Every leader who works in ecommerce knows that one of the fastest ways to lose a customer is to fail on order fulfilment. Think about it from the point of view of a consumer. Few things are more frustrating than seeing a company advertise a product and going to their website to purchase it, only to receive the dreaded message, “The item you ordered is not in stock.”
Every ecommerce team is dedicated to retaining acquired customers, growing their relationship with them and improving customer lifetime value. One of the primary requirements to doing so is the implementation of effective inventory management practices.
Inventory management is the process of overseeing a company’s resources and assets from the point of acquisition to the point of sale. It includes the goods sold to customers, as well as all the raw materials and component parts needed for their production.
The chief concerns of inventory management are purchasing materials at cost-efficient prices, storing goods and assets safely, and shipping them in a timely manner. The ideal inventory management strategy for your business will depend on the type of goods you sell and the nature of your business. And developing a process that works for your company will lead to many benefits.
Inventory Management: A Key Ingredient for Success
Unfulfilled orders aren’t the only problem caused by poor inventory management. Production delays, wasted stock, and sunk costs are all a result of companies failing to manage their assets properly.
Despite these dangers, many companies continue to persist with archaic and ineffective inventory methods that are poorly suited to the fast-moving and globalized modern supply chain model. As many as 67% of the respondents to a 2018 survey reported still using Excel as a tool for supply chain management!
On the other hand, cracking the inventory management code helps companies improve their performance in several key areas. Let’s look at some of the most important benefits of effective and accurate inventory management:
Increased Revenue
With proper inventory management, you will always have stock to fulfill any order that comes through, regardless of purchase channel. You won’ to supply shortages and instead drive up your sales numbers because of happy shoppers.
Inventory management sets businesses up to consistently meet the market’s demand for their products.
Lower Costs
Storing excessive non-moving goods is a waste of space and money. Warehousing dead stock is an avoidable expense and can be avoided with proper inventory management strategies. By minimizing the amount of inventory in storage and ensuring that it is sold, you can save on warehouse expenses, handling costs, and lost revenue due to obsolete or expired goods.
Better Shopper Relations
The main goal of inventory management is to ensure that there is always stock available for paying shoppers. And as shoppers come to depend on your company and know it can always be relied on to fulfill an order, they will appreciate your practices and want to place more orders in the future. Satisfied shoppers are loyal customers, and effective inventory management is one way to guarantee their satisfaction.
Popular Inventory Management Techniques
Inventory management combines analytics, logistics, and fieldwork. It’s impossible to declare any single inventory management model as the most effective since each is meant for a certain type of business.
While a grocery store has to move its inventory at a fast clip and sell out all fresh vegetables by the end of the day, a car manufacturer can afford to sit on showroom-ready vehicles for months before the stock becomes unsellable. Each business has to find the right inventory management strategies that suit its industry as a whole and its organization in particular.
Here are some widely used inventory management techniques you can apply to your own company:
1. Economic Order Quantity (EOQ) and Minimum Order Quantity (MOQ)
There are two ways to deploy inventory management based on the raw materials and products you purchase for your business. The first is EOQ, and the second is MOQ.
EOQ is a model where a company determines the optimal inventory levels needed for each production cycle in advance and then places the order to its suppliers. The ideal cost of purchasing this inventory is calculated by considering market demand, sales forecasts, and holding costs.
The MOQ model involves purchasing the smallest amount of goods and materials needed to keep operations running and maintaining the lowest possible inventory costs. More expensive items will have a lower MOQ, while cheaper, mass-produced items will have large MOQs.
2. ABC Analysis
The ABC analysis method of inventory management divides inventory items into three categories based on their perceived value. The organization then maintains a certain minimum stock level in each category based on their requirements.
The three categories used in ABC analysis are:
- Type A: These valuable items only comprise 20% of the total inventory but account for up to 80% of its overall value.
- Type B: Items of medium importance, which account for 30% of total inventory and 15% of its value.
- Type C: Comprising low-cost items that make up around 50% of the total inventory but just 5% of its value.
3. Just in Time (JIT) Inventory Management
One way to prevent inventory from turning into dead stock is to hold it for as little time as possible. The JIT method of inventory management is an approach that takes this principle to the extreme—this is when companies only order inventory when it is needed.
By ordering stock as needed, the only inventory on hand is what is on demand. It’s a dynamic method that can lower inventory-related costs, but it is perilous and can also backfire. Without reliable suppliers and logistics partners, there is a considerable risk of falling short on stock to meet shopper orders. That’s why companies using the JIT inventory technique need to track their existing stock and market demand at all times.
4. Safety Stock
The philosophical counterpart to the JIT method is the safety stock approach. It involves maintaining a stockpile of inventory that can be used to meet excess demand or in the case of a supply chain breakdown.
The rationale behind this technique is that it is better to have inventory and not need it than the other way around.
Though maintaining safety stock insures against shortages and supply disruptions, it also has drawbacks. Over-ordering can leave you with dead stock that can be difficult to unload. This is why companies need to carefully calculate the right amount of safety inventory based on factors like demand variability and holding costs.
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5. First In, First Out (FIFO) and Last In, First Out (LIFO)
If you are managing your inventory based on the order in which the goods are being sold, there are two main approaches: FIFO and LIFO. The choice of which to use in your business depends on the kind of goods you sell.
In FIFO, older inventory is sold first. This ensures that the items do not remain in storage for so long that they expire or that consumer trends pass by entirely while in the warehouse.
The LIFO method takes the opposite approach, selling the newest inventory first. This ensures shoppers are receiving the freshest possible items. It’s best to use LIFO when dealing in perishable goods with very short shelf lives, and FIFO is better suited for long-lasting products that could increase in value over time.
6. Demand Forecasting
No successful inventory management strategy is complete without an element of demand forecasting. With projected sales, you estimate how much inventory your company needs in order to meet the expected demand.
These forecasts must be based on historical sales data and variables based on ongoing trends and market forces.
Of course, it’s difficult to predict how shoppers will behave in the future, which is why demand forecasting requires periodic adjustments after each production and sales cycle. Relying on poorly researched or outdated information could lead to over-ordered inventory for the next cycle or a lack of stock to sell despite having outstanding orders.
Improve Inventory Management with the Right Tools
In our fast-moving world, manual inventory management is incredibly inefficient and no longer a practical choice. Companies must use robust software tools with features that can be used to solve their inventory management problems.
From digitizing inventory databases to optimizing fulfillment strategies, there are software as a service (SaaS) solutions for nearly every element of inventory management.
If you are looking to modernize your inventory processes, inventory management software like PackageX is what you need. It allows you to easily create digital inbound manifests, streamline dock-to-stock workflows, and gain real-time inventory visibility. Tools like PackageX add value to your business and increase the effectiveness of your chosen inventory management techniques.
Learning the best way to move goods and resources around will lead to more sales, lower costs, and happier customers. All you have to do is master the right mix of inventory management techniques and partner with a reliable company to take your business to the next level!
