B2B eCommerce : Trends – Growth – Solution – Software
Why B2B ecommerce? Why have I chosen this topic? We are growing through a huge growth in B2B eCommerce vertical in the past that will keep on boosting the market in coming years. It would generate more profit than the B2C in the future. By 2020, the B2B market will see a growth of twice as large as the B2C market (source)
There are many ways through which B2B eCommerce business can benefit your organization, providing 24/7 self-service and selling round the clock to your wholesale buyers.
5 ways to Champion the B2B eCommerce
1. Use your website as a lead magnet:
Without leads, business is nothing. So let’s talk about how to best generate leads for B2B vertical.
User experience is as important for B2B as it is for B2C. For online business buyers the website is the first interaction point. The quality of images with clear description and user experience on the website will be an indicator towards the quality of your product and services.
The times where the lead generation was limited to few salesmen, are long gone. A well optimized B2B eCommerce website can reach to more people as compared to a salesperson.
Customers visiting your website should feel special. Following can be few sections to include to increase conversions:
- Provide them with a personalized experience by showing them their recently bought products along with recently viewed items based on their search history.
- Provide personalized & interactive support via different platforms like chat. So that customers don’t feel as if they are talking to a bot.
- In contact us page, ask them to submit their message with details. From there, the nurturing engine should kick in and send them a series of helpful content. That will keep the leads warm and drive conversion at the right time.
2. Use an effective Inventory Management tool
To be successful in B2B eCommerce, businesses have to be dependable. One of the big problems that companies face is low fill ratio for wholesale orders. This leads to customer frustration and ultimately churn.
This usually happens because the ordering process is not linked with the backend inventory systems. Frontend systems / teams are usually not aware of the inventory levels across their warehouses.
In order to solve this problem, either you can keep track of the inventory levels in a spreadsheet and provide access to the sales teams. Alternatively we suggest deploying an inventory management platform that’s capable of handling distribution management. Here is an example case study of a customer facing the same issue and how they overcame this challenge.
Following are the benefits of deploying such a platform:
- Real time inventory update :
An effective inventory management solution will provide real-time inventory update. This will help B2B businesses to know their product count in the warehouse(s). Once an item goes out of stock, the ordering system & sales teams will be made aware. At that point, alerts can be issued for the procurement teams based on the reorder points for the given SKUs. Procurement teams must also be following standard inventory forecasting techniques to ensure smooth flow of business.
- Avoid overproduction of slow moving products:
A company must check its inventory aging reports to keep a watch on less popular products & to gain visibility on fast moving items. Most importantly, it allows a company to never be out of stock as well as not overstock any items also. This also drives customer satisfaction due to timely fulfilment of orders.
- Effective sales strategy to clear non-moving SKUs:
B2B companies can keep a close watch on products which aren’t moving out quickly and as a result, can offer incentives to purchase those products in larger quantity.
- Multiple warehouse management :
Most of the B2B businesses store their products in different locations. So, to have an effective, accurate, real-time inventory control becomes more important. Here is a guide to manage multiple warehouses effectively resulting into complete customer satisfaction and high fill ratio.
- Manage orders based on priority:
With Domino’s 30 minutes promised delivery, your customers have no time to wait, they need everything now. In order to be successfully drive customer happiness, brands have to segment the clients based on their sales volumes, their credit score etc. That combined with order level indicators such as order date, distance from warehouse to customer, brands have to design their fulfilment process to ensure SLA commitments.
- Avoid Dead Stocks:
For perishables or products with an expiry date, it helps you track items which are near their expiry. Inventory systems will apply FIFO methods to clear the aging stock first hence lowering the inventory expiration risks.
Efficient Inventory is only possible with the help of a top notch Inventory management system. A good inventory management system will help you avoid human error in calculations.
Features of an effective inventory management system include:
- Multiple Channel management from single panel (Amazon, eBay, Shopify and more)
- Centralized Inventory Management with real time inventory Sync between B2B & B2C sales channels
- Centralized Order Processing
- Logistics Support with 3rd party Logistics such as FedEx, UPS etc
- Returns, Payment and analytical reports
- Batch order tracking
- Holiday rush planning
One such inventory management with all the above features is EasyEcom, an Omni Channel platform for modern Retail.
