Managing your inventory is easy if you sell a dozen homemade scarves per week on Etsy, but what happens when you have 25 different products, shipping to 2,000 customers, across a few different sales channels? What if you’re selling out of a retail store and online? What if you have resellers pushing your goods for you? Inventory management can become incredibly complex, but it’s extremely important to get right so you don’t get caught with too much inventory, or perhaps worse, not enough.
In the early stages of starting a business, many store owners use a simple Excel spreadsheet, or even pen and paper, to manually track inventory. That might be fine for a weekend side hustle, but as your business grows, you’ll find these methods to be frustrating, time-consuming, and inaccurate. That’s where inventory management techniques come in, to increase your efficiency, accuracy, and ultimately, revenue.
What is inventory management?
Inventory management is the process of maintaining your stock of products in relation to supply and demand. This is just a small part of supply chain management, which follows your products’ entire journey from raw materials to shipment. Inventory management deals strictly with finished products, helping store owners find a balance between over and under ordering items to maximize profits.
As you get better at inventory management, you’ll be able to more accurately forecast product trends based on past transaction data and determine which items will sell and how much you should purchase.
Why is it important to track your inventory?
According to Wasp Barcode, 46 percent of SMBs lack a method for inventory management or do it manually, yet this process is incredibly important to running a lucrative business because it keeps your product stock levels organized and accurately tracks your spending. Recording and reviewing inventory trends is also vital to your business’s growth. As your company attracts more customers, your inventory needs will increase, too. We’ll talk a little bit more about inventory management systems you can use to determine which items you need to purchase in higher quantities and by how much later.
Here are some of the key benefits to tracking your inventory:
1. Avoid over or under ordering
Using automated inventory management programs, you can determine a low-stock threshold and set up notifications for when your stock approaches this number, helping to avoid going out-of-stock and missing potential sales. If your shop remains out-of-stock on popular items for too long, you risk losing customers to a competitor that they might continue making purchases with in the future.
Inventory management not only helps to prevent missed sales, but it steers store owners away from over ordering. Have you ever made the mistake of placing a large order for a particular product only to find that the item wouldn’t sell? This is sometimes referred to as “dead stock,” and shop owners often resort to selling those items at a steep discount to avoid a total loss.
With proper inventory management you can avoid dead stock by accurately predicting how much to order of each item you sell and when.
2. Maximize warehouse space
Whether you have a designated storage room in your house or you rent space from a warehouse, mastering inventory management will make your storage space more efficient. Don’t let dead stock clog up space that could be better utilized to store popular products that move quickly and rake in revenue.
By tracking your products with an inventory management system, you can identify which items are stagnate and develop a plan to clear out this inventory and forecast better selling products in the future. You can also pay less money for a smaller space if you’re not accumulating dead stock. If you have 10,000 square feet of space, but you’re using half of it to store items that sit for months before they sell, inventory management can allow you to downsize to a right-sized space that will save you money.
3. Save time and increase accuracy
Manually recording inventory may be convenient for very, very small businesses selling only a few dozen items per month through one eCommerce channel, but as your business grows, you need an accurate, real-time inventory management system. Auditing your own stock is time-consuming and often prone to human error. Free up more time to focus on other aspects of your business and document stock levels the moment someone makes a purchase with automated inventory management programs.
4. Help with budgeting and forecasting
To make well-informed decisions on which products to stock, you need to use data from previous months to forecast future trends and determine if your inventory budget is practical. As your business grows, you’re inventory will have to grow with it, but it’s easy to be overcautious, resulting in under ordering, or too excited about the potential growth, causing you to over order and end up with excess product that you can’t sell.
Automated inventory management also helps to control for seasonal demand. If your business runs a back-to-school special sale every year in August or September, you should be aware of how much your sales rise during these months to accurately forecast how much more inventory you should have on hand for the sale versus the rest of the year.
Holiday shopping season is another major time of the year when shop owners should be paying attention to sales fluctuations. Under ordering products during the holidays can cause a huge loss in revenue for most B2C eCommerce stores.
When should you track inventory?
If you’re the owner of the Etsy store we mentioned in the intro, selling a dozen handmade scarves each week, it’s probably easy to manually track your inventory. This is a very small level of stock, sold via one channel, and perhaps even made to order. However, if the store started offering more products, began selling through multiple channels, or started receiving many more orders, automated inventory management would be highly recommended.
