Table Of Contents
Managing hundreds and thousands of inventory without an organized system in place or methodical analysis tools, especially in e-commerce businesses, can turn out to be a time-consuming process. Moreover, it leads to an increase in inventory levels with a shortage of fast-selling, profitable items. Without optimizing inventory, organizations run the risk of overpaying but underperforming.
Inventory occupies space, gets damaged, and sometimes even becomes obsolete. That is why carrying a surplus or deficit of inventory can cost the organization. In fact, when obsolete inventory accumulates over a period of time, it translates to losses.
In order to prevent the aforementioned business misapprehensions, it is imperative for organizations to find the perfect balance between demand and supply. This balance is known as Inventory Optimization. The process maintains a level of inventory that eliminates out-of-stock and overstock situations, by having the right products, at the right place, at the right time, thereby reducing costs and improving efficiency.
The best way to optimize inventory is by following these 3 processes – Manage, Control, and Forecast:
Inventory Management: What is it, importance, methods
Inventory management is to track and manage inventory as it is procured, stored, and distributed through various channels. Efficiently managing inventory is the key to any successful e-commerce business. It makes sure that you have the right amount of inventory available at the right time and at the right costs.
To get started, it is important to set up a process for inventory management. Following are the steps that are generally involved in it:
- Delivery of Goods: These could include raw material or finished goods.
- Reviewing, Segregating, and Storing: After reviewing, the goods are stored in bins. For easier tracking, they are assigned SKUs or barcodes.
- Monitoring Inventory Levels: Performing regular cycle counts to avoid overstocking, understocking, overselling, etc.
- Placing Stock Orders: These orders can either be placed by customers or the company employees.
- Order Approval: Verifying the actual orders against the purchase orders.
- Moving Goods: Transfering the goods production area to the customers.
- Updating Inventory Level: Updating records after the goods are transferred.
- Purchasing New Inventory: Buying inventory that has crossed the threshold limit. This stage is easy to identify if the inventory is regularly updated.
Importance of Inventory Management
Big, small, or medium sized, inventory management is crucial business practice for all. The primary goal of inventory management is inventory tracking to avoid situations like over or understocking. On a broader scale, proper inventory management is how you ensure consistent customer satisfaction and minimize any losses.
All in all, here are the key reasons that sum up the importance of inventory management:
- A centralized view of the stock
- Cut down on costs and analyze stock performance. These could be analyzed based on the data from margins reports, sales reports, inventory forecasting, etc.
- Save time and workforce for daily operations.
- Meet customer demands with improved order fulfilment.
- Avoid situations like lost stock, stockouts, and overstocking.
Methods of Inventory Management
Moving on, one of the best ways to effectively manage inventory is by Categorizing it. By breaking down inventory into categories, organizations can handle warehousing and shipping more effectively. The most practical way to do this is by using the ABC analysis method. In this method, you categorize your inventory into 3 categories:
- (A) High-value products, with a low frequency of sale (Slowest Moving Products)
- (B) Moderate value of products, with a moderate frequency of sale (Slow Moving Products)
- (C) Low-value products, with a high frequency of sale (Fast Moving Products)
The ABC Analysis relies on the Pareto Principle which implies that 80% of an organization’s revenue comes from 20% of its customers. These customers usually purchase category A products and account for the majority of revenue. Therefore, it is more costly for the organization to lose these customers than it is to lose customers who buy category B and C products.
The goal of categorising inventory is to help the Inventory Manager divide their attention appropriately. For example, products that fall under category A may need to be ordered more often than products that fall under category C because their amount kept on hand is much smaller.
Once all the inventory is fit into the ABC framework, it can be organized in the warehouse in such a way that the operations can be optimally fulfilled. The most popular way is to keep the fast-moving products in the staging area.
The first rule of thumb that every Inventory Manager must implement is the FIFO system. It is absolutely essential for inventory to be arranged in such a way that the oldest stock is shipped out first and not the newest, regardless of whether the goods are perishable or not. This is because, over time, unsold items go through a certain amount of wear and tear, and if unsold, older stock could turn into damaged goods, eventually leading to deadstock.
In today’s technologically driven e-commerce business, the most productive way to manage inventory is by investing in an Inventory Management Software. Such software not only helps build but also scales an e-commerce business. It helps the Inventory Manager to ensure that there is never an overstock or understock. It also helps synchronize inventory across all the sales channels, tracks shipments, and consolidate all the inventory-related activities into one convenient system that can be leveraged to boost sales and find opportunities for the business.
