Inventory is the heart of e-commerce, and it’s a no-brainer. Managing it right has a lot of benefits, from smoother warehousing to a boost in profits. With e-commerce booming globally, there are a lot of opportunities for businesses big and small.
But here’s the twist—it also means more competition as new players join the field.
So, what’s the key to staying ahead?
An innovative inventory management process. It’s not just a backroom task; it’s a powerhouse move in supply chain strategy, especially when things get uncertain. In this post, we’re diving into eight techniques to help businesses master the art of inventory management.
What is Inventory Management for E-commerce?
Inventory management for e-commerce is a system that empowers retailers to enhance all facets of their business. This technology enables seamless warehouse operations and facilitates intelligent financial choices. But first of all, what is ecommerce? E-commerce, short for electronic commerce, is the buying and selling of goods and services over the Internet.
Understanding your inventory levels is key to success, aligning everything else smoothly. Ecommerce South Africa inventory management, primarily focusing on online product sales, is essentially similar to good inventory management. Mastering this process enhances business efficiency and trims operational expenses.
Eight Methods to Optimize Inventory Management for E-commerce
If you know the components of inventory management, here are some methods to optimize the functions of inventory management:
Conduct ABC analysis
ABC analysis is a handy method that sorts inventory into three categories—A, B, and C—based on their importance to the business.
A represents the most crucial items, B is moderately necessary, and C is the least essential. This technique follows the Pareto Principle, where 80% of sales come from 20% of items, also known as the 80/20 rule.
The perks of ABC analysis are abundant. It aids businesses in prioritizing inventory, avoiding overstock and understock issues, reducing lead times, and enhancing supply chain efficiency.
This method ensures improved customer service and lowers costs associated with inventory management by maintaining the right items in the right quantities.
Dropshipping is like the “anti-inventory” method—business owners never handle the product. When a customer orders, it’s fulfilled and shipped directly from the manufacturer, cutting out the middleman. This is perfect for those entering eCommerce without the funds for a warehouse. However, shortcuts come with risks.
Here’s how it works:
- The supplier provides product details like SKU, quantities, and cost
- The data feed includes titles, descriptions, categories, and images
- The customer places an order, and the owner contacts the supplier
- Supplier ships products directly to the customer
Benefits of dropshipping:
- Inventory tracking
- Avoiding overstock or understock
- Cost control
- Managing orders and returns
Implement an efficient scanning system
Take advantage of automation for tasks that don’t need a human touch. Barcodes are affordable, and avoiding human errors is crucial.
- Scan products during receiving, moving, shipping, or any changes
- Without a scanning system, errors like mistyped SKUs and inaccurate inventory data may occur
- This is risky, especially for expanding eCommerce with more SKUs in a larger warehouse
Set PAR level
When managing your e-commerce inventory, consider setting a Periodic Automatic Replacement (PAR) level. PAR level is the inventory quantity needed to cover the demand during your supplier’s lead time. It acts as a buffer for unexpected surges in demand or delivery delays and is commonly known as safety stock.
- If you sell iron boxes with a weekly demand of 300 units and a lead time of one week, your PAR level could be 375 iron boxes.
- This ensures you meet weekly demand (300 iron boxes) and have an extra 75 units as a safety buffer for unforeseen circumstances.
Demand forecasting is a must-have move for businesses looking to ace their inventory game. You will get to predict customers’ wants, helping businesses craft winning strategies.
This savvy technique isn’t just about guessing; it’s about using historical data, sales analytics, marketing smarts, financial insights, and even keeping an eye on external factors like the economic vibe.
Why bother? Well, when you know what customers are likely to want, businesses can slash those inventory costs. You will have a heads-up to adjust prices and offerings, keeping things competitive in the market. It’s not just about forecasting; it’s about staying ahead of the curve and giving customers exactly what they’re after.
Maintain a healthy supply chain
Auditing the supply chain is crucial for eCommerce businesses, especially those involving kitting or assembly.
Whether dealing with handmade jewellery, secret recipes, or electrical components, businesses with multiple vendors or manufacturers should regularly assess their supply chain’s essential components.
Even if the supply chain involves only one or two vendors, periodic audits are worthwhile. Setting reminders every six months allows businesses to map out critical components, compare lead times and costs with competitors, and identify any unfavourable trends, such as consumer returns or faulty goods.
This approach helps businesses address supply problems promptly and ensures a robust and efficient supply chain.
Optimize orders with EOQ
Economic order quantity (EOQ) is crucial for effective e-commerce inventory management. It determines the optimal order quantity based on factors such as demand, per-order cost, and cost of obsolescence. While it may appear simple, the long-term impact of implementing EOQ can be significant, especially for high-turnover businesses.
The annual demand represents the expected units to be sold in a year, while the ordering cost covers the expenses associated with placing an order.
The carrying cost, a bit more complex, includes explicit and implicit costs like warehouse insurance, depreciation of storage racks, costs of obsolescence, and other expenses related to inventory storage.
Safety stock management
Safety stock, often called ‘buffer inventory,’ is the additional product inventory you maintain to address emergencies or supply chain failures, ensuring a sufficient supply during periods of lower-than-average inventory availability. So, to figure out the just-right amount of this buffer inventory for each product, here’s the game plan:
- Know the maximum daily usage
- Nail down the maximum lead time
- Get cosy with the average daily usage
- Wrap your head around the average lead time
Now, crunching the numbers involves juggling the average daily demand, restocking lead time, and how available you want your stock to be. The magic formula? It’s all about the desired service level (in decimal form), average demand during lead time, and the standard deviation of demand during lead time.
Let’s break it down. If you’re aiming for a 95% service level, dealing with a 10-day lead time, and facing a 5-units-per-day demand twist, your safety stock sweet spot is 47.5 (0.95 x 10 x 5). This means keeping a minimum of 47.5 units at all times to keep customers happy, even when delays try to mess up the party. It’s not just about stocking up; it’s about stocking up smartly for the unexpected hiccups in the inventory journey.
For your ecommerce store, effective inventory management is key. Leveraging platforms and tools that offer enhanced control over your inventory is essential.
Inventory optimization plays a pivotal role in the success of any business. Implementing the eight techniques outlined in this post empowers you to make well-informed decisions about managing and optimizing your company’s inventory based on the nature of your products or services.
These strategies provide insights into customer behaviour, ensuring products are purchased in optimal quantities at the right moments.
Hope these optimizations are helpful to your inventory management in ecommerce!