Besides polishing your online store—making the site’s structure easy to navigate, creating upsell offers or other sales campaigns—you need to control and maintain what’s invisible to customers but essential to their satisfaction: inventory. 

In this post, we’ll discuss the best practices of managing inventory and its most common challenges. Before we dive in, let’s first define inventory management and its major concepts and explore different techniques used by e-commerce businesses. 

What is inventory management?

Inventory management implies storing, organizing, and transporting inventory which includes both products themselves and materials needed to produce and maintain products. Inventory management systems track the number of goods and materials at different stages of production and sales, as well as their characteristics: dimensions, weight, temperature, seasonality, or anything else that is relevant to the business. 

Every e-commerce company’s goal with the management of inventory is to minimize the costs associated with the storing, tracking, and delivering of products. It means understanding the demand and holding inventory levels that are both sufficient to satisfy that demand and affordable to store and maintain. 

‍

🔺 To straighten out the terminology, inventory refers not only to products you sell in your store but also to materials you use to create those products. In turn, stock refers only to your finished goods. 

Inventory can be divided into 4 major categories: raw goods (materials used in production and/or present in products themselves), work-in-progress (partially finished goods), finished goods (stock available for purchasing), and MRO (maintenance, repair, and operations goods that are not a part of final products). 

If you don’t deal with manufacturing and are reselling already made products, your inventory might include packaging and warehouse maintenance tools. If you don’t deal with warehouses at all—say, you’ve built a dropshipping business—you don’t need to bother with either inventory or stock management; finding a reliable supplier is enough.

What are inventory management techniques?

There are 3 most common approaches: FIFO (first in first out), LIFO (last in first out), and JIT (just-in-time). Their names are pretty self-explanatory: FIFO means selling the oldest stock first, LIFO means doing otherwise, and JIT means keeping the maximum low levels of all stock. 

The first in first out technique is usually recognized as the most reasonable one as it helps minimize storing unsellable products (that expired, got worn out, went out of style, etc.). The last in first out technique is justified if you’re constantly buying certain inventory and its price is continuously rising, which makes the newest stock the most expensive for you. The just-in-time approach might work well if you’re in close collaboration with suppliers and can rely on them.

Benefits of powerful inventory management

Proper handling of inventory, especially when automated with the help of inventory management software tools, can help you achieve the following:

• Minimization of storage costs. The more items you have sitting in a warehouse (or multiple ones), the more you have to pay for them while they are not making you any money in return. 

• Elimination of dead stock and spoilage. If you sell perishable goods (those that have an expiration date) or products that might become irrelevant with time (go out of season, for example), it’s essential to keep track of how they’re performing with customers so that you’re not left with lots of expired or dead stock. Inventory management systems can help you control these parameters and prioritize such products before they become unsellable. 

• Elimination of errors. If you’re always on track with how much stock you have and you’ve connected this data to your online store in real time, you won’t face issues with customers ordering what you don’t have (which might result in communication hurdles and decreased customer satisfaction). 

💡 To sync stock tracking with your online store, use inventory apps that will send you low-stock alerts or allow visitors to subscribe to back-in-stock notifications. 

• Speeding up order fulfillment. Inventory management goes in line with order deliveries, and the more effective the former, the faster the latter. Given that the speed of delivery is one of the most pressing issues and fastest-growing customer demands, you don’t want to miss on that. 

• Insights about product popularity and supplier reliability. Having the data on the slowest and fastest moving stock will help you understand what types of products to sell more actively and what ones to possibly avoid. Plus, inventory management insights can help evaluate the relationships with different suppliers. 

The biggest challenges in e-commerce inventory management

Here are the 3 most common challenges that complicate inventory management:

• Inaccurate reports. It might be hard to synchronize all data, especially if you have multiple warehouse locations and multiple suppliers. Having inaccurate stock levels might damage customer experience on your store: if they don’t see how many items are available, they might purchase more than you have and then get disappointed. 

• Supply chain constraints. Something might go wrong with product manufacturing or storing. If it does, you should have the tools to immediately learn about it and act on the problem: order more products, rethink supplier relationships, improve warehouse management, communicate issues to customers, etc. 

• Shifts in customer demand. You should be prepared for unexpected spikes in demand. The pandemic made many businesses learn the lesson the hard way: you should always track and forecast the demand, set levels of “safety stock” for different products, update your inventory data in real time, and follow other proven practices (we’ll cover more of them a bit later). 

To overcome these and other challenges without losing customers and spending a lot of money, you should find the best inventory management software for your business and adopt the best industry practices. Let’s explore which ones.

8 best practices of managing inventory

We’ve compiled a list of the best practices in managing inventory that will help you improve the overall performance of your store.

1. Automate processes with inventory management software

It comes as no surprise that manual inventory management is tiresome and prone to errors. Yet, many companies are still doing at least some of the work manually. Shopify’s recent report shows that automating manual processes has significantly grown: for example, apps for warehouse management acquired almost 200% more installs in 2021 compared to 2020. 

If you’re using a system like Shopify for running your store, you have several options for automation:

1. Using in-built capabilities. Native Shopify inventory management includes basic functionality like tracking, item history, quantity updates, etc. It may be enough, yet it can hardly cover large-scale needs and complex processes.
2. Using a third-party app. There are plenty of inventory management software solutions like Skubana or RetailOps designed to sync your store’s data to your inventory data. 
3. Using an inventory Shopify app. You can choose among the App Store solutions that offer real-time inventory sync, tracking, multi-channel integrations, etc. 

