Managing ecommerce inventory for your online store is likely the most important aspect of your business after generating sales.
Because, while sales equal revenue, proper ecommerce inventory management ensures those sales can be fulfilled accurately and in a timely manner.
So what exactly do we mean by ecommerce inventory management?
By definition it’s the measurement of available products that your business sells, as well as their location and pricing.
Sounds pretty straightforward, right?
Well, not so fast.
Without a robust ecommerce inventory management strategy for your online store, your order fulfillment record can go awry pretty quickly. Store owners know nothing hurts the credibility of your brand quite like a reputation for late or inaccurate order fulfillment: a whopping 69% of consumers polled in a recent Voxware survey said they’re less likely to shop with a retailer again if their purchase is not delivered within two days of the date originally promised.
That said, it’s clear that having a firm grasp on ecommerce inventory management is essential for your business.
To understand the foundations of ecommerce inventory, online retailers dealing in hard products typically utilize one of the three methods of order fulfillment:
This article will assume you’re in the first category: a small or medium-sized online store that's managing its own inventory.
If you’re in the second category, then the warehouse you’re outsourcing to should have an inventory management solution in place already. And if you’re dropshipping, you won’t need to worry about inventory at all.
Read on to learn more about ecommerce inventory management strategies that other small to medium-sized online stores, like yours, employ to remain profitable and keep business running smoothly.
Just-In-Time (JIT) Fulfillment
Just-In-Time order fulfillment mitigates the significant risk that can come with storing lots of inventory. In fact, the premise of JIT is that you, the online retailer, don’t store any inventory at all. Instead, when orders come in you immediately buy the product from your supplier.
Your supplier will then “pick” the product and ship it to you, and you will “pack” the product and ship it to your customer. So with this strategy, you can rest assured that you’ll never order more inventory than you need — because we can all agree that having stacks of unsold products collecting dust in your garage isn’t a good look.
You may be wondering how JIT differs from dropshipping.
The distinction is that in the JIT fulfillment model, the online retailer “packs” the product and ships it to the customer; whereas in dropshipping, the online retailer never touches the physical product. The supplier both “picks” and “packs” it.
Because of this, JIT has a clear advantage over dropshipping in the domains of quality control and order tracking and delivery. You can be certain your customers won’t be receiving damaged or defective products because you’ll be inspecting them first. Additionally, you’ll be in control of tracking orders and ensuring proper delivery.
Just-In-Time fulfillment is a great ecommerce inventory management solution for small to medium-sized stores that don’t have warehouses, or have very limited product storage space, and are committed to providing a level of quality and service to their customers superior to that of dropshipping.
Has your store been in operation for a while? Do you have predictable, recurring busy periods? If so, demand forecasting might be the right ecommerce inventory management strategy for your business.
Quite simply, demand forecasting is an ecommerce inventory method that uses past data to forecast future inventory needs.
For example, if you have a holiday-driven business model, such as an online party store that makes the majority of its annual sales in the weeks leading up to Halloween, then demand forecasting would be your ideal strategy.
Using historical data, you can be reasonably sure that the risk of over-buying in the months of September and October will be low. In this case, demand forecasting is actually a safer bet than JIT, which is typically considered a very low-risk strategy for ecommerce inventory management.
Knowing that you have the products on hand to meet the needs of your busy periods will ensure better order fulfillment.
Custom Par Levels
This ecommerce inventory management strategy is for retailers who have access to storage space and account for holding product inventory as part of their business model.
Setting par levels means that a new order of a particular type of product is triggered every time supply levels reach a minimum threshold.
For example, say you run an online clothing boutique; you may determine that the par level for a certain pair of rain boots is 30. So whenever your inventory of this particular product dips below 30, your ecommerce inventory management system should be triggered to order more.
But how do you determine what your par levels should be?
By running a simple report, you should be able figure out the average monthly sales for each product in your catalog. Then divide that number by four to get your weekly demand. If you order merchandise on a bi-weekly basis, then multiply that number by two and there you have your par level.
Other factors to consider when setting par levels for your products are average order and delivery durations from your supplier, case sizes, and minimum order quantities.
In this way, setting custom par levels is kind of like demand forecasting. Except, whereas demand forecasting might be more seasonally-driven, custom par levels are usually consistent throughout the year. Once they’re set, future ordering becomes automated.
ABC Inventory Analysis
Another ecommerce inventory management strategy for retailers who are warehousing or storing their physical products is ABC Inventory Analysis.
More so than a strategy, ABC Inventory Analysis is a categorization tool that retailers use to rank the products they have on hand.
Those that are classified as “A” products are the biggest sellers and will require constant replenishment. "B" products and "C" products follow in descending order.
ABC Inventory Analysis can also be used as a tool for organization. Products can be stored in your warehouse or storage space according to their classification.
First in First out (FIFO)
First in First out simply means that a retailer’s ecommerce inventory management strategy prioritizes selling products in the order in which they arrive at the warehouse.
In other words, ecommerce store owners who use FIFO are averse to storing their products for long durations. Any business dealing with perishable items will intuitively understand FIFO.
But this inventory method is relevant to more than just retailers who want to avoid rotten tomatoes.
Ecommerce stores specializing in fashion and technology, for example, should take an interest in employing the FIFO method. As clothing fads and technological advances change so rapidly, holding inventory in niches like these will almost always result in losses.
Got your inventory management strategy? Now take your ecommerce business or idea to the next level
Whether you’re just starting out or you want to take your existing ecommerce store to the next level, Kliken is here to help.
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Author: Michael Arnold
Michael is a freelancer from New York City. When he isn’t writing about how Kliken unleashes the marketing, you can find him reading, writing for pleasure, or traveling the globe.