Back when the retail was only offline, monthly or quarterly purchase planning was feasible. Customers would walk into the stores and buy whatever is available. eCommerce is exactly the opposite in nature. Customers visit your website expecting that they will buy the product they want. In case they don’t find it, you not only lose a sales opportunity, but also risk affecting your brand image and potential future sales.
To avoid such situations an effective eCommerce Purchase Order Management is necessary.
Here, we have discussed in-depth eCommerce Purchase Order Management, the main challenges, and how you can overcome them.
What is Purchase Order Management?
Purchase Order Management is an in-house procurement process adopted by businesses to ensure timely availability of inventory at optimal cost.
Why is it important?
In eCommerce, efficient inventory planning and streamlined purchase order management is imperative for long-term success.
Without an efficient process in place, you cannot grow your brand. Amazon has now set a benchmark for companies to manage their supply chain with utmost priority. While the excess stock is going to kill your working capital account, out-of-stock upsets the customer like none other.
Hence a streamlined Purchase Order Management ensures you don’t run out of stock and have purchased inventory from your suppliers at the optimal cost.
Purchase Order Management Challenges in Amazon and Magento/Shopify powered eCommerce portal
The main challenge with the eCommerce business is the necessity of having the right products available at the right time and in the right quantity.
This is a difficult task for all omnichannel sellers.
Let us see how inefficient management of the purchase order system can affect your sales, ranking on e-commerce websites, and more.
1. Sales momentum loss due to out of stock on Amazon, eBay, etc
eCommerce channels like Amazing favor brands or sellers who have products available whenever a customer wants to buy.
Like I said above, otherwise, it leaves a bad taste in the mouth of the customer. Hence it’s very important for eCommerce managers to keep track of products with a fast sell-through rate.
Equally important is to track products that don’t sell well and end up being dead stock. Without any detailed reporting of fast-moving products, you will always end up ordering at a whim.
How to overcome this problem?
Use an inventory management system that helps you forecast future inventory requirements and auto-suggests inventory items that you should purchase. Your inventory management system must take into account previous sell-through rates and be able to predict pricing accordingly.
2. Losing rank as a seller
To provide users with a positive buying experience and to grow their business, eCommerce portals like Amazon ensure that they give a higher rank to sellers who consistently deliver quality items within the given timeframe.
This means, if you go out of stock for a few products on Amazon and don’t replenish it timely, it will hamper your seller account rating adversely.
Amazon deranks a product if there is a sudden drop in sales.
Let us say there were 6 units of a product sold in the first week. In case, there is a sudden drop in the sales, Amazon algorithm will also drop sales rank also slowly.
Hence, not knowing when to reorder products, can lead to out-of-stock situations, and in turn, reduce your ranking on marketplace platforms like Amazon, eBay, Flipkart etc.
How to overcome this problem?
Look out for a Purchase Order (PO) system that notifies you whenever your products reach the reorder point.
Additionally, the system should be able to factor in the time taken in the product delivery at your warehouse, and should suggest you purchase planning decisions accordingly.
3. Limited storage for brands in Amazon FBA Warehouses
FBA provides limited storage for brands to stock their product. If this space is occupied with slow-moving products, you will be able to store a limited quantity of fast-moving products. This will lead to a stock-out of your fast-moving products and eventually impact your overall business.
On top of that Amazon storage fees are usually very high as they only store items that move.
How to overcome this problem?
Have a secondary storage warehouse beside FBA. That way you keep the FBA location available for whatever stock is selling fast. Secondary locations are usually cheaper, thereby enabling brands to save money incurred in storage costs that are levied by FBA.
4. Unable to track products en-route delivery
Tracking order delivery status is important for all eCommerce sellers. It helps you identify any mishaps in order delivery, and rectify it timely.
This is extremely important since fulfilling customer orders in the shortest duration possible is necessary to survive in the competitive eCommerce space.
Manually keeping a track of order status is a cumbersome task, and can delay order shipments if there is miscommunication between you and your carrier partner.
How to avoid this problem?
Consider using an automated system that can help you keep a track of your delivery partners or reach out to delivery services to rectify any problem.
It will also help you provide customers with live order status.
