Inventory Management 101: The Short Guide for Ecommerce Entrepreneurs
Inventory management is often the biggest headache of any ecommerce store. If you screw it up, it can cost you a lot of money.
In fact, I worked as the marketing director for a million-dollar-a-year retailer (sales, not profits), and they lost $100,000 of their profits in one year simply from poor inventory management. Ouch.
All they needed was a better system in place. With a little effort and some planning, you can develop such a system for your own store.
Now, this guide is written for two kinds of people:
- Those who store their own inventory (either at home or in a warehouse)
- Those who dropship from a supplier
The retailer I worked for did both—and yes, their failure to implement an inventory management system plan even hurt the dropshipping portion of their business.
So within this guide, I’m hoping to teach you the following:
- Typical big box retailer inventory management systems
- Common obstacles to inventory management
- The best systems for small- to mid-sized ecommerce stores
- A step-by-step guide to implementing these systems
Without further ado, let’s dive in.
Typical Big Box Retailer Inventory Management Systems
This section will be a (very brief) introduction to the typical inventory management systems used by the big players in the world. Think Walmart or Target.
Here are a few of the major terms (you may even be familiar with some of them):
- Minimum Viable Stock Levels: The minimum inventory quantity, or stock, you should keep on hand to keep up with consumer demand. Typically, if your inventory falls below this level, you want to order more to avoid running out.
- JIT (Just-In-Time) Inventory: A method of inventory management in which you order the product just in time to keep up with demand. In doing so, you don’t tie up your money in unsold inventory and you don’t normally have unsold product; on the downside, you run the risk of being unable to keep up with a sudden increase in demand, thus being unable to fulfill all your orders and potentially losing customers.
- FIFO (First In First Out): The first products to be received (either at your store or your warehouse) are the first to be sent out. Basically, it’s a way of ensuring people get the freshest inventory possible. This is more important with perishable goods.
- FILO (First In Last Out): The first products to be brought in are the last to go out. Mostly unused nowadays though, as it doesn’t make a whole lot of sense (and is illegal for many products, such as perishables).
- Forecasting Demand: The art (and it’s definitely an art) of forecasting demand simply means taking an educated guess (usually using past sales data) as to how many sales you’re going to make over a given period of time, then using that information to set your minimum viable stock levels (which I explained above).
- Inventory Auditing: Manually counting your inventory to ensure the number you have in the computer matches the actual number you have in stock. This should be done at least once every month, maybe more depending on how much you sell and how many people you have working for you (it sucks, but you never know who might try to nab something).
So those are the big terms you should be aware of. But how do you actually use this information to your benefit? Before I explain how to implement these concepts in your business, let’s talk about a few common obstacles to inventory management.
Common Obstacles to Inventory Management
So what are the biggest headaches for all of us ecommerce store owners when it comes to inventory? Well, other than the fact that inventory is a headache in and of itself, you’ve probably dealt with some of the following:
Over-Stocking and Under-Stocking
Unlike Christmas stockings, you don’t want your store to be overstocked. Overstocking means you have precious capital tied up in inventory just sitting on your shelves, which means you have less budget for marketing and running your store. You also risk having products you’ll never be able to sell—you never know when demand is going to suddenly dry up, leaving you with a bunch of useless paperweights.
On the flip-side, under-stocking is just as bad. On that end, while you free up capital, you run the risk of losing sales due to not having anything to sell. This can also hurt your reputation—if you bought something from a store, and they refunded your order without warning and told you they ran out, what would you do? I’d go somewhere else.
Incorrect Inventory Levels/Lost Stock
Have you ever done your own inventory audit to find the computer says you have five items in stock when in reality you only have three? These “lost stock” can also lead to canceled or back-ordered purchases, which again can affect your reputation and cost you money.
No Centralized System
All the obstacles above can be solved by having a centralized inventory management system. One of the first things we ask our clients at ChannelApe is simply “What’s your system?”
What are you using to keep track of the inventory coming and going as you run your business? How do you know how much inventory you have on hand at any given time?
Here are some common systems we’ve seen:
- Manual management via spreadsheets
- Manual management via pen & paper (yikes!)
- Automated management via a hosting platform (Shopify (Shopify Review) & BigCommerce)
- Automated management via brick-and-mortar software solutions
- Automated management via ecommerce software solutions
The first two systems can be centralized, but are incredibly difficult to keep track of. They also require a lot of time and energy to upkeep. Imagine penciling in every order, or updating a spreadsheet every time you made a sale or ordered more inventory.
The third system, using your hosting platform, can work if you only sell through one channel. If you only sell on Amazon, or you only sell on your online store, these systems may work just fine. However, if you want to expand into multiple sales channels, this system will hinder your business’s growth.
The fourth system, using a software platform designed for brick-and-mortar solutions, is also not ideal. The reason many ecommerce owners end up with these systems is due to Google—one simple search of “inventory management system” brings up tons of results made for traditional brick & mortar retail outlets. If you sell strictly online, these platforms simply aren’t made for you; they’re made for brick & mortar. The added features are great for physical stores but are a useless additional expense for online-only store owners.
Finally, using an automated inventory management system created specifically for ecommerce stores is the most ideal solution. Most of them will automatically upload your products onto your website, Amazon, and eBay with the push of a button. Further, they allow you to automate order fulfillment and inventory quantity updating. You just enter your inventory quantity once, then it can be automated on all your sales channels from there.