3. Don’t Sell but Educate Customers about your Products
The best way to sell to other companies is through consulting, helping them achieve their goals.
The brands are reaching consumers through digital marketing, enticing writing and by using different personalized marketing techniques to advertise their products. Business users are also consumers at some level and need same level of nurturing. Following are some examples on how to achieve this:
- Make tutorial videos to let customers know how your product works.
- Write powerful blogs relating to your business.
- Use strong quotes to attract more visitors.
B2B Content marketing is an art of using content in order to expand your business audience and strengthen brand relationships which as a result will help you drive traffic and sales by engaging other businesses.
4. Let your loyal customers be your sales team
A good customer service can help you turn your customers into a powerful sales team, to bring in new business. This starts with providing an exceptional product or service which customers appreciate.
Ones they like your product, they will have a story to spread across their network, sharing experience about the services that they receive. Give them a reason to talk about your product by providing an extraordinary experience which they cannot resist talking about in their network.
5. Take advantage of social platforms
Increase in the use of mobile phones and social media has transformed our way of living in recent years. It is all about comfort and satisfaction now.
Regardless of target market, present age is using social media channels (like, YouTube, Instagram, Facebook, Linkedin, etc) for promotion and communication. Utilizing these free platforms by making different strategies to engage customers can be a cost effective strategy for marketing.
Social sites on being the fast communication channel, will also allow you to manage customer inquiries quicker than ticket submission or support service calls when implemented properly.
Facebook, being a lone wolf in social platform with more than 2 Billion active users, is a great medium to connect with people from all over the world for business. It can be used to share photos, videos, important updates, web content. Target your audience, through their advertising platform based on their location, age, behavior, interest and more. This will help you get your content in front of right audience.
Let’s break down eCommerce Growth
eCommerce has been growing at an exceptional rate across the globe. Shopping is addictive, being able buy from the comfort from your home / office is whole another convenience level, hence the growth.
Let me tell you that there are 6 types of eCommerce business models:
(1) B2C: Business-to-Consumer
(2) C2C: Consumer-to-Consumer
(3) C2B: Consumer-to-Business
(4) B2A: Business-to-Administration
(5) C2A: Consumer-to-Administration
(6) B2B: Business-to-Business
These types have been receiving global exposure through different websites like eBay, Etsy, Amazon, Olx, and more. B2C Ecommerce has already gone both mobile and social, allowing sellers to get a global presence, making it much easier with the help of Omni-channel platforms. Likewise, businesses also want an ease and comfort to search for other businesses to deal with.
B2B Websites like Amazon business and Alibaba have been running successfully for past 20 years, coming up with new features, making businesses simpler and giving your products a global recognition.
Industry Example for B2B: Alibaba
Alibaba is one of the leading B2B organization from China, it has made a rapid growth in both local and International markets.
– Alibaba, founded by Jack Ma in 1999, is one to the top 10 most valuable companies in the world.
– With its presence in around 240 countries, Alibaba has marked an annual growth by 37 million active users to reach 552 million.
– It targets both on buyers and suppliers internationally. While, it targets local buyers for suppliers selling within China.
– It has launched its website in several other languages to expand further.
At present social sites like Facebook, Instagram, Twitter, LinkedIn, YouTube are no different from discovering new people/ businesses. Growing your business and going global has become simple, regardless of where you are.
These requirements aren’t b2b specific. We know that it applies everywhere and are the major needs for businesses to grow. So, let me now take you to b2b specific ride next.
Latest Trends in B2B eCommerce
B2B ecommerce is becoming more like B2C
We know that B2B transactions are universally more complex as compared to B2C and many medium and small sized b2b companies find their businesses lethargic, with no idea on how to globalize.
Consumer purchase has become a lot easier with growing digitalization, making it faster and more convenient to order the products from anywhere and getting it delivered at the doorstep. Whereas, business purchase happens over a long period of time, involving long term relationships. It is all about getting the best deal for the company.