2. Outsource fulfillment

Outsourcing whole fulfillment can also be a valid option. 3PL (third-party logistics) is proven to reduce costs and improve customer satisfaction in many industries, e-commerce in particular. With more businesses deciding to outsource, the market of fulfillment solutions is on the rise: it’s projected to reach over $25 million by 2028, steadily growing from $16 million in 2021.

Outsourcing fulfillment can be beneficial if:

• You target a lot of different locations and can’t run multiple warehouses to ensure fast shipments. A third-party solution can have a network of warehouses to store your products close to your customers.
• You’re struggling to connect the data from different sales channels. Multi-channel fulfillment can handle orders made on your site, social media, or other marketplaces, automating the process for you. 
• You don’t want to handle order fulfillment in general. This is a strategy of its own; if you find a reliable fulfillment partner, you’ll eliminate a lot of work and have room for other tasks to grow your business. 

3. Project your future sales with forecasting tools

Modern inventory tools allow for a lot of advanced functionalities, one of which is demand forecasting. Armed with data, you can project your future sales in the following steps:

1. Define a period you need to forecast. You can project your inventory needs for a year ahead, for a season or month, or for any other period that makes sense to you. 
2. Analyze your plans and purchasing trends. Consider seasonal events if they impact the type of products you sell, planned promotions, and your sales growth. If you have reports on the slowest- and fastest-moving inventory on your hands, they will give you insights into what products to focus on when deciding on inventory replenishment. 
3. Analyze your market share and competition. New players entering the market or purchasing habit changes might impact your store’s orders and, subsequently, your inventory needs.
4. Create a plan and timeline for getting inventory from suppliers. On top of all mentioned data, it’s important to understand how much time manufacturers need to produce the ordered items and how the transportation to your or third-party warehouse will happen. 
5. Adjust your forecast if needed. Say your ad is getting more conversions than a similar ad from last year and you’re getting unexpectedly more orders. You’ll need to react quickly to satisfy the demand. 

There are a lot of AI-powered solutions that assist in inventory planning and forecasting, and McKinsey’s report shows that adopting one can improve inventory control by 35%. Search for the best inventory management software that will save you time and money by accurately predicting the demand. If you run a Shopify store, you can choose among inventory apps with forecasting functionality—Stockbot, for example. 

4. Set minimum stock levels

Minimum, or PAR (Periodic Automatic Replacement) stock levels define the amount of product you should have at any time. This amount can also be called safety stock. 

It’s helpful to set these minimum levels for the items you sell and review them once a year or more frequently. Set and adjust PAR levels based on product popularity and logistics processes: it’s important to consider both how well it sells and how fast it can be replenished.  

5. Categorize your inventory based on its value

There are various approaches to inventory categorization. First of all, if you’re not only dealing with finished goods, you’ll need to categorize and separately track the materials used in production and storing. Regarding stock itself, you can utilize the ABC analysis:

1. Calculate the number of items sold and cost per unit to determine the consumption value.
2. List all your products in the order of descending consumption value. Then, calculate the percentage of this value each product—or group of products—accounts for.
3. Divide products into A, B, and C groups. Typically, products that account for 80% of total consumption value are your most revenue-generating products. Mark them as group A. Groups B and C will represent the remaining 15% and 5%, respectively. 
4. Plan stock replenishment based on ABC data. Make sure you always have enough A products and can restock them quickly and don’t put additional costs into storing a lot of B and C products.

6. Redistribute inventory closer to customers

The pressure of super-fast order deliveries is on. According to Shopify’s report, 60% of consumers expect orders to be fulfilled within 2 days. To guarantee this timeframe and increase the percentage of same-day deliveries, you should distribute your stock closer to your target customers. 

Analyze location-based data and consider keeping your inventory close to the shipping zones of your most active customers. If you run both online and offline, you can also create a hybrid space that serves as a sales point and a fulfillment center at the same time. Studies show that turning a retail location into a mini-fulfillment point reduces last-mile costs by up to 60+%.

7. Have a contingency plan in place and regular audits

The reality is that supply chain processes are susceptible to crises. If a problem occurs—for instance, a warehouse location gets out of order and certain products get spoiled, or a supplier gets out of business when orders are already made—you need to have a contingency plan.

It can include possible disruption scenarios that might affect your business, outline all transportation and warehousing options you have or might additionally refer to, define team members and partners who will be responsible for emergency planning and replenishment, etc. 

It also helps to run regular inventory audits. You can evaluate the conditions of storing and transporting, existing inventory categories, and other aspects. In terms of a quantitative check, you can run full inventory counts or cycle counts: the latter means a rotating schedule where each product or group of products is checked within a given time period. 

8. Maintain clear and proactive communication with suppliers

It’s vital to keep transparent communication with suppliers. All we’ve said about demand forecast, inventory redistribution, or contingency planning largely depends on your relationships with suppliers. You should always be on the same track with your inventory and fulfillment plans, possible risks, short-term and long-term goals, etc. 

It also makes sense to reevaluate your cooperation based on your and customer satisfaction. Be proactive if you notice something that can be improved in the supply chain and communicate it before experiencing any negative outcomes. 44% of companies claim they’re investing in the improvement of collaboration with supply chain partners. 

If you work with multiple suppliers, you can categorize them based on their impact on your revenue, location, or another parameter and build communication accordingly. 

Manage inventory with customers in mind

Any technique or goal related to inventory management should align with customer satisfaction. Always calibrate your objectives to your store’s purchasing trends, customers’ reviews and needs before anything else. 

Thanks to automation tools that fit the size and goals of your business—whether you’re going with third-party fulfillment or using an inventory management system together with other sources—you can achieve better control over inventory and overall improved order fulfillment.