Additionally, using an ecommerce software as your centralized inventory management system allows you to easily implement dropshipping services as a supplement to your store. Or, if you’re strictly a dropshipping business, you can just sync your marketplaces with your suppliers using a data feed for automatic updating of not only stock levels but also product details like pricing, images, descriptions, etc.
Here’s a quick video I’ve found to help explain the process (of course if you’re a small business you probably don’t have a receiving department or manufacturing, but the concept is the same. Think of the shelving as your garage or basement, and the distribution as you shipping things out:
Basically, having a proper centralized system keeps you from needing to waste hours of your precious time updating inventory.
Now that you’re convinced, let’s talk about how to actually implement these strategies and stop wasting time and money on improper inventory management—step by step.
First I’ll show you some solutions for those of you who store your own inventory, then we’ll move on to a section for dropshipping.
The Best Inventory Management Systems for Small- to Mid-Sized Ecommerce Stores
The best inventory management system for you depends on your ultimate goal. Some methods are cheaper but more time consuming, and others require an investment but save you time & money in the long run.
Additionally, the best solution will depend on how you store your inventory. If you keep inventory in your home or in a warehouse, you may need a more complex solution than if you simply dropship items and merely have to keep track of your supplier’s inventory.
Managing Your Own Inventory
Let’s talk about solutions for storing your own inventory first. When storing your own inventory, either in a warehouse, your basement, or a physical store, there are a significant amount of variables you need to be aware of. You need to:
Maintain Optimal Inventory Quantity
You should have a minimum level of inventory on hand at all times. When it dips below your predetermined inventory minimum, you know it’s time to order more.
Additionally, you shouldn’t order too much inventory either. I’ll talk about forecasting demand in a section later down this page.
In Order to Do That, Forecast Your Demand
Properly forecasting demand for your products is the foundation of a good inventory management plan. However, it’s easier said than done. How are you supposed to know how many of an item you’ll sell? Of course, if you’re strictly dropshipping you don’t have to worry about this—but for those of you who hold inventory, let’s run through the process.
In order to accurately forecast your demand, you basically need some kind of past sales to go off of. If you don’t have that, it’s going to be a lot more guesswork, but it’s still possible.
First, determine a “forecast period,” for example, a period of time for which you’re forecasting your demand. It could be the next week, month, 6 months, year, etc. I would start with 1-3 months if you’re new to this. Be sure to check how your guesstimate is holding up throughout the process.
Next, check your past sales history. If you’ve been open for at least a year, you should have sales data for all 4 seasons, including major holidays. Use that data as a “base demand”, or the starting point for how much inventory you want to order. Additionally, stack that up against your marketing efforts and see how they correspond.
After you’ve checked your data (or if you don’t have any), check on current trends. You can do this by going to Google Trends and typing in your product.
Next, Determine Your Minimum Stock Levels (MSLs)
Now that you know roughly how much to expect your sales to be, it’s time to figure out your “Minimum Stock Level,” as I talked about in the “Big Box Retailer Strategies” section above.
You must have enough inventory to satisfy demand, but not so much that you’re tying up all your capital and risk losing it.
To determine your MSLs, simply go back to your forecasted demand do the math so you have at least 5 days worth of stock on hand at any given time.
You Can Also Supplement with Dropshipping
Just because you don’t have a dropshipping business, doesn’t mean you can’t use dropshippers to supplement your inventory. If you run out of stock, you can rely on your dropshipper to fill in the gap until you get more inventory.
Additionally, you could use dropshipping to test product ideas.
If you’re interested in using dropshipping as a supplement to your business, check out this list of great dropshippers.
Finally, Centralize Your Inventory Management
If you sell solely on a single ecommerce store, you might not need to centralize your inventory management. It depends on how well your sales platform is handling it for you currently.
However, if you sell on multiple marketplaces, multiple sites, and/or offline, centralizing your inventory to one dedicated system is a must (if you value your time and sanity, anyway).
There are a ton of potential inventory management systems that work with multi-channel stores. Some of the best include:
Managing Inventory You Dropship
If you strictly dropship your inventory, this section is for you.
While drop shipping is significantly easier to manage, you do still need to keep up with your supplier’s inventory levels. If they run out of inventory but you didn’t update your product listings, you might have to put that order on backorder, or worse—cancel it entirely. So how do you avoid that?
Method 1: Manually Update
The first option is to manually check your supplier’s website for their inventory levels, then update your system with the new levels for the day. That’s great if you only have a few products, but once you hit even 10 products (not to mention variants), this quickly becomes a huge time sink.
Method 2: Use a Software
This is the easier way—especially if you sell on multiple channels.
Inventory management software uses a file called a “data feed.” Basically, this file “feeds” product data (including inventory quantity) from your supplier’s website to your inventory management software, and then ultimately to your sales channels.
You can use the software I mentioned in the above section, but most of them don’t offer that data feed option, which means more manual updates.
Your best option is using an ecommerce-specific solution (like ChannelApe). Why?
- Automated inventory quantity updates
- Automated product listing updates (in case your supplier changes pricing, descriptions, titles, adds/deletes products, etc.)
- Consistency across multiple sales channels (such as your website, Amazon, eBay, etc.)
- Automated variant updates (like size, color, style, etc.)
- They will create a data feed for you if you don’t have one
Most ecommerce-specific inventory management platforms are as simple as signing up for an account, logging in with your details, and pressing a few buttons to set up. You should be able to have it all done within 30 minutes to an hour.
You now (hopefully) have a solid understanding of inventory management as well as a solid action plan to put in place. I hope these methods improve your business and give you a solid ROI for taking the time to read this content.
