A Startup’s Guide to Ecommerce Inventory Management
Updated on March 8, 2022
Having a good handle on your inventory is essential for a small business. Good ecommerce inventory management can help your startup save on ordering costs and time. By closely managing your inventory, you’ll always know the optimal time to reorder. You’ll also be able to avoid costly stockouts that may leave your would-be customers disappointed.
In ecommerce, you don’t have a physical shop that stores your stock. Instead, you may have a warehouse, storage unit, or designated office area. Inventory management, then, isn’t necessarily as straightforward or intuitive.
As a startup in the ecommerce niche, you’ll need to make smart decisions when ordering stock and sending out orders. This can be daunting. Thankfully, it is possible to have an effective inventory system to keep track of your stock as it arrives and leaves the business.
This guide will tell you everything you need to know about building and managing ecommerce inventory..
What is Inventory Management?
Inventory management is the way that businesses keep track of their stock. This means knowing how much stock has been ordered, how much you have in reserves, how many sales you’ve made, and what orders you need to fulfill. It could also include keeping track of trends to see whether there is likely to be an upsurge in sales soon.
Inventory management is important for two notable reasons.
First, a business whose major product is always out of stock won’t build customer trust. Not even an amazing ecommerce marketing strategy can avoid this problem if consumers can’t buy your product.
Second, it can be expensive to have poor control over your inventory. You may end up ordering far too much stock that you don’t sell. This is obviously costly for a startup, particularly if the product has a narrow profit margin.
It’s critical, then, to get your inventory management right. But how do you do that? We’re glad you asked.
Your Guide to Inventory Management
There are a number of ways that you can approach inventory management for ecommerce, and many techniques beyond that.
This guide will take you through two principal types of ecommerce inventory management. Then it will explain some specific techniques that you can choose between or combine to manage your inventory and make your startup’s sales process more efficient.
Types of Inventory Management
Perpetual Inventory Management
Perpetual inventory is the continual counting of inventory. At its simplest, this may be manually counting stock when it arrives and ticking out each unit as it’s sold or shipped.
Manual inventory tracking is fine for very small startups. If you only need a small amount of stock to satisfy demand, this method is simple and easy to carry out.
You’ll need to make sure that whoever does this has an eye for detail and records the numbers accurately. Alternatively, you can look to a software-based inventory management program that can update stock figures in real time or even use desktop automation for this process. Desktop automation is generally more accurate and less costly in terms of labor. However, it can be expensive to set up and maintain.
Periodic Inventory Management
This is the principal alternative to perpetual inventory management. Rather than continually updating stock figures as deliveries arrive and sales get made, you count your inventory at set intervals.
You’ve heard of a monthly or annual “stock take,” right? Well, that’s an element of periodic inventory management. The smallest startups or those with very slow-moving stock may be able to opt for this form of inventory management, as not knowing their exact stock at any given time probably won’t have too much of an impact on day-to-day business.
In the fast-moving world of ecommerce, however, this option is unlikely to be suitable. Not having accurate records of stock may result in customers trying to order something online that you can’t actually deliver. This would damage your reputation.
Perpetual inventory management is often the choice of online retailers. But that’s not all you need to think of. There are also a range of tactics and techniques within inventory management that you may wish to consider.
Inventory Management Tactics and Techniques
Just In Time (JIT)
This technique allows businesses to order materials and products on the basis of need.
Businesses order as much stock as they need and no more, as the orders come in. This means that little to no inventory is wasted and that businesses don’t incur costs of ordering unsold stock.
If not handled correctly, JIT inventory management can lead to delays in shipping and problems with order fulfillment. If your supplier has stock issues and you have no spare inventory, for instance, customers could be waiting a long time for their orders, which could incur extra costs for refunds.
However, the JIT method is great for a small startup if you can carry it out efficiently. After all, it doesn’t require much space for warehousing, and it reduces the risk of getting stuck with large quantities of unsold or “dead” stock.
What you must be aware of, however, is that you may need to change your inventory management approach on short notice. Say, for example, you decide to pursue influencer marketing for your startup. If this campaign is successful, you may end up with more orders than you can quickly fulfill with the JIT method.
