Inventory is the lifeblood of any business that sells products to customers. Without the inventory, one cannot generate revenue, and without revenue, a business is destined to crumble. However, despite how important inventory planning and inventory control is, it can be incredibly difficult to get this equation right. After all, there are countless variables that one must take into account when looking to take more control of their inventory levels. What is inventory management, and what are some tips/tricks you can follow? We’ll explore that in greater detail below.
What is Inventory Management?
Let’s start high level. What is inventory management? Simply put, inventory management is how a company manages its inventory to support the needs of the business. Inventory management goes far beyond just ensuring the right products are on the shelves at the right time.
True inventory management takes numerous variables and KPIs into consideration. At times, these variables fight against each other, and determining which variable to anchor on can make or break your inventory holdings.
Variables and Key Point Indicators (KPIs)
Some of the most common variables, or key point indicators, a business will follow to determine how well they are managing their inventory includes:
Inventory turns means how many times a company sells its inventory within a specific time period. For example, if it took you one full year to sell through all of your inventory, you would have an inventory turn figure of one when looking at an entire year. If you could sell your current inventory holdings four times within a single year, your turns would be four.
This statistic that looks at how many unique products your business offers, and how many products you have on the shelf for sale. For example, if you have 500 unique products, and 400 of them are in-stock and ready to be sold, your in-stock percentage would be 80%.
Cash Conversion Cycle
This ratio is closely related to inventory turns but takes into consideration the payment terms you have with your suppliers. This ratio looks at how quickly the inventory you have on your shelf can convert into cash.
There are countless other key point indicators one could follow, but these ratios are applicable to just about any industry and carry significant importance.
A challenging aspect of stock management is the forward-looking approach one needs to take into consideration during an inventory planning process. Inventory planning is when you forecast the future needs of the business to ensure you allow adequate time to procure and receive the inventory you ordered to service that specific time period.
Consider the following example. Imagine if you own an eCommerce store that sells electronics, such as gaming systems, televisions, speakers, and various other entertainment items.
You are predicting a surge in consumer demand for the items you sell during the upcoming holiday season. How can you be best prepared to ensure you have the items on the shelf during that time period? That is exactly where inventory planning comes in.
To ensure your business has inventory on the shelf for the holiday seasons, you may need to place these purchase orders months in advance. That proactive purchasing decision is a key component of inventory planning.
But submitting the order is just one piece of the equation. The other vital piece is inventory optimization. Inventory optimization is when you strategically and thoughtfully stock your inventory in specific locations that allows the warehousing team to pick and ship these products in an efficient and timely manner.
Strategies for eCmmerce Inventory Management
Unfortunately, there is not a one size fits all strategy for eCommerce inventory management. The right eCommerce inventory management strategy is entirely contingent on your industry, your goals, and market conditions. However, here are some common eCommerce inventory management strategies for consideration.
Just-in-time inventory management is when your business relies on suppliers to bring you inventory on an as-needed basis. For example, if a customer places an order for an item you have listed on your website- you immediately place a purchase order with your supplier for that item.
The supplier will ship you the item immediately, and you will fulfill the customer’s order through that inventory. This is a common approach to keep both inventory turns and the cash conversion cycle high. However, this approach is riskier as your supplier may not have the item in stock. Additionally, there is typically a surcharge expense with just-in-time ordering.
Stock the Inventory
Instead of relying on a just-in-time network, you could also choose to stock the items in your facility, or in a 3PL, and ship the items directly to your customer. Benefits of this approach include more control over what you can fulfill for your customers and typically higher margins. However, it takes working capital to fully embrace a stocking inventory strategy and it also takes warehousing space. Both of which can be costly.
- Within a stock inventory strategy, there are numerous subcategories. For example, will your business take a ‘deep inventory’ approach, where they stock a more than adequate supply of the product offering? Or, will your business take a ‘lean’ approach to what they have in stock, and reduce their overall overstock? There is no clear answer to this question, but there are numerous questions that should be considered before determining which approach is right for your business.
Dropshipping is when you actually do not carry the inventory yourself but rely on suppliers to ship the item to your customer. This is becoming increasingly more popular as it leaves the fulfillment burden on the hands of the suppliers. However, similar to a just-in-time approach, the margins tend to be lower and you lose the ability to control the customer’s experience.
Warehousing is Challenging
As you think about which eCommerce inventory management approach is right for your business, you must take fulfillment into consideration. Depending on which inventory management strategy you decide to go with, a proper warehouse may be required to make that strategy possible.
Warehousing and distribution can be incredibly challenging to get right. If you want to have control of your inventory and ship the items from stock, but do not want to warehouse the products yourself, consider leveraging a 3PL.
A 3PL, or third-party logistics company, will be your fulfillment center, and you can focus on what you do best – which is servicing your customers. Print Bind Ship has had the privilege of helping countless companies deliver a fantastic fulfillment experience to their customers. Our 3PL management style, decades of experience in distribution, and ability to seamlessly integrate into your eCommerce store can help propel your business to the next level.