5. Not staying updated with the expiry date of perishable products
Dealing with perishable products like food products, medicines, cosmetics, etc. is tricky for any business. These short-lived items need to be sold out before they reach their expiry date. These products require special consideration while ordering inventory.
You must keep track of the expiry date and use FEFO (first expiry first out) method to ship out. Any items that are about to expire can be put on special sale. Lastly you must have a liquidation strategy in place for items that are at the end of their shelf life.
Keeping a track of product expiry of each product manually is very time-consuming, and doesn’t guarantee 100 percent accuracy. Hence, can lead to inventory wastage if the product is not sold timely.
How to overcome this problem?
To efficiently manage expiry product inventory you should invest in an Inventory Management Software (IMS) that records products expiry dates once the goods are received at your warehouse. This would help you sell products based on the FEFO model, and avoid inventory wastage.
6. Failure to track stock levels at Freight Forwarder or any interim storage
Purchase planning becomes more complex if your business imports products from foreign countries.
Tracking exact stock level available with the freight forwarder or stock availability at any interim storage is critical to avoid over-ordering. The freight forwarder may also complete product quality checks on your behalf.
Freight forward might be able to also do inspection and QC on your behalf.
Keeping a track of all this manually, and communicating necessary details with your team members is a challenging task.
This can be resolved by using an inventory management system that can track stock movements, record quality check status and enable your purchase and warehouse team to access all information from a single dashboard.
Automated eCommerce Purchase Order Management
You now understand that eCommerce Purchase Order Management challenges can be solved by investing in inventory management software. Here’s a quick comparison between manual Purchase Order Management and automated Purchase Order Management.
EasyEcom Purchase Order Management Features
1. Barcoding Products
Brands generate barcodes to identify and track inventory items available easily. EasyEcom helps you in generating barcode and barcode labels. The system also stores all necessary inventory information.
2. Serialize inventory
Inventory serialization will help you keep track of individual products by assigning them unique serial numbers. Expensive items such as jewelry, mobile phones, laptops, etc. need more detailed tracking to ensure no inventory shrink. Serializing inventory of such product categories will help you keep a track of individual products by assigning them unique serial numbers.
You can record the serial number assigned to each item in the system during the inwarding process.
EasyEcom platform supports this feature in its enterprise edition.
3. Ability to handle multiple suppliers for your product lines
Working with multiple suppliers, negotiating price quotations and tracking order delivery is a difficult task for brands. EasyEcom’s Purchase Order Management system reduces the time involved in forecasting inventory and suggesting purchases. You can create, manage and track vendor lists from a single platform. The system also makes it easier for you to manage the pricing structure and ensures that you receive your products at the optimal cost.
4. Multi-stage, multi-status, multi-party Purchase Order system
Most companies usually require a staging system to handle purchasing. Purchase plan is usually made by the warehouse team and the finance department approves it. Any system should be able to handle that.
In EasyEcom, you can give access to your Purchase Department or Warehouse Team to create a Purchase Order. The Finance Team can later approve it.
5. Quality Check process at inwarding
Whenever goods are received at your warehouse, the warehouse team inspects all items to ensure that they meet your quality standard requirements. Manually recording QC and keeping a track of it for multiple product lines is a very time-consuming task. It also leads to an increased chance of human errors and the probability of shipping a QC Fail product to the end-customer.
To combat this, EasyEcom enables sellers to record QC status while inwarding goods.
Once the quality status is recorded, the system ensures that only the products that meet your quality standards are listed across your sales channels.
6. Keeps a track of products with expiry dates
If your business deals in perishable products, the system ensures that products with early expiration are sold first. The system helps you keep a track of products nearing their expiry dates. By updating expiry dates during the inwarding process, the system allows you to apply FEFO on these products.
7. Shows suggested quantities to Manage Purchase
Many businesses fail to efficiently plan purchase decisions because of lack of accurate and timely inventory information available. EasyEcom’s inventory forecasting feature suggests the quantities you should purchase based on your past sales, and inventory planning duration.
The system suggests you with an item list and their respective quantity based on your previous sales and the quantity already available.
Here is an example to further explain this:
Let us say, you have sold 90 units of a product in the previous month, and currently have 15 units of that product available at your warehouse. If you are planning to purchase inventory for the next month, the system will suggest you to buy 75 units of that product.
