6 Inventory Management Tips for Profitability

Whether you’re new to e-commerce or a long-running veteran of online sales, inventory management is the tool that helps you keep your entire operation running – not just smoothly, but also profitably. The choices you make when managing your pipeline, storing stock, and distributing to customers contribute to customer satisfaction as well as your bottom line. Most importantly, inventory management is much more than counting and verifying product, it’s the process of actively working to increase profit and customer satisfaction by controlling how much, when, and why, you have inventory.

Good inventory management will help you to achieve good cash flow, profitability, and likely increased fulfillment speed and therefore customer satisfaction. Overall, it works to ensure that you are always in control of your product and your business.

Tip #1 Set and Use Par Levels

Par levels track to the minimum amount of stock you need to reorder and replace stock before you sell out. You can calculate this rate using your total average sales per period (in this case typically per day) and the total time it takes between placing an order and receiving it in your warehouse.

So, if you sell an average of 9 products per day at this time of year, it takes an average of 3 weeks to receive product, and you want to have a 10% margin for error, you could calculate that you have to reorder your stock when inventory reaches 217 units.

If you choose to handle these calculations manually, it’s important to frequently update them to account for changes in purchase volume, seasonal demand changes, and marketing campaigns. Software programs like Skubana also automate the process, automatically using your current sale rate for the order period to calculate a current PAR rate and automatically generating a purchase order when it’s time to reorder.

Tip #2 Use Inventory Organization that Works for Your Stock

In most cases, you should be using some form of First-In-First-Out inventory management to move your oldest stock out first.  This is especially crucial when you have perishable goods or merchandise with a limited lifespan. However, moving older stock out first also contributes to overall customer satisfaction for the long-term by preventing unnecessary damage to boxes and packages from long storage periods, ensuring that models that may have been updated or replaced are moved out as quickly as possible, and working to prevent unsellable products.

First-in-first-out may not be ideal for you. If your inventory really doesn’t matter if it moves out later, you could save considerably by using a last-in-first-out stock method, which will reduce man hours in your warehouse.

This also means working to optimize your warehouses. If your e-commerce business owns more than one warehouse or keeps stock at a third-party distribution center, you’ll have to manage that stock as well. For example, based on your current warehouse and inventory setup, how can you best calculate which warehouse to use on an order-by-order basis to get stock to the customer at the lowest cost? If you manage low inventory, do you occasionally have to ship from several locations to meet demand for one customer? And how much unnecessary stock do you have to keep just to maintain a sufficient stock level at each warehouse?

Tip #3 Plan Ahead

This is one of the most crucial inventory tips, because even if your warehouse is very well managed, you’ll still run into issues. Whether that means unexpected increases in sales, no room in your warehouse, or miscalculations and slow-moving product, you might have room, cashflow, or even total inventory stock issues. If you know what your risks are, you can plan for them and create workarounds.

For example, if you know that you can’t typically keep up with holiday spikes in sales and taking on new employees for the season generally results in a large ratio of mistakes and mispicks, you could consider moving inventory to Fulfilled by Amazon or another third-party logistics provider instead.

Similarly, if you spot that product isn’t moving, you can hold off on ordering until existing stock reaches par level to prevent it taking up too much valuable space in your warehouse.

Chances are that the larger your warehouse gets, the more you need inventory analysts who can analyze your total sales and plan pre-season inventory increases, purchase orders, and re-buying. You’ll also have to manage moving and liquidating old or dead stock. You can automate these processes with Skubana to keep total personnel lower, but you still need to actively manage these processes to reduce and optimize total costs.

Tip #4 Invest in Inventory Forecasting

While no inventory forecasting program is 100% accurate and things always happen (new product on the market, sudden massive increase in demand), inventory forecasting can help you to streamline your inventory operations to reduce unnecessary costs.

In most cases, you can use a combination of your previous year’s sales, industry trends, and growth rates to calculate what you are likely to sell. If you calculate trends with the real-world taken into account (for example, you can calculate previous year sales on a week-by-week basis, but if one week in April was unseasonably sunny, you can’t count on the same sales of beach supplies again), you can create a reasonable and valuable overview of what you are likely to sell for the period.

Other factors you should take into consideration include the economy, upcoming promotions and sales, subscriptions, new products reaching the market, and competitors.

Tip #5 Valuate Your Inventory

Most people know the 80/20 inventory rule (that 20% of your inventory drives 80% of the profit), but how much of that actually applies to you? No matter what you’re selling, chances are, a very small percentage of your total inventory accounts for most or even all your profit.

Working to evaluate your products based on total sales frequency will give you a much better idea of which inventory you should prioritize and stock in large quantities, or even continue to stock at all.

Most e-commerce sellers valuate stock based on total value of product versus total costs to manage and store and total sales frequency. This can help you to manage low selling but high-value products with a significant financial impact but infrequent sales rate as well as low earning but high sales products that may only impact your bottom line minimally.

Skubana can automate this process, helping you to assign values based on total sales and product value while tracking costs of retention and storage, so you can easily see which products are costing you rather than earning money.

Tip #6 Automate to Improve Processes

Whether you’re considering exception reporting, inventory on hand, order availability by location, purchase orders based on PAR level, metrics and KPI monitoring, or total supply chain management, automation can step in to reduce human error and total time investment on processes.  For example, Skubana uses smart workflows and algorithms to calculate the precise time to generate a purchase order, automatically calculates total product value, and helps you to automate a great deal of manual processes to improve accuracy and reduce time to completion. This will optimize your inventory management and reduce costs.

Inventory management is one of the largest cost factors in modern e-commerce sales and working to actively manage it is important for keeping costs low, fulfilling orders quickly, and ensuring that all your products are profitable. Tools like Skubana make this process easier, with automation to step in and improve efforts for most backend processes.

This is a guest post written by Skubana. Skubana is an all in one solution that unifies operations after the checkout for online merchants.

*Editor’s Note: This piece on inventory tips was originally published on April 25, 2018 and updated on August 23, 2021.