Essential Guide to eCommerce Inventory Management

Do you keep track of your eCommerce inventory effectively?

As an eCommerce business, tracking inventory is essential to fulfill orders on time and provide a great customer experience.

But according to Webgility, only 75% of sellers are confident about their inventory management process.

Without systematically tracking your eCommerce inventory, you’ll face issues like delayed order fulfillment or product wastage.

You can avoid this by having an efficient inventory management system in place. This guide will get you started with the basics, benefits and strategy of eCommerce inventory management.

Understanding eCommerce inventory management

eCommerce inventory management is the set of processes involved in handling product inventory, such as ordering, stocking, shipping and monitoring for online businesses.

Managing inventory is essential for any eCommerce business. Good stock management helps you maintain inventory to an optimal level without under or overstocking products.

It also minimizes costs, decreases stockouts and enhances customer satisfaction by ensuring timely delivery.

But before getting started with inventory management for eCommerce, you need to understand some of the related terms:

Knowing these terms will help you develop a basic understanding of inventory management. But how does it benefit your eCommerce business? Let’s find out.

Why inventory management is essential for an eCommerce business

As an eCommerce business, synchronizing online order placements with offline inventory is crucial. Without proper inventory management, you’ll encounter a number of challenges, such as:

• Overstocking: When you stock products low in customer demand, it leads to increased storage costs and product wastage.
• Stockouts: If customers place orders for out-of-stock products, it causes delays in order fulfillment. Frequent product stockouts can also make customers switch to competitors.
• Poor quality: Certain products degrade over time which impacts the quality of the overall sales order, increasing returns and replacements.
• Customer dissatisfaction: Repeated delivery delays or quality issues might lead to poor customer experiences and damage your brand image.

You can avoid these challenges and streamline business processes by having an inventory management system in place. Creating a system also gives you the following benefits:

Organized inventory

If you own multiple stock keeping units (SKUs), an inventory management system helps you keep track of them efficiently. You’ll have a systematic plan to analyze product quantity, customer demand and sales.

An organized inventory simplifies decisions regarding:

• Which products to reorder
• How much to reorder
• When to reorder

This keeps your eCommerce platform updated with current product quantity and helps avoid customers ordering out-of-stock products.

Reduced expenses and increased profit margin

In 2022, U.S. and Canadian businesses lost $349 billion combined due to inventory distortion — overstocking or understocking products.

The staggering number isn’t only due to inventory wastage. If you have excess inventory that doesn’t sell, other costs like raw materials, storage, shipping and returns also add to your losses. These costs are irreversible and decrease your overall revenue.

On the other hand, if you understock products, you’ll incur opportunity costs in the form of missed sales and customer turnovers.

You can minimize these costs by having a solid eCommerce inventory management system in place. The system will help you forecast the required product quantity — ordering only what you need and keeping extra costs in check.

Improved space and warehouse planning

Many eCommerce businesses distribute inventory to several warehouses to speed up order delivery. But this also means hefty storage costs multiplied by the number of warehouses you use.

If you don’t have an inventory tracking strategy in place, you might end up having high inventory levels in one warehouse while the actual product demand is in another area.

This leads to unnecessary shipping and warehouse costs and also causes delays in delivery. To mitigate the warehouse management issue, you’ll need a highly visible system that helps you isolate inventory levels and customer demand in all storage locations.

In tune with the latest trends

With viral videos and social media trends, customer preferences are swiftly changing across industries. For example, trends in the fashion industry are lasting mere weeks or months instead of the traditional 20 years.

A robust inventory management system accommodates these unpredictable preferences and helps you maintain a trendy inventory. You can restock optimal levels of in-demand products and ensure your inventory doesn’t outlast the trend.

This helps you keep up with changing customer demands without having too much deadstock from the previous season.

Handle multi-channel inventory

If you sell through both online and offline channels, you need to continuously track and manage stock levels. An inventory management system helps you decide how much product to sell through each sales channel.

It will also help ensure that inventory levels across all channels are in sync. Customers can get real-time updates about product quantities, creating a satisfactory experience.