8. Get notified when a product reaches its reorder point
To further improve your purchase planning decisions, the system will notify you via mail whenever a product reaches its reorder point. This will help you timely plan your inventory purchase and help you avoid stock-out situations.
It is important for you to know that it is never late to get started with an efficient procurement process. If you feel like your business needs to control its expenses and improve its profit, then an automated cloud-based system like EasyEcom is a solution for you to keep an active eye on your business growth.
Are you looking for a software to manage inventory for your eCommerce business and don’t know where to get started? Well, knowing that you need one is a good start and we will take it from there.
But before you decide to go shopping, make sure it checks the following requirements that seem quite basic but can save you a lot of frustrating hours in the future.
Support: Regardless of what you are buying, support from the seller is of utmost importance. In this particular case, there could be different levels of support system offered by the service provider. A dedicated support team, onboarding service, and knowledge base for reference can go a long way in strengthening your relationship with the service provider. So, it is important that you assess the kind of support you will receive throughout and then make a decision.
Reliability: Every software or service is prone to failure points or bugs on occasions. What separates them is the reliability factor. The maintenance and bug fixing shouldn’t take long and they should keep you in the loop while doing so. One way to figure out who’s more reliable is to check customer reviews on different listing platforms.
Ease of use: An effective inventory software should be easy to understand and its usability must appeal to everyone working in the inventory management department. Now, ease of use doesn’t mean less advanced features but it should be organized in a way that those who need to operate this find their way easily around the functionalities.
Price: Based on your user requirements and the specific features you need, compare different service providers, and pick the plan that suits you the best. Most of the service providers offer flexible pricing for different packages.
Now that you have knocked off the essentials from your list, the next step is to browse through the features and pick what you immediately require, what you might need, and what would be good to have in your inventory management software. For ease of understanding, we have categorized these features into different levels of a typical eCommerce supply chain.
Purchase Order and Stock Management
The purchase order functionality in an inventory system is designed to make creating and sending purchase orders straightforward. Once you receive goods into the warehouse, cloud inventory software will automatically update your stock levels.
eCommerce brands today are present on all the major platforms and manually keeping track of all your stock listings on these marketplaces is nearly impossible. This gives rise to the need for a centralized inventory management feature that you should look out for in your inventory management software. This allows you to provide complete control over your inventory across all channels and efficiently manage the business growth.
Furthermore, a centralized platform gives you visibility over your entire inventory movement. And, this inventory movement can be managed using a Warehouse Management System (WMS). While you can always have a separate WMS, handling inventory becomes a lot easier if it comes with your inventory management software. The WMS solution can be integrated with different sales channels and tracking stock level, product history, along with other product specifications becomes easier. Having said that, not all businesses require warehouse management, particularly when they are outsourcing to 3PL and 4PL companies. But you should be prepared if situations were to change. It’s always good to have a backup plan.
The key stock management features that you should be looking at include the following:
Barcode scanning and tagging: This helps in easy identification and tracking of your products. The inventory management software integrates with barcode scanners for precise product details, labeling that helps in locating the product quickly.
Inventory Alerts: Receive stock notifications when the levels aren’t optimal. The over or under-stocking alerts give you the time to either place new orders or offer discounts to clear out extra stock.
Report generation: Based on the sales history for your popular products or those that have not reached the expected sales levels, you can manage inventory and take action to avoid any future mishaps.
Multiple warehouse management: If you are managing multiple warehouses and points-of-sale (POS), lookout for a system that offers these capabilities, all integrated within a single platform for easier management. For the eCommerce businesses that outsource their fulfillment services, make sure the inventory software has the right integrations.
Purchase order records: To identify which products are in demand, both seasonally and perpetually, you should be able to create a single view of purchase order records. This allows you to meet your customer’s demands on time.
Stock returns handling: Automate the returning process and reduce the time-to-return the orders for your customers.
Product Grouping: Club your products into predefined categories and ensure you’re always updated about quantities of items and specifications that constitute product stock. This helps in managing reordering schedules as per the requirements.
Inventory optimization: This feature comes as a Godsend if your products experience seasonal highs and lows. You can maintain the right amount of inventory for such products, avoiding any over or under-stocking situations.
