Guide to Effective Inventory Management for E-commerce and Retail Businesses
A Comprehensive Guide For Effective Inventory Management for E-commerce and Retail Businesses
Introduction
Poor inventory management, specifically stockouts and overstocks, causes massive financial losses in the retail sector. According to a 2023 research study from IHL Group, retailers worldwide were on track to lose $1.77 trillion due to inventory distortion. That number is the equivalent of the annual revenues of the Top 10 retailers worldwide.
Effective inventory management is not just a financial necessity but the key to boosting operational efficiency, profitability, business agility, and customer satisfaction for retail and eCommerce businesses.
Scrubbed’s retail and eCommerce accounting experts understand the challenges and opportunities for business owners in this field. In this guide, we walk you through the benefits of effective inventory management and some key strategies that will help improve how your business manages inventory.
The Importance of Inventory Management
Inventory management is about maintaining the right balance between supply and demand. Businesses frequently struggle with overstocking, stockouts, inaccurate forecasting, and inefficient order fulfillment. These drive up costs and also impact customer satisfaction. Whether you’re running a small store, or a large chain, profitability, and operational efficiency rely on robust inventory management.
Key benefits of effective inventory management include:Improved Operational Efficiency
Increased Profitability
Minimizes carrying and ordering costs, preventing revenue loss from stockouts.
Enhanced Customer Satisfaction
In the next section, we outline eight strategies that you can adopt to start realizing these benefits for your retail or eCommerce operation.
In This Guide...
Introduction
Section I
Section I:
Eight Strategies for Optimizing Inventory Management
1. Leverage Technology for Real-Time Inventory Tracking
Implement advanced inventory management software to automate processes, provide real-time insights, and reduce errors.
Many businesses still rely on manual methods, like spreadsheets or paper, to track their inventory. This time-consuming approach also increases the risk of costly discrepancies. We advise eCommerce companies to look at the different inventory management software available to help them manage stock. These platforms provide real-time insights, sophisticated analytics, and automated order processing, helping your business to operate more efficiently, maintain optimal stock levels, and reduce mistakes due to human error.
A Scrubbed client who relied on manual tracking found that their records often showed higher stock levels than they had on hand. This meant frequently writing off inventory as a loss. The lack of accuracy also caused unfulfilled orders and stockouts. When they adopted an automated system, the real-time visibility into accurate inventory levels quickly helped them improve order fulfillment.
Inventory management software saves you time and helps minimize the risk of stockouts and overstocking, ultimately leading to better customer satisfaction and improved profitability.
“There are still a lot of businesses out there that are using manual spreadsheets or sometimes even paper to track their transactions and their inventory. I cannot emphasize enough how much you’re missing out if you don’t venture into automation. Investing in advanced inventory management software can revolutionize your approach to inventory control.”
– Yss Ballos, Director eCommerce and Family Office Group, Scrubbed
2. Segment Inventory
Group products by demand, profitability, or turnover to prioritize high-value items and avoid overstocking low-performing ones.
It’s important to remember that each of your products has unique qualities and characteristics, and effective inventory management cannot be a one-size-fits-all approach. We recommend segmenting your products into categories based on factors such as demand levels, profitability, and turnover rates so that you can put the right management practices into effect for each segment.
For instance, more popular items need to be managed differently than products that sell more slowly or have lower profit margins. This process, known as demand analysis, profitability analysis, and turnover calculation, helps you maintain the right product mix for your business. Focusing on bestsellers and removing your poorer-performing products can boost sales, reduce excess inventory, and improve your overall profitability.
One Scrubbed client identified their most popular products and paired them with related items that were slower sellers to create bundles their customers loved. At the same time, they discontinued the products that were costly to produce or store and weren’t generating revenue. This strategy helped them streamline their inventory while maximizing profits and improving customer satisfaction.
Understanding how each product in your inventory performs at this granular level enables you to make data-based decisions that enhance your product selection and drive growth for your business.
“If you don’t know how much each product costs you, you won’t know if you’re spending too much on them already.” –Yss Ballos, Director eCommerce and Family Office Group, Scrubbed
3. Build Efficient Supplier Relationships
Strong partnerships with suppliers help reduce lead times, improve quality, and secure better terms.
