Inventory management for e-commerce 101

Sustainability, profitability, scalability can all be easily achieved just by focusing on one aspect of your business — improving inventory management for e-commerce. This guide details everything you need to know, from challenges to methods to implement pitch-perfect e-commerce inventory management.

Globalization means one thing for manufacturers — having an online store is essential if you want to stay ahead of your competitors.

But, since 2016, the entire world seems to be enduring countless hardships. At this point in time, the list is too long and shocking to even mention. But, one thing that has become apparent to everyone — anything can happen which can disrupt your business.

Now more than ever, being prepared for uncertainty is essential.

That’s why we’ve put together this guide on inventory management for e-commerce manufacturers, to help you understand how you can optimize your handling and get the most out of your stock levels.

Inventory management for e-commerce

What is inventory management for e-commerce for sellers?

Inventory management for e-commerce is the process of sourcing raw materials, storing items, and selling products.

There isn’t much of a differentiation between inventory management and managing e-commerce inventory, other than e-commerce focuses exclusively on the products you sell over the internet. Perfecting your e-commerce management allows businesses to improve their efficiency and reduce operational costs. Given how globalized the world is nowadays, e-commerce inventory management is important because, if done properly, it will help you:

Track items in your own warehouse
Track items provided through a third-party logistic fulfillment center (3PL)
Track items stored with contract manufacturers or consigned inventory with another business
Track products sold via dropshipping
Monitor your multichannel selling strategies

By accurately optimizing your inventory management for e-commerce, you can better understand your logistics and analytics.

You can then use this information to get complete inventory control, maintain ideal stock levels, and make more accurate predictions on inventory demand.

Why do you need inventory management for e-commerce as a manufacturer?

Inventory management for e-commerce is important because it helps you monitor your inventory put aside for online sales without compromising inventory meant for physical locations.

Good inventory management for e-commerce allows manufacturers to set precise re-order points to avoid overstocking, understocking, or complete stockouts. It will also help you improve your supply chain management by understanding when you need to order products and how much. If you’re selling inventory across different sales channels, online and offline, your e-commerce inventory management will let you know exactly where your products are at any given time.

We have a series of articles that explore different inventory management for e-commerce platforms. If you want a more focused guide on managing inventory for your particular platform, be sure to check out the following articles below:

What are the benefits of implementing inventory management for e-commerce?

Poor e-commerce order management can severely disrupt your business.

First, if there’s an issue with your inventory levels, it means you can’t get products to customers by the time they originally expected. Or your order fulfillment rate will fall below what is needed to meet demand. Regardless of the problem, all of this will damage your business’ reputation and drive away customers and even suppliers.

With that said, here are the benefits of improving your inventory management for e-commerce:

Customer relations

First impressions are everything.

According to Bain and Company, a 5% increase in customer retention accounts for at least a 25% profit increase. Establishing loyal customers is critical for success — after all, customer retention is cheaper than customer acquisition. Having your inventory management for e-commerce fully optimized will help you avoid delays and long manufacturing lead times, which will leave customers satisfied, giving them the confidence to shop with you again.

Clearer oversight of your inventory

As already touched on in the article, improved inventory control helps you and your managers see when to restock items or determine which items are actually costing you money.

Improving your inventory management for e-commerce will optimize how you handle all your different inventory types, including:

Raw material inventory
Finished goods inventory
WIP inventory
Warehouse or third-party stored inventory

All of this will assist you in identifying your bestselling products and your not-so-great ones — allowing you to increase inventory levels of good stock and take measures against the bad stock, such as selling them at a discount or liquidating items altogether.

Improved efficiency

Your inventory management for e-commerce is going to be the backbone of your business.

Understanding how items move around your business and supply chain gives you the information necessary for improving a ton of different aspects of your business including:

Supply chain and supplier relationship management
Production requirements
Lean inventory and manufacturing
Routing manufacturing
And so much more

What are the challenges of inventory management for e-commerce?

Now you have some theory under your belt, it’s time to start optimizing your e-commerce inventory.

To do this, we’re going to set out some common challenges manufacturers face when looking to improve inventory management for e-commerce. These challenges will help you understand the areas of your business you need to focus on to optimize inventory handling. After that, we’ll lay out some methods you can follow to address these issues.

1. Managing inventory via an e-commerce platform

First things first, understanding inventory management for e-commerce regarding using an e-commerce platform to manage your business.

In the beginning, it was probably an advantageous opportunity to set up your e-commerce business with a platform such as Shopify, WooCommerce, or BigCommerce, for example. Unfortunately, although they have an e-commerce order management system, they lack the necessary features to track the extra inventory types needed for successful production runs. The sooner you implement e-commerce order management software for manufacturing, the quicker you can save money from:

Wasted time
Lost inventory
Preventable labor costs
Tax and accounting errors

2. Overstocking and overselling

Suppose you don’t understand your inventory requirements or your customers’ shopping habits. In that case, you’re in danger of heading into a scenario where you can’t meet demand, or you’ve overestimated how much stock you actually need.

