Comprehensive Guide to Ecommerce Inventory Management

What is Ecommerce Inventory Management?  

Ecommerce inventory management is an organized approach to tracking the goods that a company has in stock for sale. It includes sourcing, storing, restocking, forecasting, tracking, and shipping an ecommerce company’s products.  

Strategically managing inventory gets more challenging as a company grows, adds more products, and distributes their units across multiple distribution centers.  

Inventory management is crucial to get right as it’s a central part of an ecommerce company’s supply chain. A strong inventory management strategy can help a company find greater cost savings, order efficiency, and optimized supply chain flow.  

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The Benefits of Accurate Forecasting  

Striking the right balance between product supply and customer demand is a very difficult, moving target.  

Forecasting is the process of anticipating the number of products you’ll need to fulfil customer demand to make the maximum profit (sell as many as customers want) but without having too much inventory left unsold (also known as deadstock).  

Ecommerce brands need to build accurate inventory forecasts for many reasons outside of consumer demand. Inventory forecast numbers will directly impact your shipping budget, amount of boxes and packing materials, labor support to fulfill your orders, and much more.  

Forecasting is never finalized. You can have a baseline yearly projection, but it is also important to create specific forecasts to meet the ebbs and flows throughout the year. A few examples include:  

• Holiday season—most brands see increased sales volume during this time of year.  

• Peak seasons—do you sell more in a certain season or around a particular holiday? 
• Promotions and sales—plan ahead to project when you’ll need more products on hand. 

It’s important to mention that financial forecasting is different than inventory forecasting. While they are interdependent, they operate very differently and should be considered separately.  

Forecasting Models – Which is Right for Me?  

There is a lot about ecommerce that is complicated. While you’ll never actually get an accurate forecast, it’s so important to get as close as possible. Most brands use a forecasting formula, here are a few.  

Demand Forecasting  

A common forecasting formula involves using historical sales data to predict future customer interest. This can be short term (sales and promotions), long term (multi-year projections), micro-level (a single SKU), or macro-level (launching new products). Your historical data will show you the times of year when consumers are buying more, and the products that need to be restocked sooner.  

Reorder Points  

It is more cost-effective to re-order products exactly when you need them, it saves storage fees or shipping costs to rush products into circulation faster. To find this crucial place in your inventory cycle, you need to find the reorder point, or reorder level. There are many formulas to use, they consider the following data ideal safety stock, turnover ratio, and supplier lead time. 

Market-Based Forecast 

If you don’t have historical data (maybe you’ve just switched 3PLs, or just launched your brand) you can still forecast based on market trends. Look at brands with similar products to yours. They might even share some of their data with you if you reach out! Look at the cadence of their sales and promotion campaigns and research the overall market share of your vertical.  

“It’s so important to know what our inventory levels are—whether it be return material or finished goods ready to go out the door. DCL’s eFactory platform gives me the real-time view that I need of what we truly have at any given time.”   

Managing Inventory Control and Velocity 

There are two big components to inventory management: how products are managed while in stock and how inventory cycles through the process of being ordered, stored, fulfilled and shipped.  

All About Inventory Control  

Inventory control is a specific aspect of inventory management, it involves regulating and handling the inventory you already have on hand. This includes deciding the optimal amount of inventory you should store, reorder points, how inventory is stored and managed while in stock. For example, inventory control rules will determine how leftover products that don’t sell get processed.  

Learn which inventory control method is right for your brand. 

What Is Inventory Velocity?  

The rate at which your inventory turns over is known as inventory velocity.  

Calculate your annual inventory turnover by dividing the cost of goods sold (COGS) with the average inventory on hand. It’s the number of times inventory is purchased and sold during the entire fiscal year and thus how much stock is also left sitting in the warehouse. This number essentially states how much of your inventory you were able to go through and how quickly. Read more about the velocity formula.  

Low inventory velocity indicates poor sales or inventory control issues. Velocity is a good way to assess business performance. Evaluating product effectiveness can influence funding, personnel growth, and overall scalability. Higher stock turns are favorable because they imply product marketability and reduced holding costs, such as rent, utilities, insurance, theft, and other costs of maintaining goods in inventory.  

