Your online marketing worked. It drew someone in your target audience to your website. They liked one of the products they saw, and they want to buy it. Jackpot!
But oh no! It’s out of stock. Jackpot averted.
Now someone that wanted to become a customer and was ready to take that step will instead leave your website disappointed. All that work you put into marketing, and it’s wasted because you couldn’t follow through when the time came to deliver.
In some cases, an interested enough customer might find their way back to your site later when the product becomes available again. But most of the time, they move onto a competitor or decide they don’t need the item after all. Inventory issues will often lose you a customer outright.
That’s why every eCommerce business needs to care about inventory management.
What is eCommerce Inventory Management?
eCommerce inventory management is the process of ensuring that you always know what inventory you have at any given moment, and know when to order more for best results. That may sound straightforward, but in practice, inventory management gets complicated.
For new eCommerce businesses with a short list of products and small order numbers, tracking what products you have on hand may seem simple enough. But over time, keeping up with the growing number of inventory shipments that come in and which of those products have gone out to customers gets increasingly difficult—especially for businesses with big product lines that store inventory across multiple warehouses.
No matter the size of your eCommerce business, getting inventory management right early on is a key factor in gaining long-term success.
6 Reasons Why eCommerce Inventory Management is Important
Running an eCommerce business involves a lot. Maybe you’re sick of hearing people tell you about how important this tactic or that product is to being successful. So you’re wondering, is this inventory management thing really something I need to make a priority?
A good inventory management system matters on a few main levels for eCommerce businesses.
1. If you have too much inventory, you overspend on storage.
Space costs money. If you’re just starting out and your products are hanging out in your garage or guest room, it may not feel that way. But all the space you’re using for product storage now isn’t available for new products, or for other personal items you may want to use it for. That’s a cost.
Where this issue really comes into play though is once you have enough inventory to start renting space in one or more warehouses, or even rent out whole warehouses for your business. Warehouse space has a tangible cost, and one that adds up fast for businesses that sell a lot of products. Having more inventory means higher storage costs.
2. With perishable goods, too much inventory creates a total loss.
If you sell anything with an expiration date—food, makeup, flowers, etc.—then having too much inventory on hand has an even more direct cost. Every item you pay for that doesn’t sell in time gets tossed. If you don’t have a good understanding of how much of a perishable you’re likely to sell, it can lead to big financial losses for your company.
3. A crowded inventory space can lead to losing stock.
The more inventory you have crowded into a space, the harder it is to keep track of it all. That can mean items falling off your radar or becoming difficult to find. If a popular product is buried somewhere in the back, and it’s not clearly listed in an inventory management system—you’ll be paying to store it, while also failing to fulfill orders for the item.
Retail businesses also face the issue of inventory shrinkage—when inventory goes missing without any clear explanation. Sometimes inventory shrinkage is due to theft, sometimes loss, and other times errors in paperwork. Whatever’s behind it, inventory shrinkage is costly. And the messier your inventory management system, the bigger those losses are likely to be.
4. Too little inventory, and you disappoint customers and lose sales.
We’ve listed all these problems with having too much inventory, so why not just keep less on hand? Because when you don’t have enough inventory to fulfill demand, you lose money and disappoint your customers.
This goes back to the scenario that introduced the post. When you put so much work into getting people to your website and persuading them to want your products, losing them at the last moment because your products are out of stock is a waste.
Lost sales means lost profits. And worse, you could be losing out on a consumer that was poised to become a loyal, repeat customer. Measuring how much you truly lose due to inventory shortages is impossible, but it could be significant.
4. With incorrect inventory records, you risk making sales you can’t fulfill.
A customer facing the words Out of Stock has a negative customer experience. But what’s even worse is one that places an order, provides their payment information, eagerly awaits to hear it’s been shipped—only to learn after all that the item’s unavailable after all. An error like that makes them (rightfully) upset, and makes you look like you don’t know how to run your business.
That customer is unlikely to give you another chance. If you can’t keep your inventory listing up to date, this kind of error is inevitable. And it will drive customers away and hurt your brand reputation.
5. Messy inventory records can lead to incorrect orders.
Warehouse workers try to package and send as many orders as they can in the time they have. If they’re stuck with messy inventory records that make it hard to match orders to the items in the storage space, mistakes are likely.
A customer could end up with a package that has a different item than what they ordered because it was located on a nearby shelf. Or they could get the wrong quantity, which they may not mind if they get more than they paid for, but that means you’re paying for it.
When customers get an incorrect order, that creates more work for your business. Your customer service team has to go into overdrive to make things right. You have to swallow the associated shipping costs for the return and replacement, or the refund if that’s what they choose. And even with all that, you may end up with an unhappy customer, mad they had to wait longer for the right item, or disappointed enough to cancel altogether.
6. Inventory management helps you evaluate which products are worth it.
Most of the reasons we’ve provided for why eCommerce inventory management is important are about potential problems it solves. But it also provides direct benefits. A good inventory management system allows you to stay on top of which items are selling the most, and which sit in storage for the longest.
For eCommerce businesses, choosing the right products is crucial for success. If some of your inventory is costing you more in storage expenses than you’re making in profits, you want to recognize that early and cut it from your offerings. And if a particular type of product is responsible for most of your sales and earnings, you want to recognize it to focus more on stocking and promoting it.
