Inventory Management Ultimate Guide


Managing your inventory can cause you a headache if you don’t know how to do it. Not only is it confusing, it can also be quite costly.

It may seem simple. But a company that makes a million dollars per year has the potential to lose as much as 10% of their profits from poor inventory management. That’s how big of an impact it has on your business.

Now inventory management is not just reserved for ecommerce sellers who have their own products. Even dropship stores need to constantly track the inventory of products from their suppliers in order to consistently deliver products to their customers. A dropshipper’s worst nightmare is having a stream of orders only to not have inventory to fulfill it.

With this, you may want to learn about bit more about inventory planning and management for your ecommerce website. Doing so will save you tons of headaches and money in the long run.

This guide will contain an introduction to inventory management, its common problems and how to have an inventory management system for your ecommerce store. Then, I will show you how to have this system in place.

An Introduction to Inventory Management

When you hear the word ‘inventory’, what’s the first thing that comes to mind? Perhaps, you are thinking that it only applies to companies that have thousands or millions of products like Walmart and Target. But inventory management is applicable to every retailer business, big or small.

But before you can delve into this process, you need to learn some of its basic terms. These are:

  • Inventory Auditing – Auditing is necessary for inventory management. This is where you go through all of the products that you or your supplier have and keep track of the actual number that you have in stock. Ideally, this should be done once a month. This will help you stay on track by showing you the products that sell as well as the products that tend to get left behind.
  • FILO (First In Last Out) – FILO is a common term in inventory management but not everybody can understand it. The concept is as it is – the first products that comes from your supplier are the last to go out. Why is that? It is because products tend to be stacked. Products delivered first are stacked at the bottom while products delivered last is stacked on top. There is easier access for the products on top so they are the first to go out. Now, you should understand this concept especially if you have perishable supplies. This way, you can change the system and have the first products be used first.
  • FIFO (First In First Out) – This concept is better for perishable items. While the default setup is FILO because of the way warehouses are created. FIFO or first in, first out is the concept that must be followed for perishable goods. Perishable goods does not only pertain to food products. It can also be items such as soap or just any product that can degrade with time.
  • Minimum Viable Stock Levels – You’ll need some products in order to keep your business going. This is what the minimum viable stock level is for. It is the minimum amount of products that you need to have in order to stay on business. Basically, it’s a threshold that you don’t want to reach. And if you do, it means that your business is in danger and you need to order more.
  • JIT (Just-In-Time) Inventory – The concept of Just in Time is a concept made by Toyota in managing their inventory. In this perspective, anything in excess is considered as waste. So this means that only the products that will be used should be ordered – nothing more, nothing less. This can have multiple elements. The time must be perfect. This means that the retailer receives the supplies just in time to meet the demand. And it must be received in the right amount so that nothing gets stocked.
  • Demand Forecasting – If you are running your business for quite some time, you may have noticed that your online store is getting a specific number of orders. Over time, you’ll be able to predict that your store will get a certain amount of orders based on this number. Some call it regression. But in inventory management, it is called demand forecasting. It is predicting the amount of sales you will have based on the performance of your store in the past months.

So are you feeling that you are slowly becoming an inventory management expert? Well, before we go to the actual process. Let’s look at the common barriers in inventory management.

Common Problems in Inventory Management

Inventory management is more than the act of auditing your supplies to see how many products you have. It is also about making sure that your online store have enough items when buyers purchase them.

With this, here are some common problems that you should avoid.

Problem of Lost Stock

Inventory can be overwhelming especially if you have to deal with thousands of products. With this, it is quite common to suddenly find that a stock is missing or the numbers just don’t add up. How can that happen? It happens when you have noted that you have 10 stocks of an item in your last count and suddenly found that there’s 9 when no one has even bought it yet. It can also happen when you have 9 stocks of the item but you recorded 10. That’s how prone it is to human error.

When this happens, it can lead to your customers believing that you have more stocks than you actually have. And when they ordered more than your current stocks, they will be heavily disappointed.

This is the reason why regular inventory auditing is crucial for your business success. It will ensure that there are enough products to meet your customer demand.

