A successful retail business needs an efficient inventory management process. When you only need to worry about one brick-and-mortar location, managing inventory is a bit simpler. However, for retail businesses that either start completely online or expand from brick-and-mortar to ecommerce, inventory management can get complicated.
How can you keep up with customer demand while lowering operational costs to keep your business as efficient as possible? No, the answer isn’t manually managing your inventory in a notebook. In this article, we’ll take a look at different types of inventory management systems, as well as common inventory issues and how to tackle them.
What is inventory management?
Simply put, inventory management is the process of managing the stock of your products and/or materials. This involves tracking everything from manufacturing to warehousing to point of sale. Effective inventory management is a balancing act—you need to make sure you’re purchasing the right amount of supplies or products from manufacturers so you have enough stock to meet the needs of your customers.
Why is inventory management important for online businesses?
The inventory management process is important because it gives you a 360-degree view of all products coming in and out. By keeping track of what you’re purchasing and selling, you can determine what items are overstocked, understocked, out of stock, or even missing entirely, helping improve your forecasting and prepare for possible disruptions.
Types of inventory management systems
Different industries tend to use different inventory management systems. Here are some of the most common ones for ecommerce businesses.
PAR
Periodic Automatic Replacement (PAR) inventory control system is typically used in industries like food and beverage, hospitality, healthcare, and pharmaceuticals. It’s most effective for businesses that use and sell perishable products with strict use-by dates. The PAR system tells you the inventory levels that need to be in stock to fulfill demand and the optimal inventory needed after each order.
JIT
Just-in-time (JIT) inventory management is ideal for products (such as cars) that depend on suppliers to deliver goods or product parts as needed. JIT helps reduce waste and money by making sure you have the exact inventory required to produce and sell products. It also helps eliminate overstock and stockout risks while keeping storage costs down.
ABC
Always Better Control (ABC) inventory uses a classification system. By categorizing items based on price and ranked by demand, cost, and risk data, you can identify which products are in demand. This helps you improve inventory forecasting and conduct strategic resource allocation.
FIFO and LIFO
FIFO (first in, first out) and LIFO (last in, first out) inventory management systems dictate the order in which items should be sold. With FIFO, the oldest items are sold first, followed by new ones. LIFO, on the other hand, prioritizes the sale of new items followed by old ones. The FIFO system makes the most sense for businesses that sell perishable items, while the LIFO method may be more appropriate in supermarkets and pharmacies that stock goods that experience frequent inflation.
Should you use inventory management software?
Many businesses turn to inventory management software to streamline their processes. With sophisticated, cloud-based software and user-friendly barcode technology, inventory software can make your inventory management more efficient and painless. Digital inventory management can help automate redundant and error-prone tasks like stock count, plus it provides notifications about when certain items are due for a restock. This software can also give you insights and trends to help you make data-driven decisions on the inventory you purchase—and when you purchase it.
Here are some of the most popular inventory management programs for ecommerce:
- Threecolts
- Zoho
- Inflow
- Linnworks
- ShipBob
- Fishbowl
- Veeqo
- Trunk
- SkyVault
- ShipHero
3 common inventory problems and how to solve them
As your ecommerce business continues to grow, you might run into these common problems.
1. Too much or too little inventory
Figuring out a perfect inventory level can feel stressful, as you don’t want to have too many items and you also don’t want to run out. Overstocking on inventory leads to higher storage costs, while understocking items can give even your most loyal customers to shop somewhere else.
A good way to combat this is to use an inventory management system that helps with demand forecasting. If you have pre-existing deadstock, use discounts or promotions to sell it. And if you want to move away from inventory management altogether, you can switch to a dropshipping model where the manufacturer handles all the inventory and shipping. You can also consider working with a third-party logistics company, an exceedingly popular option for ecommerce businesses.
No matter what you decide, inventory problems can still happen. It’s important to always be transparent with your customers and keep them updated about product availability.
2. Scalability
When your operation is small, managing inventory tends to be less stressful. But when your online business starts growing—or when you decide to add an online store to your physical location—inventory management can get overwhelming. Not only do you need to keep track of which products you sell via different channels, but also manage a bigger pool of partners and suppliers to make sure you have the required stock.
Having a warehouse can help you manage inventory and can accommodate your fluctuating inventory needs. With cloud-based technology, it’s also easier to manage inventory and sell-through rate to keep better track of what you sold versus what you received from your manufacturer.
3. Supply chain disruption
Supply chains can get easily disrupted. Unexpected events like natural disasters, geopolitical problems, transportation issues, and price increases can make it difficult to have the items you need on a consistent basis.
By diversifying your suppliers, you can keep disruptions to a minimum. Working with different companies gives you a backup plan in case one supplier can’t deliver. There are things you can do on your end as well, like schedule periodic supply chain risk assessments to uncover potential problems and create contingency plans. It doesn’t hurt to have “safety stock” so your business continues to function smoothly regardless of outside factors. Lastly, if a disruption does occur, evaluate it immediately to understand the source and see what you can do to make sure it doesn’t happen again.
A thriving ecommerce business is a dream come true, but as your business grows, so do your inventory needs. With so many moving parts, getting the right products to your customers at the right time becomes complicated. The sooner you find the right inventory management system and technology, the better you’ll be able to scale your business and keep customers happy.