Inventory Control: What is it, importance, methods
Inventory control is different from inventory management, and it is important to know the difference between the two. Inventory control basically regulates the inventory that is already in the warehouse. It involves knowing what items are being stored and the availability of the amount of that product with the distributor. Additionally, it also involves knowing the whereabouts of the products in the warehouse ensuring that all inventory remains in a good condition, and laying out the warehouse in a way that minimizes the cost of order fulfillment.
Compared to Inventory control, managing inventory keeps you posted on the time and quantity for ordering products along with the most effective supply source for every item in the warehouse. This ensures that the right quantity of the right product is available at the right location at the right time.
To sum up, you need to improve your inventory control to reach inventory management nirvana.
To get on well with controlling inventory, you should start with setting minimum viable inventory levels. The goal is to have just enough stock to meet demand and avoid delays. To establish the number of minimum viable stocks, a thorough understanding of the demand and the amount of time it takes to replenish the stock with the wholesaler or manufacturer, is needed. This number is bound to change over time as the company grows and orders increase.
Importance of Inventory Control
Efficient Inventory control reduces the inventory investment costs and handling cost while keeping the customer satisfaction levels unharmed. Inventory control largely contributes to business growth, it-
- Ensures the smooth flow of raw material and assists in continuing production operations.
- Minimize administrative workload, human resource requirements, and labor cost.
- Prevents output fluctuations:
- Helps in making effective use of working capital by avoiding overstocking.
- Facilitates cost accounting activities
- Avoids duplication in the ordering of stock.
- Prevents a company from fluctuations in the demands of its products.
Technology may be progressing, but it always has the scope to result in errors. Auditing inventory, as old school as it sounds, is the key to controlling inventory and ensuring that your data is accurate and reliable. There are 3 ways to do this:
- Physical Inventory Audit: As the name suggests, this is the practice of physically checking all your inventory in the warehouse. It may sound tedious, but doing this once a year helps organizations to ascertain their inventory data, detect errors in the system, and rectify them. It is a great practice that helps build confidence in the inventory management system and the team.
- Spot Checks: While Physical Inventory Audit is time-consuming and tedious, the process can be broken down by using the Spot Check Method. It means to take a particular product and count the stock and cross-verify it with the numbers on the file. This way, the accuracy of the system can be kept in check throughout the year without disrupting business.
- Cycle Counting: Another efficient alternative to Physical Inventory Audit is Cycle Counting where the process of inventory audit is spread out throughout the year and is performed on a daily, monthly, or weekly basis. A different product is checked on a rotating schedule to ensure that the management system’s data is accurate. Higher value products need to be checked more often than others as their loss can pose a larger risk to the business.
Source: Bastain Solutions
It is very common for organizations to have their own high and low seasons for business but it is important to put in the effort to make the most of the high season by being prepared for it. Leverage past sales data to identify the high season and brace for it.
It is advisable to keep inventory low during the low season but not wait too long to ramp up supplies before high season. If the organization has the potential to make a lot of sales during the holidays, or summer, it could be effective to promote the products and try to sell as much of it as possible so that there is not much deadstock.
Keeping operation costs as low as possible during the year is the goal and that is why organizations must use the low seasons to get the resources like partners, warehouses, tools, etc. that they need, in order.
Inventory Control Methods
Economic Order Quantity (EOQ)
The EOQ model is set on the foundation that product demand is constant over a period of time, and that products are sold at a fixed rate.
For efficient inventory control, it is important to have a balance between inventory holding cost and inventory replenishment. The EOQ model helps you identify the optimal order quantity that minimizes the total cost incurred holding inventory and replenishing it.
With the timely executed strategic planning, you can better organize stock and improve efficiency.
The process includes -
- Labelling stock so that your team can easily identify SKUs
- Keeping a track of initial stock take
- Using inventory management techniques to track stock movements
Another important part of inventory control is monitoring product quality. For efficient quality control, initially order sample orders from multiple suppliers and assess product quality. Based on your evaluation, you can develop a long-term relationship with suppliers that match your quality requirements.
Another important thing to consider for consistent quality control is regularly monitoring stock supplied.
Inventory Forecasting: What is it, importance, methods
Inventory Management is fully reliant on-demand predictions. The organization cannot know how much inventory to have in place until it knows how much sales to expect in the future. It is nearly impossible to make a 100% accurate forecast but it is necessary to have a close figure and this is where it can get complicated.
A good place to start the forecasting process is by looking at past sales, identifying where sales were high, and preparing inventory for the same. It is as important to look into the future as it is to look at the past. Keeping an eye out for opportunities and converting them into sales is imperative.
Inventory forecasting, in general, involves the following practices:
Source: Oracle Netsuite
Importance of Inventory Forecasting
- Cut down on inventory holding costs: One of the major benefits of inventory forecasting is that it helps with inventory storage management. It ensures that you always have the optimal stock level available at your warehouse. This eliminates the need of over-stocking, and in turn reduces inventory holding costs.