Building solid relationships with your suppliers isn’t just about getting the best deals; it’s about fostering a partnership that makes your whole inventory process smoother and more reliable. When a supplier knows your business well, consistently delivers on time, and offers competitive pricing, it can be a real asset for your supply chain operations. We recommend the following tips to build this kind of relationship with your suppliers:
- Communication is Key: Keep communications open with your suppliers. Share your sales forecasts, tell them about any business changes, and invite them to share feedback. This helps suppliers anticipate your needs and deliver more effectively.
- Treat Suppliers as Partners: Fairness and transparency are the foundation for good relationships in business. If you can set clear expectations, be upfront about your goals, and pay invoices on time, your suppliers will feel valued. In turn, they are more likely to prioritize your business and offer support and suggestions.
- Negotiate Strategically: Don’t be afraid of negotiating for better terms, whether on pricing, lead times or minimum order quantities, but be prepared to offer something of value in return. For instance, you can offer increased order frequency or a longer-term commitment to your supplier.
Investing in your supplier relationships can help you avoid long lead times and stockouts and build a more resilient and responsive supply chain.
Some of our clients have found success by hiring a local representative who works with their supplier on the ground. The representative can help ensure quality checks and improve communication.
Understanding how each product in your inventory performs at this granular level enables you to make data-based decisions that enhance your product selection and drive growth for your business.
Treating suppliers as true partners can create a foundation that supports your business growth and strengthens your inventory management.
4. Consider Just-in-Time (JIT) Inventory
Reduce storage costs by receiving goods only when needed. Best for products with predictable demand and reliable suppliers.
A Just-in-Time (JIT) inventory system means you receive goods only as they’re needed, like ordering groceries right before cooking, instead of stocking up on items that might expire. Major brands like Toyota, Dell, McDonald’s, and Apple use JIT inventory systems to maintain lean operations and stay competitive.
There are several benefits to implementing a JIT system:
- Lower Storage Costs: Because you keep less inventory on hand, you need less storage space. This can reduce warehousing expenses and free up resources for other areas of your business..
- Improved Cash Flow: When you sell inventory quickly, you minimize the capital you need to tie up in unsold goods. This is better for your cash flow, which in turn can help you make investments in new equipment or systems or expand your business.
- Increased Efficiency: JIT means aligning your inventory with the actual demand from your customers. Because you only replace what customers are buying, you reduce your risk of over- or underproduction and generate less waste from obsolescence.
- Better Quality Control: Smaller batches make it easier to spot and address quality issues before they escalate, ultimately maintaining higher customer satisfaction
Is JIT Right for Your Business?
While JIT offers the advantages we’ve outlined above, it’s not the right solution for every business. JIT works best for businesses that have:
- High Demand and Rapid Turnover: Ideal for industries like consumer electronics, fast fashion, and seasonal items with short life cycles.
- Predictable Demand: JIT works well where demand trends are relatively stable, like the food and beverage or pharmaceutical sectors.
- High Holding Costs: When items are expensive to store, such as electronics or jewelry, JIT is an excellent way to bring down those storage costs.
- Reliable Supplier Network: When you rely on JIT, you must have suppliers you can depend on to deliver at the right time and in the right quantities.
- Flexible Production Systems: If your production setup can quickly adapt to changes in demand or product specifications, JIT can be a great fit.
“If you think JIT is a good fit, start by building strong relationships with your suppliers.”
– Winzeth Maglanque, Senior Manager, E-commerce and Family Office
If you decide JIT is right for your business, the first steps are to strengthen your supplier relationships and focus on developing accurate demand forecasts so that you can transition smoothly.
5. Focus on Cost Control and Profitability Analysis
Understand the true cost of products including costs including procurement, storage, and fulfillment) to identify savings opportunities.
Cost control and profitability analysis are a vital part of inventory management. It stands to reason that you can’t set prices that ensure profitability if you don’t have a clear picture of how much your products cost to procure, produce, store, and ship to your customers. On top of that, you risk overspending on warehousing, packaging, or delivery services, which all take their toll on your bottom line.
Analyzing your end-to-end inventory costs will help you uncover inefficiencies that are eating away at profits and make better-informed decisions in the future.
6. Accurate Demand Forecasting
Use data analytics to predict demand accurately, minimizing stockouts and excess inventory.
Maintaining the ideal inventory level without overstocking or running out is a constant challenge, and improving your demand prediction can be a great help. A reliable forecast ensures you’re not tying up cash in excess inventory or losing sales due to stockouts.
The key is combining advanced data analytics with historical sales data. However, it can be complex and may require specialized expertise. That’s why some businesses turn to external partners to help create or refine their forecasting models.