A common concept in inventory management is the ABC analysis, which divides products into three categories:
- Category A – Your most profitable products, often high-price items
- Category B – Products that are reasonably profitable, but less so than your A items
- Category C – Products that aren’t worth that much to your business, comparatively speaking
Understanding which products fit into each category will help you better build your eCommerce business based on what your audience wants and responds to. In some cases, hanging onto the C-level products is worth it, such as if they work as an upsell for people who buy a category A product. A business that sells home appliances may also benefit from selling the tools needed to install them, for instance. But knowing the tools make you less profit than the refrigerators you sell is important in how you market the business.
Performing inventory management and analyzing the data that results from it will help you understand where all your products fall on the ABC spectrum. Those insights will enable you to run your business better.
How to Do eCommerce Inventory Management
Every eCommerce business must figure out an eCommerce inventory process for itself, and details will depend on the kind of products you stock and where they’re stored. But a few main steps are important across the board.
1. Develop a system.
To start, figure out an efficient process that makes sense for your business. Think about how you’ll organize the physical space your products are stored within. How will you decide what goes where? Does it make sense to order products based on popularity, similarities, alphabetical order, or something else?
For many types of products, particularly perishables, you’ll want to think about where to store new inventory versus old. Most businesses aim for a process that makes FIFO (first in, first out) easy. And do you need a system for organizing the dates items were received, and when they either need to be sold by or thrown out?
Also figure out how you’ll go about tracking the inventory. Who will be in charge of recording items as they come in, tracking them as they get sold, and placing new orders as needed? What process should they use to do so?
2. Select the right inventory management tool.
If you’re running a brand new eCommerce business out of your home, you may be able to do what you need with a well-organized spreadsheet. But most eCommerce businesses will benefit from investing in inventory management software that simplifies a lot of the tasks involved in doing inventory management effectively.
If you do decide to go the software route, look for some of the main features that make the cost worthwhile:
- Automation – Some inventory management software automates a lot of the processes involved in tracking inventory. If it plugs into other systems you use, it may be able to automatically track when shipments arrive and orders go out. Some inventory management tools will even provide the option to automate the process of ordering new items when you get low.
- Alerts – Inventory management software can often be set up to provide alerts in your preferred format when you’re getting low on inventory, so you know to get more.
- Forecasting tools – People are hard to predict, but some tools use data on past trends in purchasing behavior to help you more accurately guess at what will happen in the future. When you know what to expect, you’ll do a better job of keeping the right amount of inventory in stock.
- Reports and data analysis – A big part of inventory management is collecting data related to your products—how fast do they sell, how long do certain items sit in the warehouse, and what’s the cost vs profit of having certain quantities on hand? Many inventory management software products help collect that data, and make the process of turning it into insights you can use easier.
- Compatibility – Some of the most beneficial features of an inventory management product will depend on its ability to work in tandem with other eCommerce products you use. Before selecting an inventory management tool, check what compatibility it offers with the main other software products you use for your business.
- Ease of use – None of these other benefits matter much if figuring out how the product works becomes a barrier to everyday use. Make sure you’re choosing a tool you and your team can start using without more training than you’ll realistically commit to.
3. Consistently check in on inventory levels.
Some inventory management products automate tracking the inventory as it comes in and out. If you choose a product that does this, this step will be much easier. But still make a point to keep an eye on the numbers it provides.
If you didn’t opt for a tool with that feature, it’s even more important that you commit to manually checking on your inventory levels. One of the most important goals of inventory management is always knowing how much stock you have available. This step should be a priority.
4. Pay close attention to seasonal trends.
Some types of products will have obvious seasonality. You can guess that swim suits will be more popular in the summer (in the northern hemisphere anyway), and pumpkin spice seasoning will move faster in the fall. But you may be surprised to see seasonal trends in items you didn’t expect, or different trends than the ones you anticipated.
Instead of making guesses, track your data. Pay close attention to how sales for different types of products vary from month to month, and season to season. You may realize a promotional push for pumpkin spice products makes sense in July as well as October.
5. Perform regular inventory audits.
Your inventory management process should help you simplify tracking the inventory that comes in and goes out. But whether you’re using a spreadsheet or software, you’re likely to make the occasional mistake. Make a habit out of checking your records against the inventory you have. You’ll almost definitely find some discrepancies. It’s more common than not.
Identifying those differences is important, so you can update your records accordingly and avoid the harmful issues that result from inaccurate inventory management.
6. Learn as you go.
So much of running a successful business is about learning from your past decisions. You will face inventory issues. You’ll run out of items because they proved more popular than you estimated. You’ll buy too much stock of a product that ends up not selling well.
Every time you make a misstep, treat it as a lesson. Keep collecting insights as you go, and over time you’ll get better and better at stocking the right amount of items to make the highest possible profits for your business.
eCommerce Inventory Management Matters
Inventory management may not be as important to your eCommerce business as selling great products, creating a marketing plan, or providing a solid customer experience. But it’s another important part of the equation that can make a big difference to your overall profits and success. Don’t overlook it.
Kristen Hicks is an Austin-based freelance content writer and lifelong learner with an ongoing curiosity to learn new things. She uses that curiosity, combined with her experience as a freelance business owner, to write about subjects valuable to small business owners on the HostGator blog. You can find her on Twitter at @atxcopywriter.