There are two aspects to sales management- There are features that help you with order fulfillment while maintaining optimal inventory levels. This provides you an intuitive process to follow for creating orders and updating stock levels. These include the following:
POS integrations: It allows you to keep your business operating at maximum efficiency with the ability to track, reorder inventory, and transfer items between different storing units.
Label Printing: This feature makes tracking easier during complete inventory and shipping management.
Shipping management: Your inventory management software must provide integrations with multiple logistics providers. Automating carries management reduces time to process orders and also minimize labor cost in the process.
The next set of features help you with growing sales and generating revenue. This majorly involves B2B eCommerce order management. A typical order management routine of this sort involves three important aspects:
- Sales tracking: This feature allows you to track different deals closed by your sales team and the revenue they generate. An ideal inventory management software offers access to salespeople, dealers, and administrators for a well-coordinated supply chain.
- Wholesale Management: Wholesale business transactions for B2B eCommerce can be easily managed with software that doesn’t require segregating wholesale and regular eRetail business. You should be able to adjust inventory across channels, generate purchase orders as well as invoices for wholesale orders.
- Suppliers Management: This feature ensures that your businesses receive a positive return on investment for all the money spent on the suppliers.
Your inventory management software acts as a backbone for all your sales channels, logistic platforms, CRM, accounting, and reporting systems. So, one of the most crucial features to look out for is the integrations offered by the software. Before making a choice, do a quick round-up of all the apps and platforms you are using for your eCommerce business. Following are the major integrations that you should consider:
- eCommerce marketplaces
- eCommerce storefronts
- Shipping and Fulfillment
- Accounting and Payment
- Warehouse Management
Reporting and Data Analytics
Reporting and data analytics keep you in check and help you realize the true potential of your eCommerce business with actionable insights. While making your mind about a software to help you with inventory management, make sure you check the analytics tools it has to offer. An ideal solution should be able to provide you with comprehensive reports and a channel-wise breakdown.
Here’s what your reports should include:
- Complete sales and return data
- In-depth predictive analytics
- Inventory replenishment reports
- Overall Margin & profitability Reports
- Trending products
- Repeat purchase history reports
- Reports on products frequently bought together
Inventory forecasting, as self-explanatory as it is, predicts inventory levels for the future that largely prevent you from disappointing your customers.
One of the most essential benefits of inventory forecasting is that you can spend your resources wisely. Keeping track of supply and demand helps handle purchase orders better.
It’s crucial to maintain the right amount of inventory to support service level expectations and to have tools to automate that process. Inventory forecasting depends on a number of factors and the system should automatically calculate preferred stocking levels, lead times, and re-order points, making suggestions in the order items list. All platforms don’t necessarily offer this feature but it can be a real asset if used right. It can help you:
- Cut down on inventory holding costs
- Reduce product waste
- Minimize stock-out
These are the essentials features you should ideally consider while going shopping for your inventory management software for eCommerce. But we advise you to take your time while settling on the plan that you need based on what your business requires immediately and might need as you expand. We hope this helped and in case it didn’t, give us a call and talk to one of our solution experts today. You can drop a line at [email protected] to schedule a call.
Are you looking for an omnichannel inventory management solution with integrated wholesale order management for your eCommerce business? Drop us a line at [email protected] or directly sign up for a demo here.
Inventory management is one of the most crucial aspects of an eCommerce business as it directly reflects on its growth. Keeping track of the products as they are procured, stored, and delivered involves a significant amount of time and resources. Here, we have different methods that might prove helpful for different kinds of eCommerce businesses.
Check out this infographic on the top 10 techniques for better eCommerce inventory management.
Are you looking for an omnichannel inventory management solution with integrated B2B order management for your eCommerce business? Drop us a line at [email protected] or directly sign up for a demo here.
“Inventory management is a continuous, concentrated effort – and a process that shouldn’t be handled solely at the operations level. A successful inventory plan should also involve your marketing, catalog, eCommerce, and merchandising departments”.
Table of Contents
- What is Inventory Management?
- Why is Inventory Management Important?
