While you’re setting up your online store, it’s important to prioritize a clear ecommerce inventory management strategy.
First, let’s get on the same page with a few terms we’ll cover: Your inventory is whatever physical goods you’re putting up for sale, and inventory management is the process of organizing and controlling those goods as they move through the supply chain. In other words, an ecommerce inventory management strategy helps you optimize your inventory levels from the time you order products to the time you sell products — every step along the way.
An effective ecommerce inventory management strategy helps you maintain stock levels in line with the demand for your products, while minimizing your cost of stocking inventory, which benefits your inventory’s return on investment (ROI).
In this article, we’ll give you a crash course on inventory management 101, as we walk you through the most essential moving pieces of how to successfully manage inventory.
Determining how to stock your inventory
There are two main methods for stocking inventory: outsourcing to third-party dropshipping or print-on-demand suppliers, and managing your inventory yourself.
Outsourcing to third-party suppliers
Depending on the types of products you want to sell, dropshipping or print-on-demand suppliers might be the option for you to sell online without inventory.
This method eliminates the costs of renting and maintaining your own inventory storage space. That means lower startup costs, freeing up your time and money to invest in another area of your business, like marketing your online store. Dropshipping and print-on-demand are also more scalable than managing your own inventory, since you don’t need to worry about growing your storage space as your business grows.
That said, relying on third-party suppliers has its downsides as well. You’ll have zero visibility on your products, so you’ll need to trust the quality control of your suppliers and be prepared with a customer service strategy if anything goes wrong during the fulfillment or shipping processes. Fulfillment costs are also typically higher with third-party suppliers, which is something to consider when outlining your shipping and fulfillment strategy.
Squarespace offers a few different dropshipping and print-on-demand extensions to help you get started with the ecommerce inventory management of your online store.
Managing your own inventory storage
The benefits of stocking your own inventory tend to outweigh the downsides. When you stock your own inventory, you’re able to maintain closer quality control over your products.
The size of your storage space depends on the sizes of your products, what types of products they are, and the quantities you’ll need to stock at a given time. For example, if you sell large products or need to always keep a high volume of products in stock, it would be wise to purchase or rent storage space in an off-site warehouse or stockroom. You can get creative with your options: Maybe you rent a studio that could transform partially into a stockroom, or you have an extra room in your home that works well for inventory storage. Maybe a local self-storage company offers lower rates than warehouses.
You’ll also need to consider the environmental conditions of where you’re storing and how that affects your inventory, especially if your goods are perishable and need to be stored within specific temperature ranges.
In the simplest breakdown, there are three key aspects to building an ecommerce inventory management strategy that works for your business: organizing, forecasting, and auditing. Once you build these core processes, they’ll help you to run smoother fulfillment operations and more reliable inventory and sales reports.
When establishing an organizational system for your inventory, it helps to focus on these four priorities:
Let’s start with categorization: It’s most intuitive to group similar items closest to each other. A simple way to do that is to define what categories of products you sell, then organize by those categories. For example, if you run a shop that sells clothing and accessories, you could stock all of the apparel in one section, the jewelry in another section, and so on. Within each broader category, you’d then organize products by subcategories, such as color variants of the same type of earrings. If you sell products that are the same product in different sizes, organize by size as well.
Turn your attention to inventory freshness next. This is also known as the “first in, first out” (FIFO) method. With FIFO, you’d organize your products with the oldest products at the front of your organizational system, and the newer products closer to the back. This method is especially important to use if you sell perishable products, like food or makeup, so you minimize the chance you’ll get stuck with expired products. But even if you don’t sell perishable products, this method helps you make sure no given item is languishing on your shelves for too long.
Your next step is to organize for convenience: Identify your bestsellers, and stock those closest to your fulfillment station. That could mean removing those items from their broader categories and creating a section dedicated to bestsellers, or organizing your categorized sections in such a way where bestsellers are at the forefront of each section. Organizing this way will create more efficiency in your fulfillment process.
Tidiness is the final piece of your inventory organization best practices that ties the rest together. Maintaining an orderly storage space will not only help to preserve the quality of your products and their packaging. Tidiness will also help you to keep an eye on low stock levels and see where there is available space during the receiving process when new product shipments arrive.
