Module Three

Inventory Management

In our previous chapters, we encountered major aspects such as product selection and sourcing. We discussed various things that play a crucial role when it comes to product management. 

 

So, now it is time for us to move to the next stage of building our eCommerce business, i.e., inventory management. Are you aware of the fact that about 43% of small businesses never manage their inventory and keep track of it? 

 

Is this a concern? Well yes. Sourcing products and selling them on your platform is one thing. However, maintaining a regular inventory and keeping it running is another. Moreover, it plays a crucial role when it comes to the smooth operations of your business. 

In this chapter, we are going to learn in detail about inventory management. We are going to understand what inventory management is, what are different types of management systems, and much more.

 

So, by the end of this chapter, we are going to learn in detail about:

• What is inventory management?
• What are inventory management systems?
• How does inventory management work for different product types?
• What are stock control techniques?
• What are demand forecasting and reorder strategies?

 

Let us start our discussion and understand every aspect of inventory management in detail. It will eventually help you grow and boost your eCommerce business. 

 

What is Inventory Management? 

Let us get an understanding of inventory management with an example. Imagine you are running an online store. Earlier, it was a major challenge for you to get orders and reach the audience. However, now you start receiving and getting orders on your website.

 

But wait! Suddenly, you are out of stock on most of the products. How did this happen? What can be the primary reason behind this? Well, it is poor or no inventory management. 

 

Inventory management is the complete process of ordering, storing, utilizing, and selling a company’s inventory. In simple terms, inventory management includes overseeing and controlling the ordering, storage, and use of a company’s inventory. 

 

Inventory management is a crucial aspect of an eCommerce business as it helps in the maintenance of the right balance of stocks, cost reduction, and ensuring that the customer receives products as and when they demand them. 

 

Let us understand this by a simple example where you are the customer. You saw an advertisement for a product online and liked it. But as soon as you proceed to order it, you see that the product has run out of stock. Won’t you feel annoyed? You will, right?

 

In addition to this, you also will not have positive feedback about that particular eCommerce platform. Isn’t it? 

 

So, to avoid any such circumstances, inventory management is done. The primary goals of inventory management are minimizing costs that are related to excess inventory and also ensuring that the customers are always satisfied and do not face stockouts. 

 

Do you know, stats say that one of the primary reasons for startups to fail is that they do not manage their inventory? So, let us manage yours. 

 

Inventory Management Systems

Inventory management systems refer to the systems and processes that aid a company or an organization in keeping track of the stock requirement. With this, an organization will understand and identify which stock and how much stock it has to order and at what time exactly. 

 

Moreover, these practices identify and respond to trends and consumer patterns in a manner that there is always enough stock available to ensure customer order fulfillment. So, for the smooth operation of an eCommerce business, an inventory management system works wonders.   

 

Do you know that there are three different types of inventory management systems from which you can choose? Yes. You can identify and select the system that according to you would work well for your business. These three types are:

Manual Inventory Management Systems

Imagine how inventory management would be when there was no technology or automation to carry out this task. It was all manual. Isn’t it? From counting the items to manually making the entry into the spreadsheet. 

 

Every task in the manual inventory management system needs human intervention. Moreover, in manual management systems, the chances of error are relatively higher. However, for small eCommerce businesses and businesses looking for a cheaper solution, this inventory management system is good.

Periodic Inventory Management Systems

Periodic inventory management systems, as the name suggests, are where the counts are conducted only at specific intervals. For example, they would only be conducted monthly, quarterly, or even sometimes annually. It depends on the organization’s requirements. 

 

So, here we can see that the business will not keep regular track of the inventory but only at certain durations or intervals. This system is easily manageable but mostly leads to inaccuracies that are because of infrequent updates. 

Perpetual Inventory Management Systems

Talking about the perpetual inventory management system, here we see continuous updates in the inventory record. For example, be it a single transaction, sale, purchase, or even return.

