Inventory management is one of the most underrated but important pieces of e-commerce business. At one end, you need to minimise the cost of carrying inventory meaning that you keep inventory in just the right amount for sale. At the other end, you also need to avoid stockout and backorders as these will result in loss sales and kill the customer traffic for the future as continuous availability is one of the most important facets of ecommerce.

When you think about inventory, you need to keep in mind two related concepts – credit period and cash flow. Credit period is the amount of time the supplier has given you to make the payment for the stock you have bought from him. Whereas cash flow is the movement of cash – inflow or outflow from the business.

Let’s understand this with an example.

Assume you have 30 days credit from the supplier. The material you have taken from the supplier can be sold in 10 days. This means you will order again and sell out the next batch in the next 10 days. So effectively every 30 days you can sell out 3 batches of product but have to pay for one batch only. This means you are not using working capital and the supplier is funding your working capital. This releases money for other activities that can scale business.

In another example, the supplier again provides you with 30 days of credit. But the material you have sourced from him can only be sold in 60 days. This means that you will need to make the payment to your supplier even though you have not sold all the products. You will have 30 days of stock with you when you make the payment to the supplier. You can calibrate your subsequent order with your supplier to reduce your working capital requirement. Sometimes, it is difficult to reduce your working capital because of Minimum Order Quantity, variety of options you need to keep, etc.

Inventory Availability – a key sales enabler

While new products and features provide us with a competitive edge in the market, availability also plays an important role in driving up sales rank. Higher the sales rank, better the growth prospects of the product. So consistent availability is a competitive advantage.

Strong inventory planning based on demand forecasting helps in maintaining optimum inventory. However, if you are not able to maintain optimum inventory, you need to place emergency orders to ensure that it does not impact sales rank. Emergency ordering is costlier and also comes with higher logistics costs. Keeping optimum inventory can help us avoid such costs.

To avoid emergency ordering, you should order periodically based on current sales trends, seasonality, and other factors affecting demand. It will help improve supplier relationships and help build favourable terms. Further suppliers will also support you over one-off emergency orders.

 Risks in Inventory Management

The risk of inventory obsolescence. Some products have life cycles varying from 3-6 months to 1-2 years. Post these life cycles either trend changes or new technology products are introduced. This reduces customer interest in the existing products. As the interest reduces so does the sell-out rate as the inventory becomes obsolete and the working capital is locked. We need to be aware of this risk before making stocking decisions.

Inventory Classification and Segmentation

As you grow business, you realise all inventory isn’t the same. Some sell slowly but steadily while others fly off the shelf even before you park it. You must therefore segment inventory according to the traits.

Pareto principle, while universal, works well with inventory. In case of inventory and sales, ~80% of sales comes from ~20% of products. We need to identify these 20% of the products and need to ensure that they stay in stock all the time. However, products in the 20% cohort change with time and therefore you need to observe these changes to change the mix of 20% high selling products.

One of my favourite methods is to classify the inventory based on ABC analysis of inventory or sales rate. ‘A’ category has a higher sales rate and share of sales through a small portion of the SKUs. ‘B’ category has a lower sales rate as compared to ‘A’, a smaller share of sales through a larger pool of SKUs than category ‘A’. Finally the rest of the SKUs form part of category ‘C’. Majority of the SKUs, low share of sale and low sales rate characterise Category ‘C’.

For Category ‘A’, you should plan for higher inventory cover than B & C. For Category ‘C’, you can have a few days of cover. This way, you can limit the inventory requirement across the products and work within the working capital constraints.

When a supply disruption happens, having the larger cover of the A category will benefit. This will reduce the revenue opportunity loss. Also in case, prices of products go up at the supplier end, you can increase prices as per the market. Since you have been holding lower-cost inventory, this will help increase profitability.

Apart from inventory cover, you also need to have inventory sorting and storage policies in line with the category. Category A should always be nearest to the despatch bay and at eye level to ensure fast processing and closure.

As products move between categories you will need to set up a weekly tracking system. Weekly the selling of products will help you keep inventory in check. The longer the audit cycle, the higher the chances of higher-than-planned inventory. You also need to factor seasonality of product demand. If the product picks up near a specific time, you need to stock up for the time and have a discounting plan to sell out the remaining inventory.

Real-Time Inventory Tracking Systems

You should be looking at automating inventory as one of the first pieces of automation that you should enable. One of the largest benefits of automating and digitising the inventory is trackability. This will enable you to raise disputes in case of short receipt. Further you can also track the ingress and exit of inventory by channel. The biggest benefit is it removes manual data entry errors. This will also enable you to track the inventory across the supply chain.

Digitising the inventory also makes it ready for interventions. You can use the data to build a dashboard and quickly recognize stockout and overstock situations. This gives you the intelligence to take prompt actions and reduce the risks.  Having a digitised inventory system can also enable you to get real time notifications of instances. This helps you speed up the inputs to address the situations. Further it also improves your accuracy of demand forecasting.