Consider a client we worked with who faced significant issues caused by poor demand forecasting. Their operations team placed large inventory orders without accurately projecting demand. As a result, they were left with unsold stock, which caused high carrying costs and strained the company’s cash flow. To complicate matters, their inventory consisted of food items with expiration dates, adding urgency to their financial troubles. We helped them improve their forecasts and tighten up their cash management, which helped them recover.
7. Prioritize Compliance and Risk Management
Ensure adherence to regulations to avoid fines and protect your brand. Risk management minimizes financial losses from theft or damage.
While compliance and risk management may not sound exciting, they are essential for effective inventory management. Everything in your inventory is subject to a wide range of regulations, from quality standards to specific legal requirements, depending on the industry and location.
Failing to follow the rules can mean fines and damage to customer trust, leading to lost sales and long-term harm to your brand. If your inventory contains items like food or pharmaceuticals, meeting safety standards protects your customers and minimizes legal liabilities.
In addition to compliance, you need robust risk management practices for your inventory to reduce financial losses. Effective risk management helps mitigate risks from theft, product damage, or overstocking expired goods by helping you identify and address potential problems before they escalate. Good risk management also enhances your operational efficiency by streamlining processes and reducing the chances of disruptions.So, while compliance and risk management might not be the most thrilling topics, they are vital for inventory optimization and long-term business success.
8. Continuously Monitor and Analyze Performance
Regularly review inventory metrics and adjust strategies based on data insights.
Continuous monitoring and performance analysis are the best ways to keep a close eye on your inventory and optimize stock levels. The foundation is regular performance reports that let you track how your inventory is performing and help you to identify trends. Analyzing key metrics, like how quickly inventory sells, how often you run out of an item, and the accuracy of your order system, can show you areas for improvement.
The reports are also vital to making data-driven decisions and adjusting your strategy to improve efficiency and profitability. Some key inventory health metrics we recommend focusing on include:
- Gross Profit Analysis: Break down profits by product, SKU, location, or customer to identify which items, stores, or customers are driving the most revenue.
- Cost of Goods Sold (COGS) Analysis: Ensure that your revenue and expenses align accurately, like double-checking your math to ensure everything matches.
- Inventory Evaluation: Ensure your inventory is valued correctly on your financial statements, which directly impacts your overall financial picture.
- Inventory Tracking: Make sure your inventory system reflects real-time stock levels, preventing stockouts or overstocking.
By continuously monitoring these areas, you have a comprehensive picture of inventory management in your business and can identify potential inefficiencies, improve profitability, enhance financial accuracy, and increase customer satisfaction.
Tips for Successfully Implementing Inventory Management
Before diving into new inventory management strategies, first assess your current operations and consider the following factors:
Technology Requirements:
- Inventory Management Software: Do you need specialized software to streamline your inventory tracking, order fulfillment, and forecasting?
- Hardware: Assess hardware requirements, such as barcode scanners, RFID readers, and mobile devices, which can enhance efficiency and accuracy.
- Inventory Management Software: Do you need specialized software to streamline your inventory tracking, order fulfillment, and forecasting?
- Cloud-Based Solutions: Consider the benefits of cloud-based solutions for scalability, accessibility, and remote management.
Staff Expertise:
- Training Needs: Identify the training requirements that your team needs to use any new inventory management tools and processes.
Resource Availability:
- Time and Budget: If you’re introducing a new system, make sure to allocate enough time and budget for implementation costs, including software licensing, hardware purchases, training, and potential consulting fees.
Integration Capabilities:
- Existing Systems: Evaluate the compatibility of the new inventory management system with your existing point-of-sale (POS), e-commerce, and accounting systems.
- Data Migration: Plan to migrate historical inventory data and ensure ongoing synchronization between systems.
Conclusion
Effective inventory management is not just about having enough stock—it’s about having the right stock at the right time. By focusing on steps to optimize your inventory, you can help your business to reduce costs, run more efficiently, and make better decisions. Ultimately, you’ll build a more robust business and provide a better customer experience.
How Scrubbed can Help
At Scrubbed, we understand that every retail and eCommerce business is unique. That’s why we offer customized accounting and finance solutions tailored to your specific needs. Whether you’re a startup looking to establish robust financial processes or an established business aiming to enhance efficiency, our team has the expertise to guide you on your journey to success.
Don’t let inefficient inventory processes hold your business back. Contact Scrubbed today to explore how our expertise can transform your retail operations and increase efficiency and profits. Together, we can unlock the full potential of your retail business.