Better brand reputation

According to Salesforce, 88% of customers consider the shopping experience as important as the product or service.

But poor product quality and delayed deliveries due to inefficient inventory tracking may affect the customer experience — damaging your brand impression.

With a robust inventory management system, you can update customers about inventory levels and ensure on-time delivery of good quality products. This creates a positive customer experience, uplifting your brand’s reputation.

An inventory management solution is a must for every eCommerce business. However, there are different types of inventory management processes that cater to various business requirements.

Knowing about these different strategies can help you choose the right inventory management process for your business.

Types of inventory management

There are several types of inventory management models, such as just-in-time (JIT), dropshipping, ABC analysis, bulk shipment and first-in-first-out (FIFO) or last-in-first-out (LIFO).

These models help you maintain optimal inventory levels according to customer demand and business requirements.

Each model follows a unique strategy which we discuss here in brief:

Just-in-time (JIT)

Just-in-time is an inventory strategy where you stock up on products only when you need them.

This method is good for businesses that deal with seasonal products or frequent changes in trends. You analyze customer demand and historical data to maintain minimum inventory levels and restock products as per the inflow of orders.

A great example of JIT is selling festive-themed merchandise during the holiday season. Many eCommerce platforms stock up on holiday decor during the months of November and December when customers usually look for those products.

Just-in-time inventory helps you make a profit when customer demand is high without worrying about losing money on deadstock.

However, if there’s an unexpected surge in customer demand, it might cause sudden stockouts with no immediate way to replenish the items.

Dropshipping

Dropshipping is an eCommerce inventory management strategy where business owners don’t keep true inventory. Instead, when customers place an order, they fulfill it through another company or seller while making a profit on the sale.

Dropshipping doesn’t require you to handle inventory and storage — that makes it one of the safest inventory management methods, especially for small businesses. 

You invest a minimal amount, usually only for maintaining an eCommerce website. That reduces the risk of losing money or keeping deadstock — even if the business doesn’t work out.

Due to this, dropshipping has become highly popular, with search terms for it growing 156% between 2022 and 2023.

However, as you don’t interact with the actual product, you can’t guarantee its quality which may cause you to lose customers and revenue. Many business owners also struggle to find reliable suppliers to manage their dropshipping store.

ABC analysis

ABC analysis is meant for online stores that have a large number and variety of products. In this strategy, you focus on products that fall into one of three categories:

• High cost, low sales frequency
• Intermediate cost, moderate sales frequency
• Low cost, high sales frequency

These products generate the most revenue and are important for your business. So, instead of all your SKUs, you’ll prioritize tracking and restocking inventory for these three categories.

With the ABC analysis strategy, you can focus on products that are highly profitable. But the process is quite tedious and requires you to track multiple metrics such as revenue, profits and sales frequency of individual products.

Bulk shipment

Bulk shipment is one of the traditional inventory management methods where businesses order large quantities of products at once.

This is an excellent strategy for businesses that have very few or a low variety of products. With bulk shipment, you reduce shipping and logistics costs which is especially useful if you’re ordering products from overseas.

It also helps you maintain a buffer stock if there’s an unexpected surge in product demand. However, due to the large number of orders, bulk shipment has a high risk of deadstock. Businesses wasted $163 billion worth of inventory in 2022 due to oversupply alone.

If you have a large number of SKUs or don’t have a reasonable estimate of sales, then it’s better to steer clear of bulk shipment.

FIFO/LIFO

First-in-first-out (FIFO) and last-in-first-out (LIFO) are two inventory management strategies widely used for products that have an expiry date.

In FIFO, products that first entered the inventory are sold first as they perish earlier. In LIFO, the newest products are sold before clearing out older stock. Both strategies help business owners keep stock moving while minimizing product expiration.

Even though FIFO and LIFO are highly suitable for the perishable goods industry, other eCommerce businesses also use them to maximize profits and help with taxes due to the price difference between new and old products.

Most eCommerce stores use two or more of the strategies above to boost sales. For example, an online clothing store can use bulk shipment to order its most popular types of shirts while opting for JIT to manage winterwear inventory.