Tracking the ordering system into the inventory system will integrate the chain. This helps you to build in the supplier lead time into the ordering system itself. The projection system can generate orders factoring in days of cover and the average lead time of the supplier.

Integrating the inventory system with the ecommerce dashboard can automate inventory updates across ecommerce channels. You can use solutions such as Unicommerce or Browntape to update the inventory based on sales on a real-time basis.

Demand Forecasting for Inventory Optimization

In e-commerce, the ability to forecast accurately is a strategic advantageous skill. As sellers, you need to be skilled at predicting demand, planning inventory, and optimising operations. Data-driven decision-making and mastery in forecasting are key to growth.

Quantitative forecasting methods are important for e-commerce forecasting. Leveraging techniques like time series analysis, you can harness historical sales data. This method, rooted in numbers and patterns, provides a solid foundation for your forecasting efforts. It’s all about letting data be your guide. Combining these with qualitative decision variables can bring the human element into projections. There are nuances of marketplace and competitor intelligence that cannot be captured by data. Combining these makes our projection path stronger. Building a holistic model with historical quantitative data and combining human insights is critical.

You should always use a rolling forecasting model for e-commerce given the high rate of change. This model changes with dynamic data and generates a rolling forecast. It’s a method to steer the inventory in the right direction while facing headwinds such as competitor and demand variability.

Analysing data can also help feed inputs into the demand model. Estimating product lifecycle and demand patterns can help make the model even better. Seasonality adjustments can help fine-tune the model to react to demand spikes. The model should also factor in inventory unsold through the season. The cost of carry vs. the cost of liquidation is something that the model needs to build in.

You need to build models in collaboration with a broader supply chain. Integrating data from suppliers and partners can give you visibility into the variability of supplies. This helps you plan stocking based on the variability.

E-commerce market trends, holidays, and festive seasons as per religious calendars impact ecommerce sales. Understanding how these impact forecasts is critical. Market trends shape demand, and holidays can send it soaring or plummeting. Incorporating these external factors into your forecasting model is essential.

Efficient Order Fulfilment

You also need to design an order-picking layout based on product type and volume. Designing an order-picking layout for smaller items can be done with a much less complex method than for larger and heavier items. The items should be reachable based on their daily order volume to reduce the travel within the warehouse.

You need to factor in space constraints to design the layout. You need to maximise efficiency for smaller warehousing space. The layout also impacts labour costs. Lesser lifting and walking will lead to lower labour needs. Depending upon the volume of orders to be picked per day, you will need to plan the picking system or methodology – it could be batch picking or zone picking or wave picking. Further you could deploy technology such as barcode scanners, automated guided vehicles, etc. which also could have an impact on the layout.

Reducing the walk time of labour can help reduce costs to a large extent. A warehouse management system can help track inventory and optimise picking routes. A pick and pack system can help pack in a single location reducing movement time. Barcode scanners can help locate the nearest items and reduce movement by making picking quick. Zoning warehouses as per category can help organise items and reduce the distance travelled.

You can also use a staging area for temporary holding for ready-to-ship orders. This reduces the to and fro between shipping and packing areas.

Reducing order processing through automation also reduces workloads. Order entry, shipping label creation, and payment can be automated through systems. Centralised OMS solutions help ease this issue. Multi-channel order management systems like those from Unicommerce or Browntape also help. Best are cloud-based order management systems as these are integrated and can be accessed by employees working remotely. While selecting OMS also focus on the mobile-friendliness of the solution.

Quality Control at the time of Shipping

Quality control checks before shipping are an integral part of inventory management. The product specifications including size, weight, colour, and material should match the product. The expiry date should be at least one month away. Packaging check should check for labelling with correct details. Also look for dents, scratches, or missing parts. Double check the quantity especially if shipping multiple items.

In the case of high-value items, we can also ensure third-party inspections. Document the quality control checks and results. This helps track the QC process and improve. You should also train specific staff on quality control with clear responsibility.

You should also minimise order errors. You should double-check customer information, product information, and shipping address before despatch. Shipping software can work as a check and alert us of probable errors. You should have a clear process for rectifying order errors.

While with excess inventory, you run the risk of obsolescence or dead stock, with stock out situations, you risk loss of sale to buyers looking to purchase in the present and loss of sale in the long run to falling sales rank. You can optimise the inventory for your business by treating different products on its merit and not on a set formula. From investing in digitising the inventory for real time tracking to building inventory forecasting models can help further optimise inventory. Further efficient order fulfilment process along with six sigma quality checks at the time of shipment can reduce errors during fulfilment and improve the performance of inventory. By focussing on some of the concepts enumerated above, sellers can vastly improve their inventory management and thus add to the profitability to their businesses.