Due to the COVID-19 pandemic, more customers, both B2B and B2C, shopped online in 2020, resulting in tremendous eCommerce growth. Online retailers like Amazon and eBay had their biggest years ever. B2B eCommerce will be worth nearly two trillion dollars by 2023, which means eCommerce business owners are in need of more sophisticated online sales methods.
With this worldwide migration to online business comes a myriad of chances for businesses of all sizes to broaden their reach and target new clients. But it also brings increased competition, with new players continually entering the marketplace and vying for a piece of the action. In such an environment, inventory management is crucial. With that as our backdrop, below are 7 tips to optimize inventory management in eCommerce.
Businesses that use this inventory philosophy, as the name indicates, stock a product each time a customer requests it, such that the volume of inventory is approximately proportional to the number of filled orders. Toyota and its automobile production process developed the JIT approach. It goes without saying that, while this strategy offers huge cash savings, it can also be dangerous, so it should be based on the kind of industry you are in and the demand you are able to forecast.
The main advantage and the reason it can be a great optimization technique is that there is no possibility of revenue being caught up in dead stock. You will have less inventory to maintain at your warehouse, and the product requires less room to be stored - a smaller warehouse implies reduced storage expenses. It is important to remember that good facilities management software can help you keep on top of your inventory management and much more.
First in, first-out (FIFO) indicates that the items received by your warehouse are the first to be dispatched to end consumers. This method is commonly used in the food service or food supply industries, where organizations deal with perishable commodities.
However, any company can adopt FIFO, especially if they don't want to keep things on hand for longer than required. If the resources or items acquired have variable pricing patterns, FIFO will not be an acceptable method. This might result in disparities between the cost of products received and the cost of items sold. There are clear optimization advantages, though. FIFO typically means less waste, especially when it comes to perishable foods. It also means optimized warehouse circulation that ensures no product is kept for longer than necessary. In the case, that certain batches of a product need to be kept aside or certain machines are not available for use due to safety reasons, thus affecting the inventory management, they can safely be marked with a Lockout Tagout system. This is especially common in warehouses where a FIFO system is used and can potentially be very helpful.
Dropshipping may be referred to as the "anti-inventory" inventory management method. The whole point is that you, as the business owner, will never touch the product. When a client places an order, you fulfill it directly from the manufacturer and ship it to them. As a result, dropshipping eliminates the need for a middleman entirely.
This is beneficial for business owners who want to enter the eCommerce market but can't currently afford the expense of a warehouse or storage facility. However, there is no such thing as a free lunch, and these "shortcuts" are not risk-free.
Manufacturers have an incentive to offer discounts and bonuses to firms that buy and store their products in large quantities. After all, once the goods are delivered to a warehouse, the duty of selling them falls squarely on the shoulders of the business owner. Dropshipping eliminates that incentive, which nearly invariably results in increased fulfillment costs. Some entrepreneurs just do not have an option. They are prepared to bear the increased expenditures in order to gain a foothold in the eCommerce market.
Yet again, there are clear optimization benefits to be had by employing dropshipping. Small enterprises are no longer required to own warehouse space, and it is often a much easier and less stressful introduction to the world of eCommerce. A lot of eCommerce clothing retailers, for instance, prefer dropshipping.
Third-party logistics is the practice of companies handling eCommerce logistics for other companies. 3PL providers help you by handling the basic logistics for eCommerce clients, including (but not limited to) inventory management, warehousing, and fulfillment, for an agreed-upon fee.
The products, experience, and capacity to support more complicated supply chain activities vary by 3PL vendor. 3PL is appealing to business leaders who consider themselves to be more visionary than detail-oriented. They are more than prepared to pay a premium to reclaim their valuable time. As an eCommerce inventory optimization technique, 3PL comes with some powerful advantages.
You get cost savings on warehouse rent, labor, and shipping materials that can end up being quite significant. You also get access to huge warehouse infrastructure, which allows for the creation of new customer bases, and corporate executives have more time to devote to high-level responsibilities.
Once you have decided on the best inventory management method for your eCommerce business, It's time to undertake some predictive analytics and get a fuller understanding of the current demand for your items. A successful company, as a general rule across all industries, is one that makes the future less unclear.