Expectations of business have changed with time and it has started appearing more like the retail consumers. Soon the standard practice of B2B will not be accepted and the B2B transactions will start happening just like B2C i.e. online and through open marketplace platforms.
Let me throw some light on how you can make the complexities simpler with B2B by making the process digitized:
– Provide personalized experience to your customers
– Send text messages to chat and save time on meetings
– Enlighten them with your product features
– Provide them with pricing transparency
All these things have become simpler with time and technology.
Industry Example: Amazon
There are many eCommerce brands going both B2B and B2C.
Amazon being one of the biggest B2C eCommerce platform has already launched its wholesale marketplace. That is again a third party marketplace type of platform where businesses can place their wholesale orders. This has improved the ability of B2B customers to get wide range of options to buy from, domestically and international both.
Amazon’s entrance into the B2B market has accelerated the trend of B2B websites becoming more like B2C.
Few other top online global B2B marketplaces are Alibaba, Thomasnet, EC21, etc.
B2B is all driven by tech now
In the last 20 years, eCommerce businesses have changed the way we transact and we know that in the fast-paced world of the internet, companies have to work sooner or they will be left behind.
Having a mobile integrated application is a must to keep your visibility on for professional growth. With an increase in digitization and usage of mobile phones, the business can reach out to their leads in one click.
B2B eCommerce platforms usually include features such as:
– Efficient self-service, for completing online orders or setting up recurring purchase orders to process automatically.
– Providing B2C like experience for easy order, order tracking status update, and the ability to perform transactions on any device.
– Offering a complete end-to-end solution, from resource management to quote management.
– Personalized view for customers to their products, warranties, manuals and related parts and inputs.
B2B as an open marketplace
If you remember, 30 years back, the businesses were mainly listed on yellow pages and classifieds and were restricted to a particular area.
However, with time, the B2B market has become more like an open marketplace wherein businesses can reach out openly to deal with other businesses through internet connection. It has become more like a full transact platform with a user friendly interface, similar to B2C’s.
Customers these days are very clear on their purchase. Especially, B2B clients always do their research and then plan on buying a particular product in bulk.
Whether your customers are buying a specific product or in bulk, make sure your website works great with all the processes, like,
- Having quick order checkout option is a must
- Allow order customization with the help of a quick order form as shown in the image
- Include multiple payment options like net-banking, credit card, digital wallet payments and more.
Yes! our daily activities have changed with time. Let me take you to older time when there weren’t much of technologies available. How people used to deal with their businesses.
Amazing right? I wonder where these techy geeks will take us in the next 10 years! If you have got any future tech idea, do feel free to comment below, I will be happy to get in touch with you.
With a huge upgrade in technology with time, we still find some downsides with b2b ecommerce platforms.
B2B eCommerce platforms shortcoming:
Lot of b2b eCommerce platforms are available in the market, whether you want to go global or local, the choice is yours!
– Amazon, being a king in eCommerce industry (Click here to learn about Amazon’s latest monster moves) has launched its Amazon Business across the globe. (Now in US, UK, Germany, Canada, Mexico, Brazil, Spain, Italy, Japan, China France, and India)
But there are a few shortcomings while only advertising on Amazon.
- Firstly, the people who would reach you will be Amazon clients.
- No access to the buyer details and this, as a result, will limit you from contacting them again.
- Brand promotion through Amazon store will not be same as promotion through your own website. And there are a lot of competitor products put up with different prices.
- Selling only on Amazon site might limit your business growth.
- Fierce competition due to open marketplace
Due to these issues brands are increasingly considering selling on multiple platforms. In order to successfully run such a business, you will require a multichannel sales management solution like EasyEcom. The B2B growth depends on various integrations, so does B2C for shipping services, order management, accounting and more. But as per a survey on marketing channels working for B2B ecommerce has revealed that B2B ecommerce website has the highest share of 86%. (Source)
Where do we go now? (in terms of B2B eCommerce)
With a rapid growth of B2B, their online purchase in wholesale segment will rise by 20% in coming years. As per a research from Forrester, they have estimated the B2B ecommerce growth will hit $1.2 trillion by 2020. As the trend is shifting from B2C to B2B, the eCommerce sale in B2B will make 200% increase in sales as compared to B2C. (Source) If you are a brand, it’s time to keep iterating your business model and adopt the changes in the market.