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Important Inventory Management Formulas

• Lead Time. Knowing how long it takes, on average, for your products to get from the manufacturer to your distribution center is crucial to inventory management flow. It’s a simple formula: the number of days between when you submit a purchase order and your products arrive.  
• Safety stock. Otherwise known as emergency stock, it’s important to determine the extra number of products needed in case of closures, weather, delays, or other unforeseen circumstances. Having the right amount of safety stock will ensure no stockouts or backorders.  
• Inventory turnover rate. The number of times a company has sold and replenished their product inventory within a specified period. The calculation informs everything from pricing strategy and supplier relationships to promotions and the product life cycle.  
• Economic order quantity. EOQ is the ideal amount of inventory a company should purchase to minimize its costs, like shortage or carrying costs. The formula involves annual demand units, order cost, and annual holding costs.  Read more about how to calculate EOQ.  
• Maximum stock level. This is the amount of inventory you can have in storage without incurring extra storage fees. Especially when preparing for peak season or a promotion period, it’s very important to keep this in mind.  

“With DCL’s advice and expert team, we instituted a more robust system of collecting inventory data. Thanks to DCL’s changes we have seen significant cost savings!”  

Inventory Management Software  

The right inventory management software will provide the metrics, reporting, and updates that match your needs—whether that is moving unsold products, meeting unexpected demand in sales, or re-calculating your inventory. Accurate reporting is crucial, your inventory management software should be something that boosts business efficiency.  

Inventory Management Software Terms

• ERP, or Enterprise Resource Planning — a type of software used to manage business activities such as accounting, purchasing, and supply chain management operations. 
• EDI, of electronic data interchange — allows partners in your supply chain access to real-time inventory information. This may be retailers, suppliers or other vendors.  
• IMS, or inventory management system — this is the combination of technology, processes and procedures that oversee the monitoring and maintenance of stocked products.  
• WMS, or warehouse management system — software that helps control the flow of products and labor within a warehouse or fulfillment center. While basic WMS might coordinate the picking, packing, and shipping operations, there is a large range and a more robust system might handle inventory receiving, inventory management, demand planning, labor management, supply chain management and other warehouse operations. 

Getting the right tools for your inventory management system can be complex and costly. If you outsource fulfillment to a 3PL, ask to get a demo of the software they use.  

“In the past, we used many different systems and spreadsheets for our orders and inventory. It was time-consuming and at times, inaccurate. eFactory’s analytics allows us to view reports in a variety of different ways to help us plan and forecast accurately.”  

Inventory Management Techniques  

Different products need different types of inventory management. Here are a few common techniques that brands employ.  

Just-in-Time Inventory

When products are purchased just before they are needed, this is considered just-in-time inventory management or JIT. Often raw materials or parts are ordered and then assembled as the customer orders come in. Utilizing JIT allows merchants to hold a minimum amount of stock supplies on hand, to balance inventory costs, while at the same time making sure that stock-outs don’t happen should there be a sudden spike in demand.  

FIFO and LIFO  

FIFO means “first in, first out.”  In other words, the oldest inventory, being the first in, should be sold out first before the newer stock is offered to customers. This is often used for perishable goods, or items with an expiration date (food, beverages, or medicine). This way, you don’t end up stuck with expired products that you can’t sell. Similarly, LIFO stands for “last in, first out” and processes inventory by selling the more recently acquired stock first. LIFO is beneficial if the cost of the raw products goes up because the higher priced goods will outweigh the overall cost of goods sold when accounting.  

ABC Analysis

By classifying inventory into three categories, each representing the inventory values and cost significance of the goods, inventory can be managed in smaller batches. Categories might be (a) high-value and low-quantity goods, (b) moderate-value and moderate-quantity goods (c) low-value and high-quantity goods. One of the advantages of ABC analysis is that it provides better control over high-value goods, but a disadvantage is that it can require considerable resources to continually analyze the inventory levels of all the categories. 

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How to do an Inventory Audit  

Inventory accounting is a cross-check system on SKUs in stock compared to SKUs on the books. An inventory audit requires a physical count of goods in possession and in transit.  

There are many reasons to conduct an inventory audit:  

• Internal visibility purposes for accurate records. 
• A CPA may need it to balance the financial records.  
• Recalculate safety stock levels or reorder points.  

A clear audit report is an indicator of an efficient supply chain. Issues in your audit may indicate shrinkage (theft, fraud, or damages) or administrative errors that need to be rectified. Audits are required for public companies.  

Audits can be performed by in-house staff, official auditors, or outsourced to a third-party logistics (3PL) company. There are many different systems they can use to count inventory, whether tallying each item or just spot-checking. 