Inventory forecasting is a fancy way of describing the inventory management method that will most reliably help you prevent inventory shortages or excess. You might also see this referred to as demand forecasting, which is the process in which you use a variety of factors to predict what your customers will want to purchase from you next. Your most crucial inventory forecasting tool is inventory management software, which will help you do things like analyze historical sales data. You’ll also want to consider factors like seasonal trends and the timing of your marketing efforts when predicting demand.
Taking those factors into consideration will help you determine how to set a reorder point for each of your products. A reorder point is a number that represents the minimum viable stock level for each product — or the lowest possible stock per product you could have without running the risk of selling out. When you set that reorder point for each product in your inventory management software, then you’ll be alerted when any inventory falls below that stock level for a given product.
Let’s take a look at how this works in action: Say you sell handcrafted sweaters. Thanks to your historical sales data and seasonal trends, you know that you tend to sell 15 sweaters of a specific size per month, on average, from September through March. That average increases to 30 sweaters per month in the run up to the holidays in November and December, and decreases to only five per month in April through August. In this example, you might want to update your reorder point based on the seasonality of your product. Perhaps your reorder point would be 10 units in September, 20 units in November, and only three units in May.
But once your sweater inventory falls below 10 units in September, how will you know what quantity of sweaters you should place an order for? That’s why you should also set a maximum stock level for each of your products. For example, your sweater maximum stock level could be 20 in September. Maximum stock levels help reduce the risk of creating dead stock in your inventory. Dead stock is a product that you’ve stocked too much of but can’t sell anymore, typically because it’s outdated somehow. For example, annual calendars from past years would be considered dead stock.
When setting your reorder points and maximum stock levels, incorporate lead time into your estimates. Lead time is the window of time between the point when you order more stock from a supplier (or start to handcraft those sweaters in our hypothetical) and the point when you actually receive (or complete the creation of) new stock.
Even with the best inventory management software, it’s common for inventory to get misplaced, damaged, or somehow entered incorrectly into your system. That’s why it’s best practice to perform regular audits of your inventory. An inventory audit is the process of physically counting every unit in your inventory to confirm it matches the current quantities in your inventory management software.
It’s helpful to schedule regular inventory audits. Especially when you have a lot of stock, multiple stock locations, or a particularly busy fulfillment or returns period, it’s easy to misplace products or inaccurately reflect the numbers in your software. Audits help reconcile the physical with the digital and keep your records in order. Audits also support your re-ordering process, since you might find during an audit that you’ve dropped below a product’s reorder point without the system registering that quantity.
There are a few different ways to audit inventory. A common method is to do a full inventory count at the end of the year or each quarter, typically aligning with the income tax filing process. That method can be tedious, especially if you have a large inventory or small team. So a useful alternative is to perform cycle counts: Choose a different category each week to count and compare against your recorded quantity. This way, you can audit on an ongoing basis and avoid the all-at-once hassle of an end of year audit.
Audits also help you maintain quality control of your inventory. Do you sell perishable items? If you’ve been using the FIFO method, you’ll be able to easily check expiration dates at the front of your inventory. Do you sell fragile items? Regular audits will help make sure none of those products have been accidentally damaged.
Setting up ecommerce inventory management software
Inventory management software should be the centralized point of all of your ecommerce inventory management. This software will help you sync your inventory across multiple storefronts. That means you can see real-time inventory levels across online stores like Squarespace Commerce and any popular online marketplace — all from one dashboard.
Centralizing your inventory management and analytics supports your forecasting and reorder points, helps to make sure sales and returns don’t slip through the cracks, and makes it easier to perform audits. Many tools even include the ability to create barcodes for your products, which can optimize your audit process. Scanning barcodes makes counting products more efficient and less manual, which can mitigate room for human error.
In addition to your centralized inventory management software, you should understand how to update inventory in each marketplace. For example, you might want to transfer inventory from one marketplace to another. Squarespace Commerce includes a product import tool that makes it easy to import your inventory from other online marketplaces to your Squarespace shop.
Whichever inventory management software you choose to streamline your operations, remember that another best practice is to put a single person in charge of overseeing inventory management operations. An inventory manager will have the complete picture of your inventory and stock levels, and they’ll be best equipped to establish processes for receiving stock, auditing inventory, and managing your inventory software dashboard.