This can lead to customer dissatisfaction. To avoid this, you may need to pivot to a different technique.
Dropshipping
In dropshipping, a business orders stock directly from their supplier and arranges shipment to the customer.
Done right, this can be a very effective way of managing your inventory. It reduces storage and waste costs, as well as certain labor costs.
For startups especially, where saving on costs is essential, this is a popular way of managing stock levels.
If you’re going to pursue this technique, there are a few things you’ll need to consider:
- Having a backup plan—know what to do if your supplier lets you down (have backup sources for goods and keep your customers informed)
- Communication—be clear about what you expect from your supplier and any deadlines
- Research—investigate potential suppliers and determine who will work best for your business model
Generally, a streamlined inventory management process, handled in-house, offers a smoother experience to customers than dropshipping. However, the dropshipping option can be a valuable tool to keep costs low for new startups and to fulfill orders of high-value items that are rarely ordered.
Dropshipping is best considered, therefore, as one channel within a multi-channel fulfillment strategy. Fortunately, our next technique helps an ecommerce business stay on top of just such a strategy.
ABC Inventory Analysis
Selling multiple goods through multiple channels is a unique inventory challenge. Using a multichannel inventory management technique or system can help you with this challenge, as you can identify which of your products to prioritize using the ABC inventory analysis technique.
This technique involves categorizing your inventory based on how each product contributes to your profits.
You can separate inventory into categories A, B, and C.
- Category A: These products generate the most profit for your business. They are usually either high-value items or items with the highest profit margins.
- Category B: These products have middling profit margins and are sold more often than those in Category A but more rarely than those in Category C.
- Category C: These products aren’t as profitable as those in the other categories but are nevertheless important to the company. They are usually items that are sold in high volumes but return only a small profit.
This division is useful when you’re finding it difficult to keep all of your stock levels up to the mark that you need.
Prioritizing Category A items will ensure that the main source of your business’s profit is still in place.
You should still try to pay attention to Category B and Category C items. Category C items generate less profit than Category B items, which,generate less profit than Category A items, but they’re still important to your business and add to your profits.
Consignment
Consignment is the practice of selling inventory from another business (the consigner) without paying for the stock up front—you pay for inventory as you sell it.
For example, a sustainable startup that aims to sell excess stock for clothing companies might use consignment inventory to avoid waste and environmental harm. This business could receive surplus clothing from three companies and sell it at local sustainable fairs and markets. Clearly, it’s important to keep costs down for this startup, so it benefits them to pay for what they sell as they sell it.
Using consignment inventory requires a good working relationship between the consignor and the consignee. The consignor must trust the consignee with their stock, without getting an up-front payment for it. The consignee, meanwhile, must trust that the stock—over which they have no control regarding quality, style, etc.—will sell.
You should also have contingency plans in case your consignor’s supply line fails or there are other issues. A sustainable startup with no central office, for example, might want to use a remote access solution to maintain its database and mitigate against the chance of issues arising.
Being able to remotely access your inventory supports remote teams and flexible working. It also means that out-of-hours inventory problems can be solved or investigated virtually.
Safe Stock
This means that you’ll be ordering a certain amount of stock above and beyond what your orders dictate that you need.
The major benefit of this is that you have stock to fall back on in the event of an upsurge in sales. Having extra stock can mean faster delivery for customers and a higher customer retention rate.
You’ll need to work out what level of extra stock is appropriate for your business. For example, if you sell 100 units a month and see a bit of fluctuation, then an order of 120–150 units might be suitable.
The major issue with this technique is that you could end up with excess inventory. This is particularly true if you see major fluctuations in units sold from month to month. However, safe stock inventory also exists to protect businesses against these fluctuations and help them avoid running out of stock.
One way to address this problem is by learning how to sell surplus inventory.
What Next?
Have a clear idea of the scale of your business. Some of these methods are more suited to small businesses looking for opportunities to scale up than others.
If you are going to scale up, make sure to choose an inventory management system that will continue to work for you. Switching to a different system is always possible, but it’s best to choose a style of inventory management and a selection of techniques that can scale with you. Hopefully the range of alternatives covered here has given you plenty of ideas.
