Imagine your brand gets featured on Shark Tank, you land a deal, and suddenly you've got a ton of new customers clamoring to buy your products.
But what happens when you can't fulfill all those orders because you didn't stock enough inventory?
You miss out on a massive opportunity, that's what.
This is a true story, and it happened to a brand we worked with.
The reason? Poor inventory management.
While they got their moment in the spotlight and even secured a deal with one of the Sharks, they couldn't fulfill the surge in orders that followed.
By the time they restocked, the moment had passed. Hundreds of thousands in potential revenue—gone.
Surprisingly the majority of brands don't have much of a strategy for their inventory at all.
Sure, you can get off the ground with poor inventory practices.
I've even seen some pretty massive brands get quite far with bad ones.
But once a brand gets big enough, cracks start to form in the foundation, and eventually, it'll crumble under its own weight.
So let's take a deeper look at the:
- consequences of bad inventory management,
- why those problems might be happening, and
- how to fix them before they sink your business
Prefer to watch? Check out the video
Why Inventory Management Hits Different for eCommerce
Unlike traditional businesses that can rely on foot traffic, eCommerce brands are in a fierce race against time and trends, where stockouts can tank sales and crush customer loyalty faster than you can say “out of stock.”
Plus, the complexity of juggling multiple styles, sizes, and colors means that good luck managing inventory without a rock-solid strategy.
If you’re not on top of your inventory game, you might as well be throwing money out the window because these three situations can happen.
1. Unexpected Out-of-Stocks
One of the most common issues that arise when a brand doesn't have good inventory management strategies is unexpected out-of-stocks.
When people can't buy the products they want from you, that's revenue you're most likely going to miss out on.
Most people don't have the patience to wait for you to come back in stock, so they're likely going to buy from a competitor, which also means you'll probably lose that customer long-term.
Even if they do stay, it can erode the relationship you have with your customers and hurt loyalty in general.
For example, that brand that went on Shark Tank grossly underplanned the amount of inventory they needed.
Their product came across really favorably on the show; they actually got a deal, and so they should have had way more inventory in stock when the episode went live.
What actually happened is that when the episode went live, their sales skyrocketed, but they very quickly went out of stock.
All of that organic traffic to their Shopify site was wasted, and that giant spike in search volume on Amazon?
Well, they couldn't buy their products, so those people just probably went and bought their competitors.
Because it took such a long time to finally get another shipment from their manufacturer, by the time they actually did, the moment had kind of passed.
They missed out on hundreds of thousands of dollars in sales and revenue and never really recovered.
Now, in fairness to them, planning the perfect amount of inventory to have for a Shark Tank airing isn't the easiest thing to do.
However, they had way less than they needed, and they also didn't plan for another order, so their next one took a very long time to come in.
2. Unintentional Overstocks
On the flip side, having too much inventory can be just as problematic as not having enough.
If you've got a bunch of products just sitting in your warehouse collecting dust, that's cash that's tied up and not doing anything for you.
Plus, you're probably paying out the nose for storage fees.
And depending on what kind of products you're selling, you might be risking your inventory becoming obsolete.
Food goes bad, styles go out of fashion – you don't want to be stuck with a bunch of stuff you can't sell.
I worked with a fashion brand that had a massive catalog but not a sufficiently sophisticated method to identify how much to order of each new style they came up with.
So, over time, they accumulated this massive quantity of styles in their warehouse that they just couldn't sell.
When we dug into their numbers, we found nearly a million dollars' worth of products just sitting there, tying up their cash flow.
Ready to dig into your numbers? Watch me analyze a $10B Brand.
3. Poor Decision-Making Across the Company
Finally, when you don't have a clear picture of your inventory, it can lead to all sorts of problems in other areas of your business.
Your inventory data is going to be a key factor in a lot of your financial reporting, so if those numbers are off, it can really skew things and make it hard to make informed decisions.
Grappling with questions that could make or break your biz?
Like whether to scale up, invest in new products, or even just pay your bills on time?
Yeah, good luck making those calls if you don't know what's up with your stock levels.
The Root Causes of Inventory Problems
So overall, if bad inventory management can have such dire consequences, why is there such a disconnect?
Well, the issue usually comes down to three problems.
1. Poor Technology
A lot of brands are still trying to manage their inventory using outdated tools or cobbled-together systems that don't really work.
They're relying on their 3PL's data, but they don't have a way to connect that with their own records, so they're never really sure what's going on.
2. Poor Processes
Even with the right technology in place, inventory management can fall apart if you don't have solid processes to back it up.
I'm talking about things like regular inventory counts, proper receiving and shipping procedures, and clear communication between your team and your 3PL.