Order Fulfillment Process to Streamline Your eCommerce
Planning to start online business or already at it for a while? With increased competition among retailers in the online world, one gets a competitive advantage over others by selling across multiple channels, apart from their own online store. However, not everyone who tries to sell online will be able to. Do you know who will survive? Someone who can manage their business as efficiently like Amazon manages its own business. EVERY PENNY COUNTS!
Major area for efficiency gain that you must have probably thought about is order fulfillment as a process. That generally involves warehouse setup, Inventory management, picking, packing and shipping.
Overall eCommerce business can be complicated for beginners as first of all product listings need to be made on each channel that you decide to sell on. Then the online store has to be kept up with exact items, cost and stock information. This seems like a daunting task, however the usage of an eCommerce inventory management tool can help sellers to do this in an organized way, allowing tighter control over their business.
Everyone’s primary attention is to gain profit and bring down extra expenses
eCommerce business is complicated with multiple parties involved (shipping carrier, payment gateway, warehousing & fulfillment, marketing partner i.e. eCommerce marketplace). Hence multiple expense heads appear in your balance sheet. Fulfillment costs are one of the major ones, in this article, we will explore various ways of fulfillment and their impact on the bottom line as well as on customer experience. This should help to choose the way forward for businesses venturing into eCommerce for their fulfillment strategy. Towards the end of the article, we will give you a comparison chart between different fulfillment strategies.
Fulfillment by eCommerce Channel (i.e. Fulfilment by Amazon)
In order to provide better customer service, all major marketplaces have now launched a fulfillment service. You get a warehouse space where you can keep your stock and the entire fulfillment process is outsourced from including the space, staff, packing – the whole thing.
Amazon in this context, without a doubt, has turned into a pioneer of online business. On account of its market strength, numerous brands utilize Amazon as a platform for their online sales. Fulfillment by Amazon (FBA) seems like a convincing option for all the brands selling online. However, using Amazon FBA can be tricky, with pitfalls that even experts fall into. Let’s take a look at that:
Advantages of selling on FBA (and other similar services from other marketplaces):
- Brands/sellers will not have to worry about their storage space and the Order fulfillment process and the overhead associated with it.
- They will be eligible for the Prime badge which helps them to win the Buy box (the box on a product detail page where customers can begin the purchasing process by adding items to their shopping carts) more often resulting in boosting the sales.
- Moreover, sellers with a smaller setup can also choose this, as FBA doesn’t have any minimum stock requirement.
Disadvantages of selling on FBA:
- The biggest drawback for the sellers is that once their product is with FBA, they have no control over their inventory. They also don’t have any real time Inventory status of their stock items. FBA inventory tracking can be daunting.
- FBA has the same packaging process for all the orders. No personal branding on the packaging is possible. It is all done in Amazon way.
- Sellers have to bear with extra storage charge for unsold products every 6 months, in addition to their monthly inventory storage fees. Their storage fees also vary by product tiers making it even more expensive.
- In addition to this, if products are not sold for a long time and a seller decides on liquidating the stock, FBA levies an additional charge for the same.
- There is also a possibility of commingling of similar products from different sellers. This may result in bad reviews and ratings.
- For FBA Multichannel sellers, in addition to normal storage & processing fees, Amazon charges them extra for fulfilling orders placed on other channels.
- There are strict standards encompassing with respect to how you name and bundle your stock. It’s necessary for sellers to go through the guidelines put forward by FBA before submitting stock, otherwise, it might get rejected. That’s extra work on the packing team (or the supplier) and you will be charged extra on returned products if these standards are not followed accordingly.
Amazon does have major advantages. However, one needs to have a selective strategy before proceeding with FBA.
