When anyone mentions inventory management, we imagine a scrawny teenager manually counting items in a stuffy storage closet. Out of sight, out of mind. And many E-Commerce entrepreneurs and operators similarly relegate inventory management to the bottom of their priority list.
But inventory is the lifeblood of any E-Commerce business. Without its inventory, a business does not exist. Inventory management can mean the difference between success and failure. Doing so not only saves money but lead to higher revenues and business growth.
What is Inventory
Inventory is an accounting term used to describe an array of goods in various stages of being made ready for sale: Raw materials (to be made into finished goods), Work-in-Progress (in the process of being created), Finished goods (available for selling), and Merchandise (finished goods that have been purchased from a supplier).
Inventory is considered an asset and recorded as such on a company’s balance sheet. Creating proper valuation to include on the balance sheet requires either a physical count of the inventory to establish quantities on hand or a perpetual inventory system that relies on accurate record-keeping of every inventory-related transaction.
Those managing inventories are responsible for:
- Placing orders from suppliers and vendors
- Managing inventory storage
- Accounting for available product
- Fulfilling orders placed by customers or clients
Each E-Commerce or retail business will have specific needs based on the type of products it sells and whether it has a B2B, B2C, or hybrid business model. In all cases, though, inventory managers are accountable for accurate reporting on performance and forecasting future demand. That’s why it’s so essential for a business to have a system.
7 Common Inventory Management Techniques
No matter the size of your business, there’s an inventory management technique for you:
- ABC: Categorizing products by popularity and treating each category differently when ordering.
- Pros: Resources are allocated on a prioritised scale, encourages strategic pricing
- Cons: Resource intensive to keep products accurately categorised, changes in demand can be hard to adjust for
- Cycle Counting: Using a small sample of inventory to gauge the accuracy of records.
- Pros: Time and cost-efficient, non-disruptive, and saves on holding costs
- Cons: Not always completely accurate, doesn’t account for seasonal adjustments
- Backordering: Taking orders even when a product is out of stock, then placing additional orders for fulfilment.
- Pros: Increased sales because products aren’t listed as unavailable, lower holding costs as products move out quickly
- Cons: Delays can annoy customers, fulfilment times increase
- Just-In-Time: Purchasing inventory mere days before it’s needed for fulfilment.
- Pros: Saves on holding costs, reduced deadstock on shelves
- Cons: Can impact timely delivery, high risk of being unable to fulfil orders
- Consignment: Storing stock still owned by wholesalers, only purchasing when product is sold, and order is fulfilled.
- Pros: No cost for returning unsold goods, lower risk in stocking a wider variety of products
- Cons: Can tie up holding space for long periods of time
- Dropshipping and cross-docking: Product is shipped directly from manufacturer/ wholesaler or pauses only to change transport vehicles before heading to customer.
- Pros: Almost zero holding costs
- Cons: Complicated transportation logistics, risk wholesaler, could cut out the middleman and go direct to consumer
- Bulk shipping: Ordering large amounts of product at one time.
- Pros: High profitability, lower shipping costs, great for evergreen products
- Cons: Big monetary outlay, high holding costs, hard to adjust when demand changes
While there’s no one-size-fits-all approach to inventory management, the most successful E-Commerce businesses utilise tools to make inventory optimisation faster, easier, and more accurate.
The Case for Inventory Management
The potential costs of failing to implement a sustainable solution are staggering.
Almost two-thirds of retailers say they have a hard time tracking inventory and the National Retail Federation says all forms of inventory shrink – theft, mismanagement, fraud or simple error – costs businesses an average of 1.33%, or a combined $46.8 billion. Our research shows loss could be as high as $1.75 trillion a year.
That’s an equivalent of 12 per cent of annual sales! Good news is that you already have a system and some tools in place that works for you and your team. But can it do more heavy lifting and provide your supply chain with the backbone it needs?
With an effective inventory management system in place, you can gain more visibility and control over your inventory investment (your lifeblood), analyse demands and trends, manage everything from one central source of truth, and increasing your chances for sustained profitability. Take control of your inventory management today and watch your business sales skyrocket.
Vanessa Nguyen is the Partner Marketing Manager at TradeGecko. Prior to TradeGecko, Vanessa spent over nine years building B2C marketing programs for Google and other tech companies. TradeGecko is a commerce operating platform that gives entrepreneurs, founders and independent brands the commerce superpowers they need to build an amazing business. Our cloud-based platform levels the playing field and gives SMBs the edge they need to compete through automation, AI and integration with global platforms. For more information, please visit www.tradegecko.com
Like this story? Sign-up for the free Pulse Weekly Newsletter for more essential online retail content.