Updated on November 19, 2024 by 
Sure, one of the leading expenses for ecommerce companies is the products they box up and ship. But have you considered the price you pay for of all the products not going into boxes?
Inefficient inventory management – weak spots in ordering, storing, processing and selling goods (including materials and packaging) – costs global companies nearly $1.8 trillion a year in overstocks and understocks, according to a study by IHL Group.
These expenses can be traced to inventory management red flags that include:
- A lack of automation, forcing you to rely on manual processing.
- Inventory management systems that do not provide real-time inventory data.
- Poor communication between the inventory department and other business areas.
The net result is inaccurate inventory forecasting that, to the consumer, means an unreliable merchant.
Inventory Management Solutions to Fuel Billion-Dollar Growth
Well-organized ecommerce inventory management provides the intelligence for a company to more closely forecast demand. It does this in part by streamlining product and material lists for better inventory tracking.
Such efficiency can have an outsized effect on operations by empowering a company to more correctly determine how much product to purchase. This in turn limits overstock and understocks, meaning more consistent, profitable pricing.
5 Inventory Management Solutions that Deliver Profit
If you’re an e-commerce company struggling with inventory management, overstocks, outsource fulfillment snags and/or the high cost of operating an Amazon storefront, these five approaches should equip you to master your company’s inventory process.
Consider them the key elements of effective inventory management.
Keys to Preventing Overstock
A company’s overstocks often end up being destroyed or sold at margin-eating prices, costing U.S. retailers an estimated $123 billion a year. Determining your optimal inventory level and exploring effective inventory management solutions is worth the investment.
Achieving that sweet spot takes disciplined data analysis. For the most productive insights, we recommend these two actions:
Implement demand-forecasting techniques – These include historic sales date (quantitative forecasting), market dynamics and seasonal fluctuations to estimate demand. Trend forecasting, in which the company projects potential patterns based on past sales data, can be graphed to illustrate peaks and valleys. If you do not have reliable historical data, you can conduct market research through focus groups (qualitative research).
Establish your ideal inventory turnover ratio – This figure presents how often a company sells and replenishes its stock in a set period of time. Calculated by dividing the cost of goods sold by the average value of your inventory, an optimal inventory turnover ratio often falls between one and two months (more frequently for perishables).
Keys to Avoiding Stockouts
So you’re all set up to anticipate demand fluctuations, thanks to the above demand forecasting methods. But here’s the thing: Irregularities in demand still occur.
Enter the safety stock. This inventory reserve can keep your company afloat when demand exceeds expectations. To determine how much is enough, balance the cost of overstocks against the risks of stock-outs. Here’s a formula: (maximum daily sales) X (maximum lead time) – (average daily sales) X (average lead time).
To further ensure your inventory and safety stock levels meet demand, you can implement a real-time tracking system. These software programs automatically record the details of all sales and purchases, reducing the risk of error. Real-time inventory management data is especially essential for ecommerce inventory management, as it requires continuous monitoring to avoid stockouts and overstocks.
This real-time data is especially essential for Amazon inventory management, which requires continuous monitoring due to its global scale.
3 Key Inventory Management Strategies for Efficiency
Once you’ve covered the fundamental risks of overstocks and out-of-stocks, you can widen the umbrella to include these day-to-day inventory management strategies:
Just-in-time inventory management – A tried-and-true ROI-improving technique in which you work closely with your suppliers so your inventory arrives at the moment it’s needed, minimizing waste.
Automated inventory management software – These programs are specialized for ecommerce companies to manage inventory levels, sales and fulfillment across multiple channels, including Amazon storefronts, social media platforms and your own website.
Optimized warehouse layout – Here, you turn stock-placement problems into opportunities by evaluating your warehouse layout, then reconfiguring the floor plan to maximize space and speed-up the order-picking process.
3 Key Inventory Techniques for Optimization
If you have the resources or access to a good third-party provider, we suggest the following additional techniques:
ABC analysis – Prioritize you inventory by classifying it into three categories – A, B and C – with A being the highest value (typically 20% of your inventory but about 80% of your revenue), and C being the least valued (50% of inventory and 5% of revenue).
The economic order quantity (EOQ) model – A calculation that suggests the ideal number of stock units to meet demand while keeping inventory costs at a minimum (see the formula here). This formula works best for companies with consistent demand over a period of time.
Seasonality forecasting – This model makes sense for e-businesses susceptible to seasonal fluctuations, including Amazon storefronts. It forecasts demand based on historical data then factors in current purchase patterns to detect anomalies. If your company lacks historical data, focus groups and consumer surveys can guide you.
Keys to Mitigating Risks and Challenges
With each of the above inventory management strategies, practice preparedness. Expect variability in supplier lead times. Build product expiration and obsolescence into your stock optimization models, and have systems in place to address supply chain disruptions and delays. A third-party expert can help.
Be Your Inventory’s Master; Don’t let It Master You
These inventory management solutions offer both preventive and strategic advantages. Your company’s inventory structure could be rock solid today, yet be vulnerable to pending issues you’ve not even considered.
The bottom line? By mastering your inventory management strategies, your company can help address a $1.8 trillion global problem. That’s something to take stock in.
Interested in learning how Harte Hanks can help you? Visit our ecommerce fulfillment website here.