Don’t worry, Brands do have other fulfillment options
Outsourcing fulfillment to 3rd Party Logistic (3PL)
There are companies that specialize in eCommerce fulfillment. These companies will keep your stock and the stock can be shipped directly to their warehouse. To go with 3PL, one has to have their integration with Inventory Management tool in order to manage stock and deliveries in a hassle-free way.
Advantages of outsourcing fulfillment to 3PL companies:
- 3PL is relatively cheaper, predictable and easy to go with.
- Here, you only have to buy your stocks and get it delivered. Rest will be taken care of by professionals according to their warehouse strategies.
- There won’t be any extra charge involved to sell on multiple channels. It does it all for the same rate.
- They always have their warehouse ready to handle the sudden boost in sales. Few 3PL’s even offer special services to sellers getting a higher volume of orders.
- For International deliveries, It can be less expensive than other fulfillment methods, as brands get an option to send their stock abroad to the 3PL using a cargo bearer, and then utilizing domestic transporters to dispatch order to individual buyers.
Disadvantages of outsourcing the fulfillment to 3PL companies:
- Losing Prime tag:
Amazon has more than 100M subscribers in their prime program and that number is rapidly growing. It’s very important to attend to those clients. Now in order to do that, your fulfillment should be prime which by default you get when opting for FBA. Some 3PL providers are prime certified meaning their shipments are considered as prime enabled. Please check with the 3PL provider for this factor for sure before signing the contract.
- Trust Issues:
Trust is a big issue when working with third party companies like that. Please do make sure to check references and visit their warehouses to ensure the facility is actually able to handle your business. Proper due diligence is required before deploying your fulfillment at someone else’s premises.
- Regular check ups:
Because of the nature of it, brands have to conduct regular check ups to ensure nothing funny is going on in the warehouse in terms of inventory and order management. We have seen clients where their 3PL partner wasn’t able to handle the order volume and continued to blame other factors since the business stakeholders were sitting remotely. As the brand checked their fulfillment report, they found out more than a week old orders were sitting unfulfilled in their warehouse and had to make a visit to get them cleared. Needless to say, the fulfillment partner was fired subsequently. Extremely important to keep an eye on the 3PL partner.
Sellers store products in their own warehouse and do the entire fulfillment work. This option can be time-consuming and inefficient as it may also require your company to lease warehouse space. However, this gives the maximum control to the brand. Brands can now control SLAs, can do the packaging in the desired way and use the same stock for other purposes as well besides the online sales.
– Have control over the order fulfillment process
– Have control over stock and how it is treated
– Packaging with company fliers and name
– Requires time, effort and space for setting up the warehouse
– More human effort is required in managing incoming outgoing stock with package process
– The stock can sometimes be disorganized if not taken care of properly
– No prime badge from Amazon
– With an increase in demand, a bigger space for products might be required.
– Can be expensive
Drop shipping is where brands/sellers work directly with manufacturers who have the ability to ship their products directly to the end customer on their behalf. This works great in case of low volume. However the chances of error by the dropshipping partner are high, hence this option needs strict QC and monitoring.
Pros of drop shipping process:
– You are not required to hold the stock
– No staff is required for order fulfillment process
– It won’t be required to buy stocks beforehand
Cons related to drop shipping process:
– No control over order fulfillment process.
– As there can be multiple sellers for one manufacturer, there has to be better relation with suppliers for more shipments
– You will be responsible as a seller for returns and customer support
Now let’s take a look at different fulfillment strategies in one view:
Impact on Business
|FBA||3 PL||Self Fulfilment||Dropshipping|
|Amazon Prime Badge||✓||✓ (by few)||✖||✖|
|Real Time inventory count update||✖||✓||✓||✓|
|Control over shipping process||✖||✖||✓||✖|
|Better customer relation||✓||✓||✓||✖|
|Lease Warehouse space||✖||✖||✓||✖|
|Require Extra Manpower||✖||✖||✓||✖|
Choose your options carefully in terms of fulfillment
You can always have your options wide and choose to run a comparison between fulfillment ideas and make an informed decision based on your experience and resource availability. It’s all about creating marketing strategies based on products which will provide you with better efficiency and profit with improved customer satisfaction as a result.
