3 Quickest Wins in eCommerce Inventory Management

One aspect of running an e-commerce brand is something that even billion-dollar companies struggle with.

I’ve worked with a few of them, and even they’ve had problems with this issue.

But just because it’s extremely difficult to do well doesn’t mean it can be ignored, because it can crash your brand entirely.

I’m talking about Inventory Management.

While managing inventory can be a nightmare for billion-dollar brands with thousands of SKUs, many warehouses, and multiple sales channels, as a small and growing e-commerce brand, you can get a handle on it much more easily.

However, if you ignore it, you can run into some serious issues.

In this post, we’ll cover three of the most common problems that e-commerce brands run into and how you can turn them around into quick wins.

This article is available in video format, but if you prefer reading just scroll below.

1. Preventing Stockouts

I can’t tell you the number of times that we’ve been working with a brand; things are going great, we have some ads that are crushing it, and then all of a sudden, performance falls off a cliff.

I’ll go check the landing page to see if there’s an issue, and there it is: out of stock.

I’ll turn off the ad and let the brand know, and they’ll be like, “Oh, okay cool, yeah, we’ll order some more.”

This isn’t just some minor thing.

Not only were you wasting money on an ad sending people to an out-of-stock landing page, but you’re also losing out on the revenue that the high-performing ad could have been generating.

While you’re out of stock, there are customers who might have been interested in that product and would have purchased it.

But now, because they’re not interested in other products on your website, they just won’t convert at all.

Not only does that send a bad signal to the algorithm, but it also allows your competitors to acquire those customers instead.

• Consequences:
  • Wasted ad spend.
  • Lost revenue opportunities.
  • Negative signals to algorithms.
  • Customer loss to competitors.
• Solution:
  • Implement a robust inventory tracking system.
  • Utilize predictive analytics for demand forecasting.
  • Set up automatic reorder points.

2. Planning reorders in advance

That also leads to the second major issue, which is increased expenses.

In a situation where you realize one of your high-performing products is suddenly out of stock, what do you do?

You try to get it back in stock as quickly as possible.

You can sweet-talk your manufacturer to hopefully get them to produce your order a little bit faster, but the real lever that you have available is shipping.

Air Freight is much faster than shipping by sea, but it’s also a lot more expensive.

When you’re facing the situation of a high-performing product going out of stock and all the revenue you’re going to miss out on because of it, you’re probably going to pay for the expensive shipping to get it in sooner.

Ideally, you want to be able to plan reorders well in advance so that you can pay for slower shipping without missing out on any revenue.

• Consequences:
  • Increased shipping costs.
  • Reduced profit margins.
• Solution:
  • Plan reorders well in advance.
  • Optimize logistics for cost-effectiveness.
  • Build strong relationships with suppliers for better terms.
  • Leverage data to forecast and align inventory levels with sales cycles.

3. Avoiding Overstocking

You can have problems from having too little inventory, like missing out on revenue and having to pay for expensive shipping, but having too much inventory is also a problem.

Without proper planning, it’s very common for brands to buy too much inventory.

While on the one hand, it might seem like, “Okay, if you have too much inventory, at least you’ll avoid going out of stock,” it might not actually be as helpful as you think.

Too much inventory of the wrong SKU can make it harder to have enough inventory of another SKU because inventory costs cash, and you have a limited amount of it.

For example, let’s say you sell two colors of T-shirts: black and a bright orange.

If you haven’t done proper planning, you might think both of them will sell equally and you’ll shell out a bunch of cash to get both in equal amounts.

But maybe your customers love the black T-shirt and they’re not really feeling the bright orange.

In that situation, your black T-shirts might sell out and your orange ones might be left untouched.

You could use the profits from selling the black T-shirts to buy more, but you’ll have less cash available than if you’d sold them both.

Less cash means making smaller purchases, which means you have a higher risk of selling out again.

You could have avoided that had you not tied up all the cash in the bright orange T-shirts that nobody really wanted to buy.

So what do most people do in that situation?

Well they put the bright orange T-shirt on a steep discount just to liquidate it and recover some cash so that they can buy more of the black T-shirts and actually, this happens more often than you’d think.

• Consequences:
  • Limited cash flow.
  • Increased warehousing costs.
  • Discounting products to liquidate stock.
• Solution:
  • Conduct regular inventory audits.
  • Utilize data analytics to align inventory with demand.
  • Implement a feedback loop to adjust purchasing strategies.

Inventory Analysis: A Case Study

Once, I worked with an 8-figure client that had some 20,000 SKUs.

I decided to do an inventory analysis for them, and upon analyzing the data, I realized that about a third of the inventory they had on hand had sold less than 10 units each.

Those SKUs made up less than 4% of their total sales but were holding up a million dollars in cash.

Because they had so many SKUs, their inventory was just a total mess.

They lost track of how many SKUs they had in different categories and how much they were actually selling.

They would buy inventory to make sure that they had it on hand, but they wouldn’t keep track of what was actually performing well.

As a result, they didn’t have a feedback loop to keep improving their purchasing strategy.

Which is how they ended up with so much cash tied up in inventory that wasn’t moving.

Cash is the life of your business.

You always want to make sure that it’s working as hard for you as possible, and it’s not doing that if it’s just sitting in a warehouse in the form of slow-moving inventory.

Best Practices for Inventory Management

When it comes to inventory management, mastering a few key principles can spell the difference between thriving and barely surviving.

Let’s dive into each section with laser focus.

1. Forecasting Demand Techniques for Accurate Demand Forecasting

Your ability to do this hinges on two pivotal elements.

a. The Sales Forecast: Your Crystal Ball

Your sales forecast dictates how quickly you’re using up inventory.