 

We receive real-time data on inventory levels with these systems as they are supported by automated software. Hence, when it comes to accuracy and efficiency, a periodic inventory management system is better. However, they can be expensive to implement and maintain and thus are suggested for large businesses. 

 

How Does Inventory Management Work For Different Product Types?

 

Now, we come to an essential aspect of inventory management. Have you ever thought that the inventory management of every product, depending on its type should be different? Right? So, let us proceed and understand how inventory management works for different product types. 

Perishable Products

The first class of products that we are going to talk about are perishable products. We know that the shelf life of perishable products is not much. So, we need to keep and manage them accordingly. The list of these items includes food, flowers, etc., that spoil very quickly. Hence, it is essential to store them in controlled environments where you can control the surroundings. Moreover, sell them as soon as possible and keep monitoring their expiry dates. 

Non-Perishable Products

The inventory management system for non-perishable products will be pretty different as compared to the above perishable category. Here, we can include products such as canned goods, clothing, and electronics. As these products do not spoil easily, they have a higher shelf life and can be stored for longer periods. Furthermore, you must regularly perform stock checks and organize storage to ensure that these items are in safe condition. 

Seasonal Products

As the name suggests, seasonal products are only in demand for a limited period of the year. For example, this category of products is going to include products such as holiday decorations or seasonal clothing. 

 

One thing that has to be considered about inventory management of these products is that they require careful planning. For example, you need to be aware of the timing of stock levels of these products. Why? Let’s suppose there is an occasion coming up ahead. So, you have to manage your inventory in a manner that these products are available when you need them. Also, when not in use, they should not be taking up your space. 

Fragile Products

Handling fragile products and managing inventory for the same is the most challenging task that one has to deal with. When we talk about fragile items, these include items such as glassware or electronics, which can easily break. 

 

It is important to understand that these items need special packaging and careful handling when it comes to storage and shipping. In addition, you should perform regular checks for any damage as it is crucial for maintaining the quality of the product.

Bulk Products

If you are in an e-commerce business where you need to manage bulk products, then you have to keep these aspects in consideration. First, when talking about bulk products, we have large quantities of items. It can be items like grains or other raw materials. 

 

Now, one primary aspect of the inventory management of these products is that they often need some special storage conditions and equipment when it comes to handling. In addition, you have to be considerate about tracking inventory levels with accuracy to avoid issues like overstocking or running out. 

Customizable Products

Other than this, we also have customizable products. For example, you are selling items li

ke personalized gifts or custom-built computers. So, here you need additional components or other modifications before you are going to ship the product. 

 

Thus, managing both the base item and other elements used for customization is important when it comes to these items. 

Other than this, the products can also be categorized as fast-moving, slow-moving, or seasonal. Each of these products requires specific inventory strategies. Be it shelf life, demand variability, or storage requirements.

 

What are Stock Control Techniques?

 

Do you know that about 34% of businesses struggle in their operations due to unavailable products and delayed shipments? And we all know the fact that even the slightest disruption in operations can cause a significant issue for your business. 

 

So, to ensure such problems do not arise in your business, stock control techniques play a significant role. Let us explore more about them. 

 

By definition, stock control refers to the management of stocks in the inventory of a company to the ideal levels within the maximum and minimum capacity of the inventory. The main aim of stock control is to ensure that there are enough products available to meet customer’s demands while keeping inventory management costs to a minimum. 

 

So, some different methods or approaches are used for stock control. These techniques are known as stock control techniques. What are these techniques? Let us understand each one by one:

Just-in-Time Stock Control Technique

In the just-in-time stock control technique, the major intention is to maintain only the minimum stock level for each of the products you are selling. In this strategy, the inventory is received only as required. Here, managing the overall costs 

 

By minimizing how much stock you carry in the warehouse at any one time, you’re able to mitigate the risks and costs of holding too much inventory. However, you would be required to make a precise estimate of the demand for each of the products. 