Cycle Count vs. Physical Inventory 

There are two main ways to conduct an inventory audit:  

• A cycle count will spot-check the inventory. Often a small section of inventory is counted so operations aren’t disrupted. The idea is that if that section is clear, the rest is fine too.  
• A physical inventory usually involves counting every single SKU within the distribution center or warehouse. It’s often done with a barcode scanner and electronic ledger.  

Integrating Inventory with Omnichannel Fulfillment  

Inventory management is much more than just keeping track of what’s in storage—it also requires keeping track of what’s coming in, going out, moving to another facility, and being fulfilled for sale in any number of sales channels.  

Many high-growth brands sell on multiple types of outlets, which is called omnichannel. Here are some of the different types of integrations and inventory support you’ll need for these various sales channels. 

• Ecommerce platforms—It’s easier than ever to start an ecommerce business, with off-the-shelf platforms like Shopify, BigCommerce, WooCommerce, and others, sellers can host their products online through these platforms. These platforms often include inventory management software, integration with other partners, along with cart and payment support, plus many other plugins. 
• Retail—One of the more complex and difficult sales channels to execute, retailers each have different requirements for products coming in to be sold at their stores. Many use EDI (electronic data interchange) for communicating inventory levels, purchase orders, delivery timing, and more. 
• Marketplaces—Of the many marketplaces available to sellers, Amazon is the largest and most popular. Others include Ebay, Wayfair, Walmart.com, ASOS, or Rakuten, or Target.com. Brands can partner with any of these marketplaces to have their products listed. Inventory management is a big part of this relationship because some marketplaces will store inventory and fulfill it, but others may not.  

“DCL was able to help accomplish a time sensitive integration with Best Buy and start shipping into them. It worked because our inventory could pass through DCL fairly quickly.”  

Common Inventory Issues and How to Solve Them

• Visibility – If you’re not getting real-time inventory updates, you’re going to run into big problems. You need to know what is in stock, what is going to be ordered, the size and quantity of the order, and what items need to be replenished.  
• Deadstock – If you have items that can no longer be sold, items that are out of season and style, or items irrelevant, this is called deadstock. Optimizing your inventory velocity formula and control procedures will help you avoid this.  
• Stockouts – a stockout occurs when a customer orders a product, but no inventory is available. This usually happens when demand for products is higher than expected, and safety stock number or reorder point is too low. 
• Storage costs – This is a variable cost that changes based on the amount of inventory in storage. Whether you have too many products or too few, you’re overpaying either way. You can optimize storage fees with more accurate forecasting.  
• Backorders – If products are out of stock but still available for purchase it’s considered a backorder. Supply chain optimization is important to ensure you have all the products in stock that are listed on your ecommerce site.  
• Slow fulfillment – If you are getting customer complains of slow delivery time, there are a few inventory issues that could be at play: low staff, complicated kitting, or outdated tracking systems. A good 3PL will help you optimize these.  

“By moving our inventory to DCL’s Louisville facility, we got a much higher proportion of our freight to a lower cost option. We were able to see significant cost savings because of Louisville’s excellent location.”  

Top Inventory Metrics 

Data and metrics, when leveraged correctly, can provide insights on your ecommerce operation and workflow. Analyzing your inventory levels is important to find inefficiencies, and correct them, and look for ways to save on costs.  

There are many inventory management formulas already listed in this guide that will help you navigate forecasting, supply chain flow, and product storage. But there are a few more metrics that are important to track:

Inventory Accuracy

Measure accuracy by comparing physical inventory with what’s recorded in your database. Maintaining inventory accuracy reduces inventory carrying cost and stockouts. Calculate inventory accuracy by dividing physical inventory count by the database inventory count.  

A rate between 95% and 99% is your goal. Inventory naming and good labeling practices will help improve your accuracy rate.  

Order Picking Rates

There are many ways to calculate how fast orders are picked: total order picking rate, order fill rate, perfect order rate, orders picked per hour, and more. Select one or two to evaluate. Track them over time and see where you can make improvements.  

These picking rates directly contribute to how quickly your customers receive their purchases. They also contribute to your inventory turnover ratio.  

Returns

So much of inventory management deals with the acquisition and monitoring of products you have. Don’t forget to factor in your rate of returns as well. Getting returned products back into good stock (if they can be resold) is crucial to your inventory management system.  

Plus looking at your return rate will help you figure out why customers return their orders, helping you spot weakness in your supply chain, and make improvements. 

If you are looking for omnichannel fulfillment we would love to hear from you. Send us a note to connect about how we can help your company grow. You can read DCL’s list of services to learn more, or check out the many companies we work with to ensure great logistics support.