It might sound like a good idea to have your shelves fully stocked and waiting to be sold. But, every second an item spends in your warehouse diminishes the profit margin for that product. Not only do you risk increasing carrying costs, but your chances of storing dead stock increase too. According to a report by Celect and Coresight Research, a mindboggling $300 billion revenue is lost due to markdowns.

3. Lack of transparency

Sometimes miscommunication that could have easily been avoided between suppliers, warehouses, factory workers or retailers can lead to big problems.

If you want your supply chain running as smooth as silk, you’ll need to figure out how to make your business transparent. This way, your sales department or retailers know if they can make fulfillable commitments or not. According to a 2017 report on global supply chain resilience from the Business Continuity Institute, 69% of respondents said they do not have full visibility of their supply chains.

4. Lack of reliable data

“It is a capital mistake to theorize before one has data.” — Sherlock Holmes.

If you plan to grow your e-commerce business, you’re going to need to find a way to uncover and track data about your inventory movements, such as:

What items are selling the most?
What items are selling the least?
How does inventory fluctuate over time?
Do you need more items?
Do you need fewer items?

Finding the answers just to these several questions alone will be a great start to boosting profits, supporting growth, and catering to your customers’ needs.

7 Inventory management for e-commerce methods to adopt

1. Safety stock

Keeping safety stock gives you a buffer when something unexpected happens like an issue with your supply chain or a sudden surge of e-commerce orders.

Safety stock means you can keep fulfilling orders as you purchase more materials or create more products to top up your inventory levels. However, the amount of safety stock you should keep depends on several factors. You can use this following formula to calculate how much safety stock your business should be holding:

Safety stock = (maximum daily usage x maximum lead time days) – (average daily usage x average lead time days)

2. Inventory kitting

You identify products that have been loitering for too long in your inventory — what do you do?

It might be tough to admit this, but it comes to a point where you might have to consider cutting your losses. Though, that doesn’t mean that you should throw everything out the window. One technique you can implement is inventory kitting your products.

This is where you take your slow-moving or dead stock, and bundle it with stock that is selling, so you can offload the products and recuperate some of your costs.

3. Demand planning

This is an essential process step for a spring clean and a method of optimizing your inventory handling.

The purpose of performing demand planning is to make future sales and stock level requirements a little less uncertain. To do this, look into historical sales data and identify past trends to make a prediction on what you’ll need for the coming period. You can use PEST analysis to make these estimations by looking into factors such as:

Political
Economical
Sociocultural
Technological

4. Storage and routing

This is easy to overlook when improving your inventory management for e-commerce.

Be smart where you place your items and equipment in your business by answering these questions:

Do you have easy access to your raw materials?
Are there problems moving items from one manufacturing process to the other?
Do you keep your finished goods inventory for e-commerce and offline selling separate?

Rethinking how your warehouse, factory, e-commerce inventory, and physical store locations are laid out will help you improve inventory management, minimize costs, and maximize value for the customer by reducing waste.

5 Reorder points

Reorder point is an essential tool for managing inventory and improving operational efficiency.

By using a reorder point system, businesses can always have the right amount of stock on hand to meet customer demand. This leads to lower costs, increased profits, and happier customers. You can calculate your ideal reorder point with the following formula:

Reorder point = (Average daily usage x average lead time in day) + Safety stock

6. ABC inventory

ABC inventory stands for “Activity-Based Costing.” This system helps organizations better manage their high-value inventory.

In particular, it allows managers to use their stock management resources more efficiently. The ABC inventory system works by dividing all the items in a company’s inventory into three categories:

Items in category A are the most important, and those in category C are the least important.

By managing the items in category A, companies can improve their availability and reduce losses and costs. The ABC inventory system is a great tool for improving inventory management. By using it, organizations can make sure that their most important items are always available when they need them.

This improves overall business efficiency and helps to reduce losses and costs.

7. Stock takes

When you conduct a stock take, you’ll compare your physical stock with your records to identify any discrepancies that might exist.

This will help you to identify any areas where you may need to improve your inventory management practices. You can then take steps to address these discrepancies and improve your overall inventory management. A stock take is also a good way to identify any damaged or expired products.

This information can help you decide whether or not to continue stocking these products. Damaged or expired products can be costly and can take up valuable space in your inventory, so it is important to make decisions about these products based on the data from your stock take.

Optimize inventory management for e-commerce with ERP manufacturing software

Katana ERP manufacturing software empowers users to optimize their inventory management for e-commerce effortlessly.

It does this by giving you real-time data on sales, production, and inventory, so you can make important business decisions and scale your business. Katana has all the necessary tools you need to set reorder points or manage inventory, regardless of whether you’re a make-to-order or make-to-stock business.

As it stands, e-commerce platforms lack the features needed to monitor your production lines.

Integrating Katana and your favorite e-commerce account not only allows you to improve your inventory management but optimize:

Sales and manufacturing order
Raw materials and finished goods inventory
Bill of materials
Production and operations
Expiry date tracking
Barcode scanning for selling and receiving goods
And so much more.

See how Katana will take your business to the next level firsthand by heading to our integrations page.

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KatanaMRP

PLM ERP Integration