No Centralized System

If you operate a company with different units or departments, then centralization is really important. You’ll want to have one database that can be accessed by your administration, packaging and delivery department. You’ll want all of these to be consistent so that you have a clear idea on whether or not you can meet a customer demand.

Now, there are many ways to do this. You can use an inventory management software. This will help you track everything and have it all in one place. This way, once someone updates it, everyone sees it.

Over or Under-Stocking

I have mentioned a while ago in JIT or Just in Time inventory that over stocking and under stocking are both crimes in inventory management.

While having more stocks than you need may seem ideal. It is viewed as waste in the JIT perspective. Think about it. You spend money on products that your customers will not even buy and it just stays in the warehouse taking up space and collecting dust. Over time, the product degrades. If that doesn’t sound like waste to you, you’ll understand once you see a red bottomline. Also, overstocking can have a negative impact in your inventory turnover. The more stocks you have, the higher your turnover. This is a signal to investors that your business is hardly selling.

The same is true for under-stocking. This happens when a customer orders for a product only to find that it is out of stock. Often, this is enough to enrage customers especially if they have already charged their credit card to purchase from you. So do your customers a favor and ensure that you have enough stocks.

When it comes to stocking, you have to find that sweet spot of having just enough. Not spending too much on products you are not going to be able to sell and not being too thrifty that you don’t have any product to sell. It is about finding that balance in between.

How to Manage Your Inventory

STEP 1: Predict Demand

Demand forecasting plays a major role in inventory management. You will not be able to determine your optimum product quantity if you don’t know the demand. If you have just opened your online shop and you currently don’t have data about your business, you can skip this. But if you already have some monthly revenue, you can predict how many sales you can make in a month.

With this, it is all about looking back and looking at your average sales per month. Then, you need to look into the products that have sold a lot and the products that didn’t. You can then order more of the products with higher demand and put up some products on sale.

The most important thing in forecasting is the period. You need to look at the average number of sales from at least 3 months. If you have some data for 6 months to a year, then that’s better. This will mean that your estimate is more than a guess. It is based on the actual performance of your store.

Also, check if some of your products are ‘seasonal’. This means that it gets a lot of sales from one month but doesn’t get any sale for the other months. It is important to note these products to see when you need to restock these items.

If you have not sold anything yet, don’t worry. You can use Google Trends to see the demand for a particular product. Simply key in the product name and you’ll see a graph that shows the number of searches it has per month. This will give you an idea on the demand.

STEP 2: Maintain Minimum Optimum Quantity Levels

The minimum optimum quantity is the amount of stock you need to have in order to comply with customer demand. Note that there is the word ‘minimum’ here. This means that you don’t need to overstock just to ensure that you meet the demand. It is about having enough items to meet the demand but not losing all of your capital in order to do that.

For this, I like to use the ‘5-Day’ Rule. This is where I go over the products that have consistent demand and ensure that they have 5-Days worth of items. This means that the demand for 5 Days will be met by the inventory. That’s the goal. This is a strategy that has been employed by big companies but you can alter the number based on your preferences or your store’s performance.

STEP 3: Centralize Your Inventory… Always

I cannot emphasize enough how horrific it is when your inventory is not consistent across different departments or channels. Let me show you how this can happen.

Let’s say a customer ordered one ruby necklace. It says on your store that it is ‘in stock’. However, the inventory section just sent the last piece for packaging and they no longer have another piece to pack. And if your customer is already charged for this item, they can go crazy. Sure, they can refund the item. But credit card companies usually take days to refund amounts. And this is enough of an inconvenience to teach your customer to never trust you again.

With this, it is better to go for automated inventory management processes. There are manual processes (pen and paper) or utilizing a spreadsheet. However, this doesn’t update across different channels. You’ll need a system that updates you with the inventory even if it is your supplier’s. You don’t want to have any non-updating spreadsheet. And for that, you’ll need some ecommerce inventory management solutions. Why is that? Well, you cannot use the system that brick and mortar businesses use. You need a system that automatically updates online.

This works for dropshipping as well. You’ll need to get access to your supplier’s inventory. This is crucial if you plan to sell their items in bulk. You need to be on the same page as your supplier in knowing how many products is there that can be sold.

And that’s inventory management for you. I hope you managed to learn a lot. Feel free to ask questions below.

Posted by Tariehk Geter

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