If your business fits any of the following criteria, and you’re still manually managing your inventory, it’s probably time to switch to an automated system:
- process a high volume of orders
- have lots of SKUs
- sell on multiple channels or in multiple stores
- have multiple warehouses
- sell wholesale in addition to direct-to-consumer sales
- your business has lots of seasonality
- you sell perishable or consumable goods
eCommerce companies with high order volume or an extensive collection of products benefit from real-time tracking with an automated inventory system in order to stay organized and aware of their stock levels. The same can be said for owners selling across several channels, because automated systems collect inventory information for every channel in one dashboard, preventing owners from having to individually track inventory on each outlet.
Businesses that sell seasonal items, such as holiday decorations or clothing that goes out of style, will also benefit from inventory management by more accurately anticipating when demand will be highest and purchasing inventory based on this information. So will stores that sell perishable goods. Those shops need to pay particularly close attention to inventory as they have a limited amount of time during which items must sell before they expire and must be discarded at a loss. Similarly, stores selling consumable items that need to be replenished, such as batteries or lightbulbs, can use inventory management systems to get a better understanding of when customers will be reordering and so stock should be high enough to meet that demand.
What inventory information do you need to track?
Basically, not tracking inventory information is a major mistake as a small business owner doing a lot of sales each month across different platforms. But, what type of information do you need to record to have a comprehensive understanding of your inventory? Product levels (how much inventory you have on hand) is one of the most essential details to track, but here are some other numbers to keep in mind.
- Lead time: Lead time is the delay between the time an order for inventory is placed to a supplier and the time it takes for that order to arrive. You want to stay on top of lead time because it will help you know when to reorder items before you run out of your current stock. For example, if your lead time is 30 days, you can’t let your product level fall to 29 days worth of inventory or you’ll go out of stock for a day.
- Lead time demand: This is how much of an item you’ll need to cover orders for the entire time it takes your inventory order to arrive.
Lead time demand = Lead time * Average daily sales
- Safety stock: As the term suggests, safety stock is a safety net for your inventory. This is the extra amount of product you have in stock to prevent a stock out (or going out-of-stock on an item). Stocking additional items does tie up capital, but it may be less expensive that missing out on sales. You calculate this number by subtracting your expected lead time demand from a worst case scenario (high order volume with shipping delays from your supplier).
Safety stock = (Maximum lead time * Maximum daily sales) – (Lead time demand)
- Reorder point: The reorder point is a low level of inventory that requires shop owners to reorder that particular product. Nearly every inventory management system has an option to set your reorder point to automatically purchase more inventory or notify you that the reorder point has been reached. Basically, once all your have left in inventory is your lead time demand and your safety stock, it’s time to place an order for more inventory.
Reorder point = Lead time demand + Safety stock
- Dead stock: Dead stock is just a term for inventory that doesn’t sell. Inventory management systems can alert you when a product is not moving. Then, you can take steps to try to make back some of your money through discounted price offers.
- Seasonal/perishable goods: If your business sells seasonal items or perishable goods, your inventory management will need to be more complex. Items with expiration dates need to be tracked accordingly to ensure that you’re not selling old (or almost expired) products. Your inventory management system can help record which products have been in stock for longer and remind you to sell these first or alert you is a product is getting too close to the expiration date. For seasonal items, you can use historical or industry order data to predict which times of the year will be busiest and order your inventory based on this information.
How do you track this information?
With so many pieces of information to track, especially for sellers with multiple platforms, manual inventory management is unwise. Thankfully, there are dozens of platforms designed to help. Each platform is different, so spend time researching and ask vendors about their support for whichever of the features we’ve discussed that you’ll need.
Determine which program is best for your business based on your monthly sales volume, number of employees, and number of channels on which you sell. Consider things like cost, whether you’re paying per seat/user, by order volume, per SKU or some other pricing scheme, how user friendly the platform is, and what sort of support or training is available to you.
To keep everything simple, organized, and accurate, you’ll also want your inventory management system to include integrations with other programs you currently use like accounting software, fulfillment applications, and POS systems.
If your business is selling more than a handful of items each week, automated inventory management is essential to keeping your inventory accurate, setting a budget, and forecasting future stock needs. Manually recording this information will cause you to lose valuable time and, most likely, money as there is much more room for human error. Instead, implement an inventory management system that works with your business to cut costs, boost sales, and provide customers with a satisfactory experience.