While it is essential to be able to remain agile and be able to react to changing market and industry dynamics in real-time, having a good grip on your sales cycles, historical demand and lead times will allow you to make much better inventory management decisions.
If there is a process that you can automate and eliminate the need for humans, you should take advantage of the opportunity. Barcodes are inexpensive, however, human mistakes may be quite costly.
Scanning products anytime they are received, moved, shipped, or altered in any manner is a recommended practice in inventory management. Without a scanning system, you are vulnerable to human mistakes, mistyped SKU numbers, and inaccurate inventory data. This is especially dangerous if your eCommerce firm expands beyond a few SKUs in a small warehouse.
Par levels protect eCommerce retailers by assuring a minimum amount of stock at all times. All eCommerce business owners, assuming they are not dealing with food or perishable commodities, should maintain a minimum sustainable stock.
Setting par levels are basically dependent on two variables: your items' demand patterns and manufacturing schedules. Some IMS platforms will automatically notify administrators when specific product SKUs go below the par level threshold while considering a variety of factors. These include the amount of time it takes to get a new product, the demand curve for that specific SKU, and your present stock levels.
Here's an easy example:
Let's assume that you have a product that sells one unit each day on average. You are aware that manufacturing and fulfillment of such goods at your warehouse takes 30 days. As a result, your par level must be more than 30 units in order to avoid stock-outs.
It's time to segregate your product line when you've developed a foundation of an inventory management philosophy, realistic demand estimates, and data-backed par levels. By adapting your fulfillment approach to different product lines or categories, an ABC analysis may help you optimize your income.
For example, Category A might comprise things with a high value but a limited number. Products in Category B are reasonable in both price and quantity. And then there's Category C, which includes things that are low in value but large in number.
By categorizing your inventory in this manner, businesses that sell a variety of products may develop customized restocking plans for each product category. If you're a musical instrument maker that offers $2,000 bespoke electric guitars and $2 packs of picks on the same website or channel, you'd be crazy to use the same fulfillment technique for both.
The following is a step-by-step guide for completing an ABC analysis:
Collect statistics on the product under consideration — most often, yearly spend per item (including carrying costs, if possible). Next, rank each inventory item from most expensive to least expensive.
Following that, divide your inventory into ABC categories – typically, Category A goods account for 15-20% of your total product line but account for 80% of your expenditures. Similarly, Category B goods account for 30% to 35% of your inventory and 15% of your expenses, whereas Category C items account for 50% of your inventory and 5% of your expenditures.
Finally, conduct monthly or quarterly evaluations to confirm that the categories you've developed represent actual purchase trends.
eCommerce businesses that need a lot of kitting or assembly are likely to have a number of vendors or manufacturers from whom to acquire items or raw materials. Handmade jewelry, secret recipes, and electrical components are common examples.
Even if your supply chain consists of only one or two vendors, this activity is worthwhile. Set a regular reminder every six months or so to map out all of your supply chain's essential components and assess their contributions to your business. This contains items such as comparing your lead times with those of your competitors, doing cost comparison with competitors, and measuring any unfavorable trends (consumer returns, faulty goods) that may force a change.
You may discover that a supply problem in your eCommerce business isn't your fault but rather the result of a defective link in your supply chain.
Audits requiring a total stoppage of warehouse operations are outmoded, hazardous, and wasteful. Furthermore, no one likes them. Of course, thorough inventory audits on a regular basis are important, but you should count in cycles.
Cycle counting is a method of dividing inventory counting tasks among numerous days and staff. You begin by prioritizing the highest-value items (those in the A category if you're already undertaking an ABC analysis) and having numerous workers (or just you if you're a solopreneur) count those products for a portion of their shift.
Then you move on to items in the B and C categories, which you countless frequently since they contribute less to your bottom line. The frequency of your cycle counts is determined by how cautious you want to be in resolving inventory issues.
Understanding inventory management is critical for every organization, large or small. It reduces waste, reduces expenses, and saves time. Keeping up with supply promotes greater customer attention by providing them with the things they need.
Unfortunately, many organizations are still unaware of the best optimization practices for inventory management. Some of the world's largest corporations have failed due to a lack of proper processes and systems. You, as an eCommerce business owner, can avoid the pitfalls of bad inventory management by keeping the above optimization techniques in mind and ensuring that you are getting your goods to your customers in the most efficient and cost-effective way possible.