- Inventory Management Terms and Definitions
- Inventory Management Process
- Inventory Management Techniques
A systematic and simple approach to sourcing, storing, and distributing inventory is what we call inventory management. However, it’s not that simple. Without effective inventory management, streamlining any business becomes challenging which, in turn, leads to profit margins taking a hit.
There’s more to inventory management than just organized stocks. New entrepreneurs, business owners, and independent brands today compete with businesses all over the globe. A solid knowledge of inventory control and management goes a long way in the competitive curve. Here, we have compiled a comprehensive guide to the ins and outs of everything inventory management. By the time you finish reading it, we hope that you will know everything there’s to know about stocking your inventory right and ways to achieve that. Let’s get started with the basics of inventory management.
What is Inventory Management?
Inventory management is one of the core activities of all retail businesses. It is basically how you track and manage your business’s inventory as it is procured, stored, and distributed. The primary objective of inventory management is to keep track of the inventory in such a way that it’s neither understocked nor overstocked. Managing accurate inventory levels ensures that the right inventory is available at the right time.
“Inventory management is a systematic approach of tracking the flow of inventory. It starts right from procurement and its storing and continues to distribution in the marketplace”.
Why is Inventory Management Important?
Inventory management is crucial for all businesses regardless of the size. It strikes a balance between the amount of inventory going in and getting out. Furthermore, it regulates the costs of the items in stock along with the non-capitalized assets, allowing the business to gain maximum profitability.
Moreover, inventory and customer service go hand in hand. Inventory management is the best way to ensure constant customer satisfaction and minimize any losses. Additionally, inventory management also gives actionable insights for your financial standing and helps capitalize on business opportunities of all kinds.
In a nutshell, inventory management is important because of the following key reasons:
- Tracking your inventory gives a centralized view of the stock
- Control costs and empower sales teams by analyzing performance. These analytics could be sales reports, margins reports, inventory forecasting, etc.
- Improve order fulfilment as per customer expectations
- Diffuse the situations that lead to lost stock, overstocking, and stockouts
- Cut down on time and manpower for day to day operations.
Like mentioned before, businesses of all sizes need to manage their inventory effectively. The size factor comes into play while deciding how to go about the process. Every company has its own sets of requirements cut out for them and they should follow a system that suits those requirements. A newly set up small business can maintain a system using spreadsheets in the initial stages.
That said, working on spreadsheets can be a very time-consuming process in the long run and increases the risk of manual error. This creates a diversion from scaling strategies and focusing on overall business growth. As the business set up expands on different verticals, there will be a need for an omnichannel inventory management system that caters to the changing requirements and increasing demand.
Hence, investing in a good inventory management system (IMS) at early stages is highly recommended so as to streamline the day to day operations and channelise the rest of the resources on growth opportunities.
For all intents and purposes, an inventory management system reduces the chances of:
Due to mis-shipments, businesses incur losses on the following fronts:
- Pick-up time is doubled
- Charges for return shipping in case the items are not delivered or delivered at the wrong address.
- In case a business uses custom packaging, an additional cost has to be incurred in re-packing the product.
- Plus, if the business uses custom packaging, re-packing the product will be an additional cost.
- Additional incentives need to be provided to retain the dissatisfied customer.
- Customer orders will not be fulfilled on time which will lead to customer dissatisfaction.
- Incur additional expenses of the workforce’s idle time.
- Lose chances of price negotiation, this is particularly true in B2B where the order quantity is huge.
- Increase in storage costs
- Increase working capital requirement
- Increase the probability of inventory loss due to theft, damage, pilferage, expiry, etc.
So, assess your requirements and look for an inventory management system (IMS) that goes well with your business objectives. Coming back to the importance of inventory management, let’s also look at the monetary aspects of it.
How does Inventory Management improve Cash Flow?
First and foremost, a good inventory management system is cost-efficient.
Secondly, you pay for the inventory you store which is later sold to generate revenue. While the inventory is stored in the warehouses, it is not minting any profits to the business but costing instead. Therefore, it is important to consider inventory while making cash flow management decisions.
Inventory management will lead to better cash flow management inventory directly affects a firm’s:
- Sales (By ensuring that the right quantity is available at the right time)
- Expenses (By ensuring that inventory purchasing is done timely and that the inventory is available at the right cost)
Both of these factors together play a significant role in determining the amount of cash that is available with a firm at any given point in time.