You'd be surprised how many brands don't even have a basic process in place for noticing when an item goes out of stock.
I'm not even talking about having enough lead time to reorder before you run out – I mean not realizing you're out of stock at all until customers start complaining.
I've worked with brands where they'd only find out that an item went out of stock because people were complaining on the ads.
3. Poor Planning
Inventory levels are a push and pull between sales and purchasing.
Making sure that you have the right amount of the right SKUs requires proper forecasting, and most brands don't have the expertise to do that at all.
How to Improve eCommerce Inventory Management
Fortunately, though, it's not all doom and gloom.
There are a handful of steps that an ecommerce brand can take to improve their inventory management.
1. Implement an Inventory Management System
Using a system like this can help with tracking, reduce errors, and offer real-time insights into your inventory levels.
But you do have to choose the right system for the stage that your business is in.
At a larger size, you might move over to a more complex ERP like NetSuite, but that can be a very significant investment, so you don't want to make that move before you're ready.
There are better options for most six, seven, and eight-figure brands that are using a simpler system like QBO or Xero.
There are plenty of inventory software that integrate with those platforms and can get the job done.
You've got options like
- Sin7,
- Katana,
- Fishbowl,
- Luminous
But honestly, even a spreadsheet can do a lot of the heavy lifting if you design it well enough.
The point is, you need some sort of visibility.
It's not enough to just have the cost of your inventory in your accounting software.
You want to be able to have a running tally of how many units you have of each SKU, and that is generally going to be increased by purchases from the manufacturer and decreased by your sales.
2. Integrate with Your 3PL
Ideally, your 3PL provider's systems can integrate seamlessly with whichever inventory management solution you choose.
This guarantees real-time data exchange, which should give you a more accurate picture of your inventory levels.
Some brands that don't have an inventory management system might just connect the 3PL to Shopify; that way, at least the quantities in Shopify can stop a product from selling when it goes out of stock.
However, that's not an ideal solution because you don't have your own system keeping track of the inventory levels as well.
For example, if the 3PL loses inventory, or if they ship more than they were supposed to, or if the manufacturer sends them less than they were supposed to, in every instance, a 3PL system might show the actually correct quantity of inventory, but that won't necessarily match what your expectations are.
If a manufacturer bills you for 100 units but the 3PL only received 80, there's nothing to show you that there's a disconnect.
So ideally, you're connecting the 3PL data to your own inventory management system.
3. Conduct Regular Inventory Counts
Inventory counts are a way to validate that the physical quantities that exist in reality match the imaginary numbers that exist virtually in the inventory systems.
If you're working with a 3PL, they should already have their own inventory count processes, but if you do your own warehousing, then it's important that you conduct these yourself.
The two main approaches are
- periodic counts and
- cycle counts.
With a periodic count, you just shut down the warehouse one day and do a full count of everything. Often, it's done on the last day of the fiscal year.
With cycle counts, you just work through your catalog and count different SKUs on different days, so that way you get an overview over time.
4. Set Par Levels
Basically, this means determining a minimum amount of stock that you need to have of each SKU at all times.
When a particular SKU reaches the par level, that means it's time to place a new order.
This is a very simple approach, and if you have an inventory management system, these alerts can also be automated.
5. Set Up Forecasting Processes
This starts by building out a robust sales forecast.
To be clear, it's not the easiest thing to do, but this is what advanced brands need to do.
Forecasting of inventory relies on three main processes: the inflow of new inventory, the outflow of sold inventory, and keeping track of the inventory on hand.
Now, the outflows are the hardest part, and that's what you need the sales forecast for.
This might be easier for a relatively stable brand with similar sales month-to-month, but it's a lot harder for an aggressively scaling brand that spends a lot on paid ads.
The middle part is something that many brands do struggle with, but it is easy to manage once you have a good inventory management system in place.
That system should always be able to give you an accurate picture of how many units you have at any point in time.
Once you've got those in place, the inflows are reasonably easy to manage.
If you know your lead times, have good relationships with your manufacturers, and place your orders on time, it should be relatively smooth sailing.
The thing to keep in mind is that while sales happen every day, inventory purchases typically happen in big chunks, so it's important to have visibility on those future purchases so that you can make sure you have the necessary cash available when the time comes.
That's why an inventory forecast will typically be accompanied by a sales forecast and a cash forecast.
Sales bring in cash and deplete inventory, and cash is spent on increasing inventory.
Now, while hopefully those tips can give you a good sense of how you can get your inventory management practices under control, the truth is that it is still a difficult thing to do well.
So if you're looking for some help with your e-commerce brand, feel free to reach out to us; that's what we specialize in.
But if you're not ready for that yet, then maybe you'll enjoy this video on how to build an e-commerce financial forecast.
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