give you different counts. The single source of truth will have the up-to-date numbers, so employees across the organization can access the information when needed.
You should also use Key Performance Indicators (KPIs) to set your maximum order levels and to understand how they could change throughout the year.
Track Inventory KPIs
There are three categories of inventory KPIs: sales, receiving and operational. Each of them involves a calculation that helps you evaluate your inventory management techniques.
The main sales KPIs include stock to sales ratio which measures sales versus the stock that's been sold and the inventory turnover ratio, showing the number of times an item is sold and replaced.
The main receiving KPIs include time to receive measuring the efficiency of your receiving process and put away time measuring the total time on the put-away task.
Two of many operational KPIs are the rate of return measuring the percentage of shipped items returned to you and cost of carrying inventory measuring the percentage spent on inventory overhead.
Learn more about these and other KPIs to keep up with your competition and for unbiased metrics that help you stay on track in your inventory management processes.
Audit Regularly
Regular reconciliation is important because what your inventory management software reports and what's actually sitting in your warehouse are often two different numbers, this is crucial if the discrepancies are large and frequent in your organization.
The way you go about this auditing process depends on the effort required, which in turn depends on how much inventory there is.
Many businesses take inventory at year-end because that coincides with the tax and accounting fiscal year end.
Do Your ABC’s
ABC analysis separates your inventory items by the consumption value, the total value of a consumed item over time, typically a year. This is also called the Pareto method. Let's relearn our ABCs.
- A items: goods with a high annual consumption value. Applying the Pareto, or 80/20 rule, tells us that 80 percent of the demand or output comes from 20 percent of the effort or input. A items are low in number but have a high consumption value. So, analysis and control of these items yield the greatest potential for cost savings.
- B items: interclass items whose consumption values are less than A and greater than C items. Watch items in this group that are close to A and C items and that could influence stock management if they fall into A or C. Stock management costs money, so you have to reach a balance, and the scope of this class coupled with your company's inventory management policies help you determine the cost-benefit of reducing costs in the other classes.
- C items: lowest consumption value but high frequency of purchase. This class represents a large portion of your line items that have a relatively low consumption value. Since it's not cost-effective to tightly employ inventory controls at this level, this is where your minimum effort for improvements goes.
Once you understand which of your inventory items fall into each category, you can prioritize accordingly, including restructuring your warehouse to align with this classification. It also helps you identify and track your hidden money makers.
Forecast Upcoming Sales
Forecasting helps you avoid over and understocking during slow and busy times, respectively.
Forecasting is tricky, but there are some tricks to employ to forecast more accurately.
- Use trends from the same time the last year and last month.
- Include your projected growth rate and build in seasonality.
- If possible, figure in promotions and sales you're already planning to put in motion.
Good inventory management techniques need to be backed up by a good inventory management system, and SkuNexus can help you customize your forecasts according to historical inventory data.
Here are a few things to consider before you sit down to prepare a forecast:
- What are the trends in the market?
- What was happening last year in sales during the same week?
- What's this year's growth rate?
- Are there any guaranteed sales from contracts?
- What's the impact of seasonality and economic conditions?
- Are there planned promotions and advertising?
Use an Inventory Management System
Using an inventory management system is a way to bring all these best practices together and track your inventory accurately. An inventory management system lets up update and review stock levels in real-time, which is a big improvement over manual tracking in different systems that might not even talk to each other.