Try not to stall out in single Market Channel. Get multichannel availability.
Most of the businesses manage their stocks and multiple channel accounts through one platform by getting hold of management services tool. One can take care of stock, multiple channels, shipping, accounting, returns and so on from a single platform.
It’s an independent solution for businesses controlling every process and type of data. Connecting out to marketplaces, web stores, delivery centers which themselves are associated with the tip of the iceberg.
10 Experts Suggest The Need for Amazon Inventory Management in 2018
Every brand aims to boost their sale and reduce the carrying cost of inventory. With growing business demand, companies find it hard to be profitable in long-term due to sheer competition and the complexities involved in running the business. Hence it’s absolutely critical to control your costs & mitigate business risks in order to survive and grow.
Being an online seller you must be aware of expenses involved with managing stock, like
- Overstocking of a product with less sale
- Going out of stock with fast selling products
- Storage space expansion with overstocking of products
Besides the increase in cost, brands also encounter challenges involved with managing Inventory:
- Efficiently overseeing the constant flow of units in and out applying FIFO strategy.
- Managing the purchasing process and forecasting inventory demand
- Ensuring inventory coverage while the vendor sends the replenishment stock.
- Relying on a manual process for stock counts, accounting, and shipment tracking
- Tracking stocks across warehouses and making necessary transfers and adjustments to drive business volume and clear the excess inventory
- Identifying slow moving stock and come up with some sale / promotion to clear before it becomes obsolete
- Managing inventory inside the warehouse & keep inventory shrinkage in check
If you can relate to these issues, you must have thought about simplifying the process. Who would help you better than the experts who already have experience managing their online business?
So, we went on asking a question from few e-commerce industry experts based on critical scenario faced by many players. i.e., “Why should we consider Amazon Inventory management software”
Let us see what the experts have to say,
– Krista is Ecommerce Analyst at FitSmallBusiness.
[bctt tweet=”Amazon inventory management is more than posting accurate inventory numbers in Seller Central. ” username=”easyecom”]
[bctt tweet=”Keeping track of inventory is very important on Amazon. Mistakes happen, Amazon forget to process shipments and things go missing.” username=”easyecom”]
– Jeremy is a data center industry analyst, who heads up PR for exIT Technologies.
[bctt tweet=”The need for inventory management to Amazon’s standard is key to success in not only the e-commerce industry but countless others.” username=”easyecom”]
– Jayneel Patel Founder & CEO at Orderhive.
[bctt tweet=”Inventory management also helps you keep a track on identifying which channels are helping you build larger margins and at what times.” username=”easyecom”]
– Elaine, CEO of Hollywood Mirrors
[bctt tweet=”If you oversell and do not dispatch 90% of your products in time you are looking at getting suspended.” username=”easyecom”]
[bctt tweet=”Amazon inventory management is important to avoid stockouts and keep up with demand, sellers need consistent cash flow.” username=”easyecom”]
[bctt tweet=”It’s important to keep a very close eye on your inventory levels, to have a clear understanding of how quickly your product is moving.” username=”easyecom”]
– Shannon is the founder of Marketplace Seller Courses
[bctt tweet=”Amazon inventory management tool is our favorite, since it takes into account FBA as well as merchant fulfilled inventory.” username=”easyecom”]
9 Brian Liebman
– Brian is Chief Revenue Officer at goamify
[bctt tweet=”long-term storage fees (LTSF) will significantly penalize FBA sellers that do not appropriately manage their inventory or stock levels.” username=”easyecom”]
[bctt tweet=”Certainly the norm with Amazon selling but inventory management; without question, critical. ” username=”easyecom”]
So, as you’ve read how some of the best brains in eCommerce do the inventory management, it’s time for you to follow the same.
We would like to thank all the experts who contributed. It was an absolute pleasure getting response from them. I am sure readers will be able to minimize challenges involved with managing inventory.
