Inventory Management in Ecommerce: How It Saves Money

What is inventory management?

Inventory management is the process of planning, organizing, and controlling the flow of inventory (products) from the manufacturer and supplier to the retailer and, eventually, the customer. It involves the following activities.

• Demand forecasting: Predicting how much inventory you’ll need in the future.
• Order planning: Determining when to order and how much.
• Warehousing: Storing inventory in a way that’s efficient and secure.
• Inventory tracking: Keeping track of the quantity and location of inventory.
• Inventory control: Ensuring that inventory levels are neither too high nor too low.

For ecommerce retailers, effective inventory management means having the right amount of stock on hand at the right time to meet customer demand. However, finding this balance can be trickier than you might expect.

Poor inventory management can be an expensive problem for an ecommerce business. Overstocking and understocking are both liabilities in the retail industry.

Bad decisions around inventory planning in retail led to $300 billion in lost revenue due to markdowns, and out-of-stock orders caused $634.1 billion in annual losses for retailers.

How to manage inventory effectively

Managing ecommerce inventory requires the right inventory management technique, plus the right tools or software that automate the repetitive and error-prone aspects of this key operation.

As you explore different solutions, you may want to start by learning what is an inventory management system. An inventory management system is a software application that helps businesses efficiently manage inventory across multiple locations, uniting workflows under one dashboard.

Typically, an inventory management system includes capabilities such as inventory tracking, demand forecasting and other business analytics, order placement, cost management, and reporting. There is a wide range of providers available, and finding the right fit for your ecommerce business takes research.

Read online reviews to see what other businesses think of an inventory management solution. Industry publications can also provide rankings of various vendors and their features.

Look for a solution that integrates with your existing software. For instance, Webgility uses accounting automation to sync store, marketplace, and order data (including inventory quantities and prices) with QuickBooks automatically to significantly improves your accounting and financial tracking.

4 inventory management techniques

There are four main approaches to effective inventory management. Most small businesses and large enterprises follow one of these techniques — often enabled with inventory management software. 

1. Just-in-time (JIT) inventory

This method involves ordering inventory only when you need it, so you don't have much inventory on hand. This approach can save ecommerce merchants money on carrying costs, but it can also lead to stockouts if you don't forecast demand accurately. About 6% of sellers in a Webgility survey said they use this method.

2. Materials requirement planning (MRP)

Similar to JIT, MRP aims to optimize inventory management and reduce waste. However, while JIT focuses on minimizing excess inventory through real-time demand, MRP plans materials based on production schedules and sales forecasts.  

3. Economic order quantity (EOQ)

This inventory management method calculates the optimal order quantity for a product based on the cost of carrying inventory and the cost of placing an order. This approach can help businesses to save money on inventory costs. It’s best applied in situations where demand, ordering, and holding costs remain constant over time. 6.75% of online sellers use this method.

4. Days sales of inventory (DSI)

This method measures the number of days of inventory on hand, which can be used to assess inventory levels. A high DSI indicates that there is too much inventory on hand, while a low DSI indicates that there may be stockouts.

All of these ecommerce inventory management techniques offer ways to run your operations more efficiently and cost-effectively — leading to significant business benefits.

Around 12.75% of online sellers who manage their inventory in-house prefer the ABC analysis method in which they identify and rank items according to demand, cost and risk, and other factors.

4 benefits of effective inventory management

1. Ecommerce inventory management prevents overstocking and overselling

Overstocking and overselling are some of the most harmful consequences of a lack of inventory management in ecommerce. But with accurate inventory data, you can maintain stable business operations.

In fact, 37% of online sellers who manage inventory in-house say stocking issues — overselling items, restocking popular items, overstocking, and supply chain issues — are their biggest inventory challenge.

Meanwhile, the majority of sellers who use a specific technique to manage their inventory are only “moderately” confident in that technique, according to new inventory management statistics from Webgility.

Overstocking happens when you purchase more of a certain item than you sell. Overselling occurs when you say you have more items in stock than you do and allow customers to buy them anyway. Both are the result of inaccurate ecommerce inventory management and forecasting.

Too much inventory can result in a pileup of unsold products (also known as “surplus” or “dead stock"). Overstocking can take a huge chunk out of your bottom line, especially if surplus items expire. It can also significantly increase storage costs and the total amount of cash you have tied up in the investment.

On the other hand, having too little inventory and completing sales anyway can significantly affect customer experiences. The result could be increases in refunds, canceled orders, poor reviews, customer disputes, chargebacks, and bank fees if you fail to deliver the items you claimed to have.

An inventory management system for ecommerce can decrease the likelihood of those events. A hallmark of ecommerce automation software, the right system can give businesses better inventory control and more accurate stock data. And if the system can update stock across stores and platforms, you can save money on the consequences of having or selling too much.

2. Ecommerce inventory management supports better customer experiences

Customer satisfaction plays a significant role in the success of every ecommerce business. Merchants and business owners need to ensure customers have the best online shopping experiences to gain their loyalty and raise their upsell or cross-sell potential.

Businesses that can increase customer retention can gain a significant competitive advantage. Moreover, converting and keeping customers is much easier when an ecommerce merchant has an inventory management system in place.

With the right inventory management system, ecommerce retailers can ensure that stock is available to meet customer demand. This prevents backorders, waitlists, delays in order fulfillment, and delivery issues. Overall, accurate product listings can help build customer trust, retention, and, inevitably, more sustainable profit growth.

3. Ecommerce inventory management can maximize sales across channels

While multichannel selling can give you the advantage of a wider market reach, it can complicate the inventory management system. This is where an ecommerce inventory control solution comes in handy. It eliminates the need to update or reserve inventory in multiple channels manually.

Without a centralized management system, displaying an accurate stock or inventory count for each sales channel is difficult. And let’s say you manually update your inventory on each channel but have more demand on one platform than another. Customers on that platform may see items out of stock and shop with other businesses.

Many ecommerce inventory management solutions on the market come with various features and pricing plans. The right solution uses multichannel inventory sync capabilities to take the tedium out of inventory management.

Capabilities like this can help you track inventory levels by sales channel and instantly update your accounting software when you cancel or refund orders.

4. Ecommerce inventory management helps you oversee multiple inventory locations

As an ecommerce business grows, it may need to distribute inventory across locations to meet customer demand in more markets. But overseeing multiple warehouses can be challenging.

Online sellers need a clear and comprehensive inventory management system to maintain a smooth and integrated fulfillment process. Workers at each branch must also follow the same workflows, complete inventory cycle counts on time, regularly report inventory levels at their respective sites.

An inventory management system for ecommerce can also make large-scale supply chain management more efficient. Multichannel inventory management solutions give organizations better visibility into their total inventory: the products they have, the condition of the items, and where they’re located.

Inventory management systems also help businesses understand market conditions and preferences in different locations by analyzing turnover and purchase trends. This information can help you develop better marketing strategies and predict future sales.

Finally, an inventory management system built on cloud-based software can sync data from multiple warehouses. Streamline and store your inventory data in your accounting software, reducing the overhead costs associated with managing inventory manually across platforms.