That about sums up the importance of inventory management. Now that we have covered the what and why of inventory management and you have also got a gist of how it is projected in the real world, let’s move back to exploring the terms and definitions associated with it.
Inventory Management Terms and Definitions
The first step to understanding the nitty gritty of inventory management is to know about the basic inventory management terms.
Read the complete glossary below.
- Inventory– Inventory is a broad term that includes all products, raw materials, work-in-progress, and finished goods.
- Inventory Management Software– Inventory management software makes it easier for retailers to track their inventory on a real-time basis. A good inventory management software streamlines the entire process by recording, tracing, and tracking all items a retailer either receives or sends away. A good inventory management software will increase inventory visibility and improve overall efficiency.
- Activity-Based Costing– ABC allocates the cost of specific resources based on its actual consumption.
- Alerts– These are the reminders which an organization receives to better manage its inventory. It can either be based on type or due date.
- Inventory allocations– setting aside a specific inventory count for sales or manufacturing purposes.
- Annual Physical Inventory– It is the manual count of inventory on hand. Its results are then compared to the inventory system counts.
- Backorder– An order that a retailer can not fulfill currently, and it is requested by a customer who is willing to wait until it becomes available.
- Barcode Inventory– A barcode inventory system combines barcode technology and inventory management system. Its purpose is to increase speed and efficiency.
- Batch Picking– In batch processing or batch picklist, a bulk picklist of multiple orders is created. It is also known as consolidated picking.
- Bill of Material (BOM)– It is a list of items/materials which were used in creating an assembled item.
- Warehouse Bin Management– Inventory is stored in bins/shelves so that it can easily be located.
- Cycle Count– Often termed as physical inventory count. It is performed to reconcile physical inventory count with the inventory count which is recorded in the inventory management software.
- Cross Docking– In cross-docking goods are unloaded from an inbound carrier and immediately loaded in an outbound carrier.
- Dispersed Acquisition– Inventory is acquired from numerous suppliers worldwide.
- FEFO– It stands for First Expiry First Out. It is an inventory management technique that makes it easier for retailers to manage products that have a limited shelf life.
- FIFO– It stands for First In First Out. In this technique, the retailer first sells the product which was first manufactured/purchased by them.
- Forecasting– Predicting future demand based on past sales data and prevailing market changes.
- Integrated inventory management– In this inventory management system, all the business processes like the Accounting system, Finance system, Inventory system, etc are integrated across the organisation. An integrated inventory management solution makes information flow across all business processes easier.
- Inventory analysis– It is the process of determining the optimal level of inventory required.
- Inventory replenishment– It is the process of re-ordering inventory items when its stock is depleted.
- Kitting– Multiple inventory items are bundled together and sold as a single unit.
- Lot Number– The identification number assigned to products which indicates the lot or batch in which they are manufactured.
- Lot and Serial number management– It refers to tracking products by their lot numbers/serial numbers so that the lots can be traced back to its suppliers.
- Material Requirement Planning– It is a method applied to calculate the materials and components required to make a product.
- Maximum stock quantity– It is the highest count of an inventory item that an organization can have at any given time.
- Minimum order quantity– It is the minimum quantity that can be ordered at a time.
- Minimum stock quantity-Also known as the reorder point is the lowest quantity of inventory that can be held. Once it is reached the stock needs to be reordered.
- Obsolete Inventory-The inventory that has not been sold for a long time and is expected not to be sold in the future also is known as obsolete inventory.
- Omnichannel fulfillment– It is the order fulfillment process that ensures that inventory is available across all channels from a single location. This means, irrespective of the channel that the user is using (online marketplace or brick-n-mortar store) his order will be fulfilled.
- Order Picking– It is the process of finding the right products from the warehouse to fulfill an order. A picklist is created to ensure that the Order Picking process is right.
- Picking accuracy– It is the level of accuracy achieved in the Order Picking process.
- Reorder Point- It is also referred to as minimum stock quantity. It is the point at which the minimum inventory level of a specific SKU is reached and a purchase order needs to be issued to order it.
- Replenishment– It is the process of reordering inventory once the stock has been depleted.