Just-in-Case Stock Control Technique 

The just-in-case stock control technique works as a phenomenal protector against stockouts. What happens here is that there is always an extra amount of stock items that are always kept as a buffer for each type of unit. So, be it a supply chain issue or any other inventory disruption, your operations will work smoothly. 

 

One of the biggest advantages of this strategy is that it improves overall customer experience. There is hardly any chance that your customers are going to face an issue of stockouts. However, you should ensure that you do not spend too much of your capital in managing excess inventory. 

First-In, First-Out (FIFO)

The FIFO stock control technique is one of the most effective strategies to manage perishable stocks. In this method, the oldest stock is sold first and the new one later. It prevents perishable goods from spoilage. 

 

An alternative to this is the LIFO method which refers to the Last-in, First-out approach and is a complete opposite to this.  

Economic Order Quantity (EOQ)

In this stock control technique, you will need to calculate the optimal order quantity. Once calculated, it is obvious that the total inventory costs would be minimized to only the required amount. Here, the total ordering and handling costs are also reduced. 

 

What is the formula for calculating EOQ? Well, the formula is: EOQ = √(2DK/H)

Here, 

• D stands for the annual demand for the product, i.e., the number of products purchased per year of a single type. 
• K stands for the total order cost per order
• H stands for the annual holding cost per unit

ABC Analysis

ABC analysis is a type of stock control technique where we categorize the inventory depending on various aspects such as value and frequency of use. Therefore, it helps in prioritizing management efforts, ultimately, saving time and costs. 

 

Other than these techniques, there are other strategies too such as vendor management inventory and batch control. In the first scenario, the role of managing the inventory is with the supplier such that the required number of stock items is always available with the company. While with batch control, the stocks are managed as per different batch numbers, sizes, or codes attached to them. 

 

Demand Forecasting and Reorder Strategies

Now, there is one crucial aspect that one has to keep in consideration. How are you going to find out about the demand for the product? Moreover, when are you going to know that it is the right time to reorder a stock? 

Methods of Demand Forecasting

Now, one of the most important aspects of inventory management is to forecast the demand for the products. Why is it important? Well, the importance of demand forecasting is as we discussed to ensure that there are enough products in the stock to avoid any operational disruption. 

 

How can it be done? Well, there are two simple methods that you can consider here. The first is asking experts. You should have experts in your team who can predict the demand as per their understanding and as per the analysis of the trend. The other aspect is considering the historical data to predict the future demand for the product. 

Reorder Point (ROP) Calculation

Another prominent aspect you cannot overlook is the Reorder Point (ROP) calculation. With this, you will be able to determine the optimal time that you should be following to reorder stocks based on lead time and demand. This helps you prevent stockouts and always provides smooth operations for your eCommerce business. 

Safety Stock

We all are aware of this instance at our homes. Be it groceries, batteries, or any other daily use thing. There is always a reserve stock kept at our places to ensure that the particular thing never runs out. Right? 

 

The same is the aspect that we are considering here. In safety stock, an extra inventory is maintained to eliminate the risk of stockouts. You never know when in your eCommerce business you are going to face a lot of demand. Especially we face a huge demand during sales and festive seasons. So, during such a time, safety stock works well to mitigate any risk of stockouts or supply chain disruptions. 

 

Inventory management has the potential to either make or break your eCommerce business. So, make sure that you are always ready for any demand surge. However, you should also ensure that you keep an optimal level of inventory to make sure that the inventory management cost is minimal. 

Image Source: Unsplash.

Crucial Takeaways From This Chapter

• Essential for maintaining the right stock levels, cost reduction, and ensuring customer satisfaction by preventing stockouts.
• Choose from manual, periodic, or perpetual systems based on your business needs and scale.
• Different inventory strategies are needed for perishable, non-perishable, seasonal, fragile, bulk, and customizable products.
• Methods like Just-in-Time, Just-in-Case, FIFO, and EOQ help balance inventory levels and minimize costs.
• Use expert insights, historical data, and safety stock to forecast demand and determine optimal reorder points accurately.