5 Inventory Management Best Practices for Small Businesses

Imagine that each vital business process is a part of your body. In this analogy, inventory management would be your eyes. It’s what provides visibility into the health and performance of your eCommerce store. Without smart inventory management, you could be blindly moving away from profitability.

Inventory management is the process of ordering, storing, and using your inventory, including receiving, warehousing, and processing items.

In eCommerce, success hinges on keeping the right products on hand and in the right amount. This minimizes the cost of carrying excess stock and helps you avoid costly and embarrassing out-of-stock scenarios.

Best practices for inventory management help you answer questions like:

• What are your best and worst selling products?
• What amount of a product should you be buying?
• Are you losing sales opportunities due to being out of stock?
• Are you losing money due to carrying excess stock?

Use this article to learn the best inventory management techniques for eCommerce.

1. Audit Your Stock

Taking a count of inventory isn’t fun but it’s important. You can’t improve what you haven’t measured, right? A stock audit helps you see what you have on hand, what’s sold, and what hasn’t. It's also the first indicator if something is amiss in the stocking process, or you’re experiencing theft or loss.

It’s recommended that you count inventory annually, quarterly, and sporadically for optimal accuracy. You can audit your stock using several methods, including:

• Visually: count up the stock at a glance (if small enough)
• Tickler: maintain an ongoing count across all sub-sections of inventory throughout the year, which eventually returns an accurate count for all inventory
• Master list: tick an item of the master inventory list whenever it moves out of inventory (a digital or manual paper count)

Counting stock is the foundation of inventory management. When used alongside overhead cost and labor analysis – it’s an insightful practice that highlights where you can save money and maximize your returns.

This process, however, is complicated by the prevalence of returns in modern eCommerce. It’s important to have real-time accurate inventory counts that reflect in your store, or you risk disappointing buyers. Similarly, inventory counting can be a sizable undertaking if your stock list is large.

Easyship includes top-of-the-line inventory management software, making it easy to keep a real-time count of your inventory whether it's sold, in transit, or being returned. Our inventory counts update automatically, helping you keep an accurate tally of inventory across all stages of the customer journey.

2. Identity Your Best & Worst Performers

Your audit will indicate what’s been selling and what hasn’t. You’ll want to repurchase your top sellers regularly and abandon items that haven’t been selling well. This helps you maximize returns, increase cash flow and capitalize on market trends in real-time.

Consider why your items are turning over or not. Seasonal variance? Poor quality? Unpopular colorways? It’s important to jettison low-turn items because they waste capital and storage space. Try to account for the influencing factors, and avoid purchasing similar products in the future.

You can use marketing incentives like discounts and promotions to jettison old stock. The faster you free up capital, the sooner you can experiment with new items and repurchase top-sellers.

3. Rank Your Inventory

It makes sense to pay closer attention to your high-value items. And if you group high-value items together, they’re easier to focus on. The Inventory Categorization Method, or the ABC Analysis, helps you better manage your inventory by grouping like with like.

Segment your items into three categories based on their value and stock volume – low, moderate, or high. This allows you to prioritize the re-ordering and stock reviews for A-category items over low-value inventory in groups B and C.

Category A: your best-selling, high-value, or priority stock. You make the most revenue from these items but they may cost more, meaning you want to keep fewer on hand. Perhaps you keep these items secured because they’re at risk of theft. Category-A items require the most attention in terms of stock reviews and reordering to ensure adequate supply.

Category C: items of higher volume but lower value, which requires less reordering and oversight. Category B is your moderate sellers that need moderate attention.

Thinking of inventory in terms of its priority can help you gain clarity into how best to manage it at scale, and how best to reorder.

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4. Forecast Your Demand

Imagine being able to buy exactly the right amount of stock to sell without wasting a dime on unsold stock. Now consider that the estimated yearly cost of holding excess inventory is between 25-30%.

This goal is achievable if you forecast demand, or use past sales data and market trends to predict how items will sell in the future. Model your projections using the historical sales data in your eCommerce platform. But also factor in market trends, Google trends, customer feedback, seasonality – even growth in the larger economy.

While more of an art than a science, the practice of forecasting demands will pay dividends over your business lifetime. Your predictions will improve as you get a better sense of your niche and your customers. Fortunately, even a moderately correct estimate can help you cut your future losses on overstock.

5. Use FIFO

First-in, first-out (FIFO) is an inventory management method in which you sell goods in the order they were received. In other words, the first item you receive from the supplier is the first sold to customers and vice versa. FIFO helps you reduce loss and waste if you’re selling perishable goods like food, makeup, or items that depreciate quickly like fashion.

Best practices suggest that you place the oldest items in the front of the queue, and store incoming inventory in the back of the storage. Chronological sorting helps you maintain a clear sense of what’s new and old, but also makes it easy to spot theft or inventory manipulation.

Lastly, FIFO keeps your balance sheet closer to the actual market value. You’re selling stock received months ago today so you get the going market rate. This approach is helpful in times of inflation when you want to get every dime back on your spending as prices rise.

6. Track Your Inventory

Inventory tracking is the process of monitoring the SKUs in your possession, including the location and quantities of each item. This provides real-time visibility of inventory, helping you get a clear sense of your business health, performance as well as product availability.

Most importantly, tracking inventory helps you avoid disappointing customers. Say a shopper orders an item but it’s out of stock. Frustration sets in and you lose that customer. You can avoid this scenario by knowing how many SKUs you have in stock at all times, plus the manufacturing and delivery lead times for your incoming inventory.

Inventory tracking systems show you what inventory is coming, going, and when it will arrive, including:

• En route from the supplier
• In transit to the customer
• Returns from customers

The manual process of tracking inventory gets more complex and time-consuming as your business grows. Look to tools like spreadsheets, apps, and shipping software to help you maintain a bird’s eye view of your SKUs and costs at once.

Inventory Management for Small Businesses

Inventory is the lifeblood of your eCommerce store. You want to effectively regulate its flow, and doing so requires visibility. Inventory management systems enable you to track, control and forecast your optimal stock – whether you use a spreadsheet, an app, or your shipping software.

The benefit of using Easyship for inventory management is that your inventory automatically updates based on outgoing shipments and returns. This ensures you maintain an accurate real-time stocklist so you never sell items you just sold out of. Plus, you'll never have to do manual counts on returned items.

Create your free account today if you want to try Easyship’s all-in-one shipping and inventory management platform. Your first 50 shipments each month are absolutely free – and you’ll actually save up to 89% on all your shipping rates with our business-level courier discounts. Sign up free.