- Safety Lead Time– It is the process of placing a replenishment order while keeping into consideration the buffer lead time so that unexpected customer orders or any other problem can be easily managed.
- Shipping accuracy– It refers to the level of accuracy achieved with orders’ shipment.
- SKU– It stands for Stock Keeping Unit. It is a number or code that is used to identify products.
- Stock Control System– It is a system established for maximizing stock control by integrating inventory management, warehousing, and other business activities.
- Third-Party logistics– It is commonly referred to as 3PL. 3PLs provide outsourced logistics, warehousing, and distribution services.
- Trend Analysis– Analysing historical data to identify a pattern or trend in the information.
- Vendor Managed Inventory(VMI)-In VMI the inventory is managed by the supplier on behalf of the retailer, based on their predetermined minimum and maximum inventory level.
- Zone Picking- It is a warehouse practice in which orders are picked from specific zones or sections, and then finally grouped for the final order picking and fulfillment.
Well, that was a lot of terms. But, that’s all you need to know. Now, let’s take a look at the process involved.
Inventory Management Process
The first and one of the most important steps is to make a flowchart for your inventory management process. This gives detailed instructions that the workforce needs to follow for smooth inventory management.
However, the exact method may vary from business to business, and from industry to industry. In general, inventory management process for all businesses will include the following major steps:
A good inventory management process involves a top-notch IMS and effective techniques that together streamline the entire affair. Here are some of the important techniques that you should know about.
Inventory Management Techniques
There are plenty of techniques that retailers can apply to improve their inventory management activity. The most common and effective techniques are:
- ABC Analysis
It is an inventory categorisation technique, in which a “class” is assigned to every SKU.
A- 20% of items with 80% of total revenue
B- 30% of items with 15% of total revenue
C- 50% of items with 5% of total revenue
By performing the ABC Analysis, retailers can decide what items to buy and in what quantity.
The A stock is the most valuable for the retailer and he should ensure that he has adequate quantity so that customer demand can be fulfilled.
The C stock is the least valuable for the retailer and is often termed as dead stock.
Note that the percentage of figures will vary across industries, but retailers can perform the ABC Analyse to efficiently categorize SKUs based on their profitability level.
- Have a Contingency Plan
Contingency planning is of utmost importance for a company’s survival and growth.
Companies need to pre-plan their course of action in case a problem arises. To do so they need to first analyse what are their potential risks.
These can be:
- The supplier runs out of stock, therefore orders can’t be fulfilled on time.
- The inventory count was wrong, this means you have either understocked/overstocked your SKU.
- The company is falling short of cash and can not purchase inventory.
- The inventory forecast was wrong.
- The warehouse is not properly organised. For example, a dead-stock has occupied a lot of your storage space and there isn’t sufficient space available to store products that have a higher demand.
When a company makes a contingency plan they are better able to cope with these situations swiftly without having a major effect on their business operations.
- Just-in-Time (JIT)
Just-in-Time, or commonly referred to as JIT is an inventory management strategy in which retailers keep a very minimal stock of inventory in hand to fulfill the customer orders and replenishes it before SKU goes out of stock. This is a great way to reduce inventory costs.
JIT can be applied when:
- When producers can forecast demand accurately
- There is a steady production
- High quality of workmanship and no machine break-down.
- The company has reliable suppliers.
Just-in-Time strategy is the opposite of Just-in-Case strategy, in which companies store sufficient inventory stock with them to absorb the maximum market demand.
- Consignment Inventory Management
In this technique, the retailer stores goods with him and pays the supplier only when the goods are purchased by the end customer.
When a retailer makes a consignment inventory agreement, he enjoys the benefit of:
- Improved Cash Flow-as he will only pay the vendor after the goods are sold to the customer.
- Low Risk- as retailers don’t pay for the inventory upfront the risk involved in buying the stock is significantly reduced.
- Lean Manufacturing
Lean manufacturing aims to reduce the wastage and non-value adding activities from the business operations. The lean manufacturing philosophy includes 7 types of wastages, inventory is one of them.
When inventory is moving through the production process it is adding value, and at whatever production stage it stops moving it is a non-value adding activity.