If you have any thoughts or unique challenges that you typically face with Amazon inventory management, please post them in the comments section.
Understanding Inventory Shrinkage (And Tips to Control it)
What is inventory Shrinkage?
Inventory shrinkage means the difference between the physical count of inventory from the total inventory that’s recorded in the official company records.
Inventory shrinkage is a real phenomenon and affects every single retail business on the planet. If not managed on time and with proper systematic approach, can prove to be deadly in the long term.
These differences might be due to various reasons ranging from natural causes or managerial errors, being stolen by employees, shoplifting or inventory getting damaged and disposed of without having any record. Whatever the reason there is a discrepancy referred to as inventory shrinkage which needs to be accounted for to reconcile the accounting records with the physical count.
Needless to say, this loss of goods directly affects your profit margins.
In this article, we will learn about the reasons for inventory shrinkage and how to prevent them from hampering your business.
Let’s start first with how to calculate shrinkage.
How to Calculate Shrinkage:
As per the accounting rules, the shrinkage should always be marked as an expense in the accounting period in which the shrinkage occurred to match it against the revenue earned during that period.
Check your company’s records to determine the value of inventory that you should have in stock based on prior inventory totals and the value of goods sold. This is the book value.
Total the actual value of inventory that you have in stock. This number may be different than the book value because of losses, damaged goods or theft.
Subtract the actual amount of inventory from the amount that you should have according to your financial records.
Let’s consider Mirage Enterprises for example, they have listed $15,00,000 of inventory in its records. After conducting an inventory audit and calculating that the actual amount on hand is $14,00,000. The amount of inventory shrinkage is therefore $1,00,000 ($15,00,000 book cost – $14,00,000 actual cost). The inventory shrinkage percentage is 6.67% ($1,00,000 shrinkage / $15,00,000 book cost).
Another example is if the inventory records of a retailer report that 5,000 units of SKU A are on hand, but a physical count indicates that there are only 4,925 units on hand, there is an inventory shrinkage of 75 units.
A different type of Shrinkage can be referred to the loss of raw materials during a production cycle. For example, while baking food items the baker will experience shrinkage throughout its production process due to ingredients left behind with the utensils as well as due to evaporation. This is termed as spoilage or waste as well and it can be occurred due to normal or abnormal circumstances.
Now let’s understand what causes the shrinkage.
Causes of Inventory Shrinkage
You can define shoplifting as when a customer leaves a store or supermarket with more than what they paid for. This constitutes a majority chunk of the inventory shrinkage. Use of CCTV cameras, RFID, Chips, Tags can reduce the shrinkage to some extent.
Employees are expected to be the people resisting the shrinkage but some employees think otherwise and steal from the employer. The reasons for stealing varies from being greedy to taking revenge to trying to get compensated for being underpaid/underappreciated. This is difficult to track as being the insider they are aware of the loopholes in the system. They can cover up it easily and pass this off as an accident. Proper security systems in place can help prevent this. On top of that, a deeper introspection by the management needs to be conducted if this a frequent event in your company. There might be a general sense of dissatisfaction causing employees to do such a thing to begin with.
With the emergence of digital methods to record keeping and different warehouse management software, the human error has decreased many folds. But it is still one of the major reasons for shrinkage. Consider a situation where a particular SKU is ordered 1000 pieces and while making the entry in the record book the clerk has entered it as 10000. When you conduct an audit of the warehouse, the missing items as per record will be 9000. This will completely jeopardize your inventory record keeping. Some other reasons can be pricing mistakes, accidental reorders, missing zeros as well as left-out decimal points. You need to count and recount the inventory even when the business relies on automated systems.
On top of that, a systematic approach to inwarding where an automated QC is performed based on weight or other factors can be conducted along with manual QC.
When a product changes hand, it becomes essential to keep a record of the stock every single step. There are chances of the theft happening during transit between two warehouses, loading, and unloading. So every time inventory leaves or enters the premises, it should be counted and recorded appropriately.