No sales forecast? You might as well be navigating with a blindfold.

“Your sales forecast is like a crystal ball, albeit an imperfect one. It tries to foresee market trends, ad platform behaviors, spend, and ROAS.”

It’s no walk in the park, but get it right, and you hold the keys to the kingdom.

b. Mastering Your Supply Chain

Next, you need an intimate knowledge of your supply chain.

This means knowing your lead times like the back of your hand—when to place that crucial order with the manufacturer, how long it takes for stock to arrive, and what buffer times to allow for hiccups.

“Think of the ocean delays or varying production speeds based on order size. These aren’t just minor details; they’re potential game-changers.”

To forecast effectively, you need to understand both your sales trajectory and your supply chain intricacies.

If you have multiple manufacturers, even better—you’ll have alternatives when you need them most.

In essence, these two pillars—sales forecasting and supply chain mastery—form the bedrock of any reliable inventory management system.

Get these right, and you’re well on your way to inventory nirvana.

2. Determining and Maintaining Safety Stock Levels

At its essence, determining safety stock is an extension of your sales forecast.

Think of it as a safety net crafted from the threads of your sales data and supply chain insights.

This isn’t just about padding your numbers; it’s about ensuring you never leave your customers hanging.

Once you grasp the rate at which your inventory depletes and the time it takes for new stock to arrive, you can make informed decisions.

For instance, if it takes two months for an order to land in your warehouse, your trigger point is clear.

“I need to place an order when I hit two months’ worth of inventory. This is predicated on my anticipated sales over the next two months.”

Building Buffers: Expect the Unexpected

But forecasting isn’t foolproof.

That’s why buffers are your best friend.

What if sales spike unexpectedly? Add a buffer to cover faster-than-expected sales.

What if your supply chain hits a snag?

“Consider potential delays—maybe the shipment takes longer than expected. Instead of sticking to a strict two-month rule, you might extend it to three months as your safety stock threshold.”

Once you hit that three-month mark, it’s decision time. Do you place an order now, or can you afford to wait a bit longer?

Mastering safety stock levels is about balancing certainty with flexibility. It’s an ongoing dance with your data, always keeping you one step ahead.

3. Supplier Relations

In the realm of supplier relations, the game is won by those who master the art of negotiation and trust-building.

Your goal? Secure favorable terms that give you an edge.

Building Trust: Your Reliability is Key

First and foremost, suppliers need to trust you.

This trust is built on your track record of timely payments and financial soundness.

When suppliers believe in your reliability, they start offering perks that can drastically improve your operations.

Once trust is established, the negotiation table is your battlefield.

Here’s where you can work your magic:

• Credit Lines: Convince your suppliers of your financial stability, and they might extend your credit line, allowing you to place larger orders without immediate payment.
• Order Prioritization: Being a trusted partner means your orders might jump the queue, reducing lead times and ensuring quicker stock replenishment.
• Cost Per Unit: Larger orders often lead to discounts. Make the case for reduced costs per unit if you ramp up your order size.

If you tell them, ‘Look, if I place a bigger order, can you reduce my cost per unit a little bit?’ you’re tapping into the economies of scale.

Flexibility in Orders: Customization and Variants

Flexibility is another cornerstone.

Maybe you need smaller minimum order quantities or want to diversify your product lines.

Instead of ordering 20,000 units of each flavor, what if you could order 10,000 units across five different flavors, totaling 50,000 units? That’s the kind of flexibility that can set you apart.

In sum, successful supplier relations are a blend of trust, strategic negotiation, and flexibility.

Master these, and you’ll not only improve your lead times and cost efficiency but also build a resilient supply chain ready to adapt to any market demand.

4. Inventory Turnover

Inventory turnover isn’t about hitting some mythical perfect number. It’s about finding that sweet spot.

Too low, and you’re skating on thin ice—risking stockouts and unhappy customers.

Too high, and you’re drowning in inventory, locking up precious cash that could fuel growth.

Generally, you don’t want too high or too low. Ideally, you want it as low as possible without risking stockouts.

A Function of Forecasting: The Heartbeat of Turnover

At the core of optimal inventory turnover is accurate forecasting.

The better you can predict sales, the closer you get to that sweet spot.

You want to maintain just enough inventory to satisfy demand while keeping your cash as liquid as possible.

“Forecasting ties everything together. It’s your crystal ball and safety net rolled into one.”

Then there’s the age-old balancing act between order size and cash flow.

Larger orders often mean lower costs per unit, thanks to economies of scale. But be wary—bulk buying can tie up significant capital.

Consider drop shipping as the extreme example.

It offers perfect inventory turnover because you carry zero stock.

But it usually comes with a higher cost per unit. On the flip side, large inventory orders reduce your cost per unit but could squeeze your cash flow.

“If you have good supplier relations, they ship quickly, and you forecast well, aim to carry as little inventory as possible. But don’t fall into the trap of placing tiny orders that skyrocket your unit costs.”

Supplier Relationships: Your Secret Weapon

A robust relationship with your suppliers can turn the tide.

Reliable suppliers who understand your business can be the difference between agility and stagnation.

“Negotiate better terms, faster shipments, and flexibility. These elements allow you to maintain leaner inventories without sacrificing service levels.”

Conclusion

Hopefully, this helps illuminate why inventory management is so important.

It’s something that most brands don’t focus enough on, and it’s something that can cause some serious financial difficulties.

However, it also means that it doesn’t take much to do it better than your competition.

Even some basic effort into inventory planning can go a long way.

Solid eCommerce bookkeeping is the foundation of how you can get better at inventory planning in your e-commerce business.

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