Therefore to ensure that the inventory is not a waste the following lean manufacturing practices should be deployed:
- Have an accurate inventory record
- Manage supplier relationships
- Keep safety stock
- Perform Cycle Counts
It is an inventory management fulfillment method in which the retailers do not buy the inventory that they are selling. This means that whenever they get a sales order, they purchase the inventory from a third-party and then ship it to the customer.
- Two-Bin Method
As the name suggests, the SKU is stored in two bins or locations. When the first bin is empty, the stock is moved from the second bin. The stock is replenished when the second bin is also empty.
- KPI Analysis
KPI stands for Key Performance Indicators. KPIs in inventory management can help in improving production and purchasing process, cash flow, and profitability.
Companies can compare their KPIs with the industry standards, however when external industry standards are not available, businesses have to set their own KPI goals and use them to monitor their growth.
Here are the common KPIs in Inventory Management:
9. Invest in a Cloud-Based Inventory Management Software
Managing inventory management manually or even by using spreadsheets can be a hectic task for companies. Plus the credibility of the inventory data will also be low. It is a smart option for companies, thus, to invest in inventory management software.
A good inventory management software should be able to do the following for the companies:
-Run Cycle Counts for them
-Help in Inventory Forecasting and Planning
-Minimize losses due to understocking or overstocking
-Alert business when they have reached the Reorder Point
-Make it easier for them to track inventory across multiple locations, and platforms like storefronts, e-commerce channels, warehouses, etc.
– Provide companies reports which improve their inventory analysis
If you run a business or planning to start one soon, you need to know your way around all these terms and techniques. If your business spreads across geographies, you definitely need to have an inventory management system to handle large volumes of orders for customers across the globe. As for the small business owners, it is important to set up a system at an early stage to gain a competitive advantage over big businesses when you expand.
We have covered everything there is to know about effective inventory management to streamline your business. If you still have some doubts, check out the following FAQs that might help.
How to improve the inventory management system?
To improve your inventory management system you can practice multiple tools and techniques.
All these techniques can be really helpful in improving your inventory management and should be followed according to your business and the industry you are working in.
One technique that I will suggest to all businesses, irrespective of their size or the sector they are working in is to invest in a good inventory management system. This will help you in reducing your costs and improve your productivity.
How can a business measure whether they are successfully managing their inventory?
To measure their success rate in managing inventory, companies should compare their data after they have implemented a new inventory management technique.
If the following have reduced they are successfully managing inventory:
- Obsolete Inventory
Which department or personnel should be accountable for an efficient inventory management system?
The burden of implementing an efficient inventory management system can not be held solely by a single department.
The purchase department needs to closely monitor the purchasing activity, the warehouse department needs to properly conduct all the warehouse operations like receiving and storing goods, correct shipments, etc, the sales department needs to provide the purchasing department with a sales forecast so that purchase planning can be done accordingly.
Information needs to be shared between all these departments regularly for an efficient inventory management system.
How should retailers prepare for peak seasons?
Preparing for peak seasons is a complex process for retailers. There is an increase in customer orders which needs to be fulfilled in a short deadline. To efficiently manage peak season sales a retailer needs to:
- First, analyse the sales forecast and all your further decisions like inventory purchase, or hiring temporary sales staff depend on it.
- Conduct a cycle count to ensure that the inventory level is correct. If there is a mismatch between physical stock and stock count in inventory management systems, take steps to reconcile it on an immediate basis.
- Improve your supply chain so that you can fulfill the customer orders. Make sure that your suppliers can provide you with the raw material or finished product timely and that your shipping management system can efficiently fulfill the order as quickly as possible.
What is FIFO perpetual inventory?
FIFO stands for First-In-First-Out. In a perpetual inventory system the stock movement (whether it is received from a supplier or sold to the end customer). Therefore, in a FIFO Perpetual Inventory Management system, the stock which is inwarded first is sold out first, and this stock movement is tracked and recorded on a real-time basis using an inventory management software.
Differences and Similarities between Warehouse Management System and Inventory Management System
The below infographic talks about the similarities and differences between a Warehouse Management System and Inventory Management System.
If you are interested in knowing more about the Warehouse Management system please click here.
Are you looking for an omnichannel inventory management solution with integrated B2B order management for your eCommerce business? Drop us a line at [email protected] or directly sign up for a demo here.