This post is by Jake Rheude, the Director of Marketing for Red Stag Fulfillment.
If you’re looking into inventory management techniques, it probably means you’re having growing pains. Congratulations! Your business is doing well, but it can be tough.
Get too ahead of yourself and you can make some big blunders, so it’s a good thing you’re here: I’m going to help you find the perfect inventory management method for your business. And trust me, there are a lot of options out there.
Notice that I said the right one for your business, not the right one for every business. As you’ll soon learn, there is no right and wrong way, only ways that will work better (or worse) for you.
Business factors to consider
Read through the checklist below and take stock (sorry) of the state of your business right now:
- Cash. How much liquid cash do you have to throw around? Can you handle a big upfront cost, or are you running a lean machine?
- Product type. You probably have a variety, but do they tend towards being highly variable or more consistent? Do they have a long shelf life?
- Demand. Do you know the demand for your products like the back of your hand, or is it all over the place?
- Purchasing cycles. How well do you know them?
- Suppliers. How good is your relationship? How quickly can they get product to you, and how consistently?
- Wholesalers. How good is your relationship? Do they track your inventory, are they reliable, do they offer shipping services?
- Manufacturers. How good is your relationship? Are they dependable, do they offer shipping services?
How you’re doing in those areas will affect which inventory management technique is a good fit. With all these variables, you can see why there is no one right way to do things. Read on to find your inventory management soulmate.
Order in bulk
Ordering in bulk is a classic – too old-fashioned for some, but a perfect fit for others.
The pros are lower per-unit shipping costs by doing it all in one go, and capitalizing on those staple products with consistent demand and a long shelf life. However, your trade-off is the risk of never selling it.
Ordering in bulk requires a large upfront investment to order in large quantities (and reap the savings), and also to store it all somewhere. There’s the potential to partner with a third party logistics company to handle the logistics and fulfillment for you and take some of the stress out of managing and storing the products, but that cuts even further into your profits.
Ordering in bulk could be a great inventory management technique for plain white 100% cotton t-shirts, and a horrible fit for potential dead stock like fidget spinners (remember those?) or Christmas ornaments.
Another popular option, dropshipping involves sending your orders directly to a manufacturer or wholesaler, who then ships the items for you.
You avoid holding inventory, but you lose some of your profits. The other big downside is the risk of an unreliable supplier – if they mess up the order, it’s your name on the box and your unhappy customer that you have to pacify.
If you have an excellent relationship with your supplier and you trust them to fulfill orders consistently and accurately, dropshipping could be an excellent inventory management technique for you.
This technique involves a little more work than the previous two, but can really pay off. Essentially, it involves keeping the minimum amount of inventory on hand at all times.
It avoids the extra cost of storing huge amounts of product, and the risk of those pallets never making their way out the door – while still keeping everything available for sale all the time.
So how does it work?
There are several parts of the inventory management machine that have to be well-oiled for this to work. First, you need a thorough understanding of the purchasing cycles of every product. Second, you need a great relationship with dependable suppliers, as it relies on a very short production and fulfillment cycle. Third, you need an extremely efficient order fulfillment system.
As you can probably imagine, it’s easy to be constantly plagued by “Out of Stock” warnings and late shipment notifications if you get the just-in-time inventory management technique wrong.
Consignment involves owning the product, but storing it with retailers, who purchase it only once sold. It avoids holding inventory at your own warehouse, but instead allocating products to where they will be sold to the end user.
This is not a very common technique in ecommerce, but for a certain type of business, it can be the right fit – namely, if you have high confidence in your product, you want to test a new product, and you want to explore new markets. It lowers the risk to the retailer, so they are more likely to agree to stock your product.
You can see the retailer’s cut as a substitution for the cost of warehouse storage. The downside is that retailers often take a hefty commission, and if it doesn’t sell, they can simply return it risk-free, leaving you stuck with the unsold product anyway.
For businesses trying to turn over a high volume of consistent inventory, consignment is not a good fit, as the profits will be lower than conventional wholesale.
ABC inventory management
ABC inventory management is one of the more advanced inventory management techniques out there, but putting in the work can have a huge payoff.
If you have a wide variety of products with vastly differing sales volume, purchasing cycles, and profit margins, this could be a perfect fit.
The general idea of this technique is to separate your products into three categories: A, B, and C, hence the name.
- Category A is for your best products – the 20% with the highest sales value.
- Category C is for weak selling products. These often make up the bulk of your SKUs but a low proportion of total sales.
- Category B is for mid-range products, between the other two groups.
The reason to separate them into categories is so that you can focus your attention more efficiently on the products that need it – the products in category A. They make you the most money and are the most unpredictable, so knowing which products those are can help you manage them more effectively.
From there, category B will need some of your attention, and category C will need the least. By separating inventory this way, you can best allocate the time and effort it takes to manage your inventory.
ABC inventory management is not a great fit if you don’t have a very good understanding of the purchasing cycles for each product in your inventory, if your inventory changes frequently, or if much of your inventory is very similar.
Picking the right restocking, reordering, or replenishing method is a crucial component of your chosen inventory management technique, and they should pair harmoniously together.
It gets more complicated when you’re utilizing multiple warehouses, or working with a 3PL. When working with multiple warehouses, it’s important to have a real-time grasp of how much inventory you have at each warehouse, how purchasing patterns differ based on location, and how you can best optimize your shelf space at each location.
Choosing the right restocking strategy also depends on many of the same variables that choosing the right inventory management technique does, so look at two popular restocking methods:
With this approach, inventory levels of all products are checked at predetermined times, like every month or every three months. Only at that time do you decide if you will reorder – if inventory levels are high enough, you won’t check (or reorder) until the next checkpoint.
Likewise, if you run out of inventory before the next checkpoint, you stay out of stock. This is a lean way of managing your inventory, and helps you save money by receiving fewer shipments, but comes at the cost of potentially running out of stock.
It’s generally best for products that are predictable and consistent, so you can reorder at set times without risking stock-outs.
With this technique, which is also known as the “routine” method, restocking happens automatically once a product falls below a minimum amount in stock – the reorder point.
When the inventory level falls below say, 100 packs of staples – it triggers a reorder automatically to bring your inventory back up to your predetermined maximum threshold – say, 500 packs of staples.
This is a more agile and accurate way of restocking and replenishing inventory, and ensures that you’re much less likely to run out of stock, but can incur more cost with multiple shipments and extra shelf space in the warehouse.
Working with a third-party logistics fulfillment center (3PL) can make your inventory management strategy a bit more complex, because you’ll likely be housing your inventory at multiple warehouses. But it can also make inventory management easier, as your 3PL should provide you with tools and assistance to more effectively manage your inventory.
Once you decide which inventory management technique is best for you, you can work with your 3PL to not only see your inventory in real time, but also receive automated warnings of low stock.
The right inventory management technique
As you can see, choosing the right inventory management technique is crucial. It affects so many steps of the process that it’s essential that you choose the right one for the stage your business is at. And remember, that can change!
You may decide that you want to fulfill orders yourself, but eventually build a great relationship with a wholesaler or manufacturer that could one day fulfill them for you. Let your inventory management grow with your business.
Once you pick a technique, you can turn your focus to implementing it, whether that be finding the right inventory management software, working with your 3PL, or setting up new inventory check points. The right method will help you continue to grow.
This post was by Jake Rheude, the Director of Marketing for Red Stag Fulfillment, an ecommerce fulfillment warehouse that was born out of the founders’ own ecommerce business challenges.
Jake has years of experience in ecommerce and business development, and in his free time enjoys reading about business and sharing his own experience with others.