- Minimize Stockouts: Stockouts imply a loss in sales revenues. With an effective inventory forecasting system in practice, you can better predict future sales and timely purchase required inventory to avoid stockouts.
- Minimize product waste: Another major advantage of inventory forecasting is easy identification of products that have low demand or zero demand. Based on this information, you can repurpose your distribution strategy. Low selling products can be bundled with products in high-demand and sold as a combo. This helps you remove idle stock from your warehouse, and stock more high-demanding products in the free up space.
Inventory Forecasting formula:
While forecasting inventory, you need to factor in many data points like sales history, trends, demand, reorder point, average lead time, safety stock etc.
Here’s a step by step process for using the inventory forecasting formula:
Measuring lead time demand
Put simply, lead time is the time taken by vendors to fulfill your order. Predicting lead time demand helps you avoid stockout while your purchase order is fulfilled.
Here, average lead time is the time taken by vendors to fulfill Purchase Orders.
Average daily sales can be calculated from historic sales data.
Analyzing sales trends
Monitoring sales trends helps you stay updated with the latest customer preferences, buying patterns and helps you easily adapt to the changing market conditions. Broadly speaking there are two types of sales trends:
- Micro trends: Analyzing specific products for a short time duration
- Macro trends: Analyzing a wide variety of products for a longer duration
Fixing the reorder point
A reorder point (ROP) defines the specific level at which you need to replenish your stock. Simply put, it determines when to place an order before you run out of a product. During forecasting, a static ROP will be of no help. The value of ROP should be variable based on forecasted sales trends and it should be constantly adjusted during every sale season.
As the name suggests, safety stock is the surplus quantity of products kept at your warehouse to prevent stockout situations. This, in turn, helps you fulfill customer demands on time (increasing sales revenue) and avoids incurring extra shipping cost in expediting order delivery by vendor.
However, it is important to note that excess safety stock also leads to higher holding costs. To avoid this, you should calculate the quantity of safety stock required at your warehouses.
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Inventory Management -Key Formuale[/caption]
Inventory forecasting methods
All forecasting models draw information from the wavering trends in consumer demands. The more accurate your model is, the more profit margins you will be able to push.
Now that you know the importance of inventory forecasting, let us understand the common inventory forecasting methods.
Using this method, inventory forecasts are made based on past sales and market growth. Trend forecasting helps you easily identify what products are in demand (or are not in demand) based on which you calculate the stock required to fulfill customer demand.
This method is usually practiced when relevant historical data is not available. Demand is forecasted based on qualitative measures like market research, personal insticints, customer or sales feedback, etc.
This method is also useful for new business since they do not have past data to rely on, and by established businesses if they are introducing a new product line.
Using this method, product demand is predicted based on historical sales data. Based on the duration for which you are planning, you can forecast based on your past sales for a month, a quarter, year and so on.
Past sales data is presented in a graphical form for easy analysis of sales trends, in turn, improving inventory forecasting accuracy.
Forecasting inventory plays a major role in dictating the future of your business, especially around the peak sale seasons. Hence, it is advised to use a proper system for getting up to speed with the process. With EasyEcom, you can overcome the roadblocks involved with calculating the sales and planning inventory with ease. For accurate forecasting, the system can be configured to calculate the previous month or season’s sale and based on the data retrieved, the next batch of inventory can be estimated.
In order to plan the inventory for the upcoming month based on the last month’s sale, you need to provide the number of days you want to plan the inventory for along with the range of days you want the inventory planning to be done based on.
To be specific with a particular product or vendor, you can further apply a filter based on the brand name, SKU, or vendor name. The system will then provide you with the recommended quantities for the inventory, based on the previous month’s average daily sale. The suggested quantity also calculates the time taken by the vendor to deliver the products. Similarly, the system also provides you with the recommended quantities to plan on the upcoming festive season , based on the sales made during the same time last year.
For any organization, business is affected by multiple factors, both external and internal. Market trends play just as much of a role in predicting the sales of a given product as much as the marketing efforts of the organization do. In fact, even day-to-day activities fluctuate the sales of an e-commerce business. Product advertising, promotions, and discounts or even listing a product on the homepage can boost sales.
In all of this, the most important thing is coordination between the inventory management team and the marketing/advertising team. It’s logical, advertising products push their sales but they also have to bear in mind the stock levels and turnover ratio. This is where inventory can be truly optimized.
There are several tools available in the market to help companies forecast their demand to generate a near-accurate result. Yet, most companies prefer to use a mix of automated tools, instincts, and traditional techniques to forecast demand.