You can also choose the most suitable inventory management type based on your business requirements. But before that, you’ll need to create an eCommerce inventory management system to keep track of your product needs.

Steps to create an eCommerce inventory management system

Creating an inventory management system requires tracking past purchases, customer demand and current SKUs to build an organized structure for managing product stock.

Here’s a step-by-step guide for how you can tailor a strategy for your business:

1. Study customer demand for each product category

The first step to managing inventory is understanding the demand for each product. By knowing customer demand, you can determine when and how much to restock a product.

For example, if you sell three colors of a type of sneaker, one of them might have more sales than the others. Restocking that color in a larger quantity will help you keep up with customer demand.

You can check product purchases and reviews on marketplaces like Amazon and eBay to determine product demand among consumers. You can also use websites like Google Trends to explore what products people are searching for.

2. Determine future sales using customer data

If you already own an eCommerce store, analyze historical data to forecast future sales. This includes data such as sales, revenue, customer demographics, and product variants.

By analyzing this data, you can identify patterns in customer behavior that can indicate future sales.

But using only inventory data isn’t enough. You should also consider general consumer sentiment and upcoming product trends to determine inventory levels for various products.

3. Consider seasonal trends that affect sales

Some trends are anomalies that can’t give an accurate picture of customer demand. When using historical data for inventory forecasting, you need to consider these trends to ensure accuracy.

For example, the demand for pink-colored apparel rose due to the Barbie movie, with several brands introducing pink collections. Though businesses made a considerable profit, this is likely a one-time trend that isn’t predictive of future sales.

However, some seasonal trends, such as coats during winter or books during the start of the school year, are great selling opportunities that repeat every year.

Identifying these windows helps you predict the right time to stock certain products to make the most out of trends.

4. Calculate inventory threshold levels

Once you’ve analyzed customer data, you need to determine a minimum inventory level to keep your business viable even during emergencies.

This is the lowest amount of inventory that enables you to fulfill product demand but doesn’t end up in deadstock.

To determine inventory threshold levels, first, calculate the safety stock:

The safety stock acts as a buffer in case of unexpected disruptions in supply chain management.

Next, you need to calculate the reorder point (ROP):

The reorder point is the inventory level at which you restock products. 

Then, calculate the minimum inventory level:

This is the amount of stock you need to maintain to ensure a smooth business flow.

While minimum inventory level and safety stock may look similar, they serve slightly different purposes.

The minimum inventory level helps fulfill day-to-day product demand during stock replenishment. On the other hand, the safety stock helps keep your business running during unexpected emergencies.

5. Use inventory management and analytics software

While manual inventory management works for small businesses, it isn’t feasible once your eCommerce business starts to scale.

If you have an extensive product catalog or want to streamline your business processes, you can use automation to simplify inventory management.

ECommerce inventory management software improves workflows through its diverse functionality. It can help you track real-time inventory, reduce human errors and analyze sales data for better order management.

Tools like Zoho Inventory and Ordoro can help with the optimization of the inventory management process.

In addition, many eCommerce solutions, such as WooCommerce, come with inventory management tools and extensions.

6. Continuously measure sales to accommodate changing trends

Inventory management isn’t a one-time process but a continuous one. As your business changes and new trends emerge, you’ll also need to keep your calculations up to date.

This involves reanalyzing customer data, forecasting future sales and recalculating minimum inventory levels.

Once you have an inventory management system in place, analyze how well it’s working for your business, identify gaps and introduce the required changes. This will help you provide a better customer experience by meeting their ever-changing needs.

Final thoughts: Essential guide to eCommerce inventory management

Managing inventory is an essential part of maintaining a successful eCommerce business.

And choosing an eCommerce platform that helps you manage inventory along with other business processes makes it easier to run your store.

Platforms like WooCommerce have several inventory management extensions that will help you monitor stock, manage shipping and handle purchase orders. Use WooCommerce to build an eCommerce store with hassle-free inventory management. Check out Bluehost’s WooCommerce hosting plans to get started.

FAQs for eCommerce inventory management