A gate pass system is required for inter-warehouse transfers to avoid any miscommunication of quantities transferred. In the case of supplier fraud, warehouse inwarding team should be able to catch these while doing the GRN (Goods Received notes). GRN details compared against the purchase bills should help find the issues if they exist.
Sometimes, the inventory may disappear off the shelves and cannot be matched to any of the other causes of inventory shrinkage. Unknown causes represent a significant percentage of the total inventory shrinkage. A company should have an allowance for such a thing as well, especially in large organizations.
Natural or Accidental Damage
Sub-standard storage areas and unskilled workers make the company take a hit due to inventory shrinkage. Natural calamities can ruin stocks. Even a normal roof leak can cause severe damage to the inventory. If water-logged goods are there it gets damaged due to improper maintenance of the warehouse. Apart from these human errors, natural calamities like violent storms can destroy the whole warehouse. Again, the chance of goods getting damages arises while shipping process, or from movement inside the storage area. Insects, rodents can be another cause of infesting perishable goods, thus proper sanitation is important. So skilled and specialists are essential for every job in the warehouse to reduce shrinkage due to handling goods improperly.
How to Prevent Inventory Shrinkage?
Cross Check System
The first thing any organization does is implement multiple layers of quality check and verification. Assign more than one employee to important assignments such as signing invoices, recording stock and accepting stock. The second person ensures that any crucial details are not missed out on or any inaccuracy is there. It also helps eliminate fraud.
While hiring a new employee do a proper background verification to understand the past. It helps you understand if the employee had any past record of stealing etc. You can understand the general conduct and behavior of the employee. If a potential employee has a long history of improper conduct, the company should drop them. The hired employees should be properly trained to handle inventory appropriately and carry out stock-taking.
Upgrade to Cloud-Based Inventory Management
When you upgrade your inventory management from paperwork to cloud-based system, you get every data within a smart dashboard that has access to all your inventory movements. Purchase orders, inventory report will give access to all the stakeholders in the organization with a centralized database. You can manage supplier side, review and monitor stock list from the headquarters to eliminate any discrepancy. It also eliminates human errors with barcoding. It will track the location of the inventory from the point of origin to the point of sale and produce logs for all the users that logged into the system.
Regular audit is essential to track the inventory shrinkage percentage over regular time intervals to measure any increase or a decrease in shrinkage. The inventory report should be compared to the previous inventory reports to understand any shrinkage. The regular checks provide a pattern of inventory shrinkage. A steady decline in shrinkage percentage confirms the techniques used are working out and steady increase or zero increase implies the current measures are not able to bring the shrinkage down and you need to revisit your strategy.
Better Surveillance & Security:
Track and keep all the areas of goods movement and warehouse under surveillance all the time. Installing cameras, RFID, Tagging will help reduce the shrinkage. The warehouses and storage areas should have restricted access. Whoever has access to the warehouse should go through a swipe card technology to trail movements in case anything is found missing in future.
Empower, Give Rewards and Make Employees Accountable:
Make sure that each day the employees are leaving the premises ensuring they have done their part in keeping the shrinkage to the minimum. Empower them to take the decision to do the best for the interest of the organization. Rewards and appreciations work wonders to make employees take responsibility. When you make them accountable, they make sure nobody tampers with their part of the inventory.
Make Stricter Company Policy
Educate employees about the latest fraud trends and help prevent them from being fooled. Make them understand that when the company takes a hit due to shrinkage, they are going to get affected as well with the damage and losses as it will hamper their growth. In this way, they will put maximum effort to avoid any glitches or errors on their part.
Make Regular Maintenance Of Storage Area
Make regular maintenance of storage areas to avoid any rodents damaging your goods. Do regular pesticide treatments to keep the storage place free of pests. Even small negligence in sanitation increases the deteriorating rate of the goods stored and reduces their storage time. Keep the storage place well maintained to avoid any leakage of water or dust. A well-organized inventory always lasts long and minimizes wastage.
Although there are many unforeseen reasons that can hamper your inventory shrinkage, following the above methods and regular audits can help you reduce the shrinkage percentage drastically. This will eventually result in a higher profit for the organization.