Inventory Strategy – What It Is & How Best To Create One

Inventory Strategy – What It Is & How Best To Create One

What is an inventory strategy? What are some best practices e-commerce retailers versus traditional brick-and-mortar retailers need to consider when creating an effective inventory strategy for their business? We’ve broken down the basics of an inventory strategy, how to create one and how to track and measure outcomes of your inventory strategy to see when, and if, it needs to be adjusted for things like seasonality or other changes in the market. Since most product-based e-commerce businesses have most of their money tied to inventory, effective inventory management is essential to compete in the world of online shopping.

Keeping your inventory levels lean so that you have enough inventory to fill orders and avoid stockouts but not so much that your inventory turns into deadstock is the ultimate goal of good inventory management strategies. While most brick-and-mortar businesses have set-in-stone schedules and reordering methods in place, most e-commerce companies start small and it can take a bit before they can’t be managed manually. These e-commerce businesses need a way to get on top of their inventory with strategies that keep their supply chains flowing smoothly, even with disruptions in suppliers and unexpected events, such as global pandemics.

What Is Considered Inventory Or Stock?

Generally, whatever you use to sell your product is considered part of your inventory. According to Unleashed.com, the types of inventory are defined as such:

  • Finished goods/for sale goods: The products you sell to your customers
  • Raw materials: The inventory you use to make your finished goods
  • Work-in-progress: Unfinished goods – inventory that is part way through the manufacturing process
  • MRO goods: Maintenance, repair, and operating – MRO goods are the inventory you use to support the manufacturing process
  • Safety stock: The additional inventory you keep on hand for emergencies, such as  supplier shortages or surges in demand, or supply chain breakdowns

Every business that is involved with inventory will need some way of managing its stock. For instance, your business makes products that rely on various suppliers for different components of the product. If your product is hand-thrown pottery, then you’ll need sources for clay, glazes, and different types of kilns to complete your products. You’ll also want a pottery wheel supplier and various other tools that potters use in crafting their products.

How Can You Determine How Much Inventory To Keep On Hand?

While every business is different, e-commerce businesses working to implement or improve their inventory management strategies are tasked with figuring out several factors to maintain a lean, healthy inventory. Automating inventory management is a must, so the first thing growing e-commerce companies need to know to grow involves acquiring inventory management software, or an Enterprise Resource Planning (ERP) system, that can give you real-time inventory counts across all of your channels, integrates with your warehouse management system, and also integrates with your shopping carts.

Additionally, ERPs assist in forecasting inventory needs for upcoming cycles and also measure product performance to determine if adjustments should be made with positioning products or perhaps with the flow of your product pages. As an all-in-one solution, ERPs also connect with your accounting department to help with tax preparations and end-of-year analyses. Many e-commerce companies on the threshold of moving into their next successful phase are faced with decisions to invest in expensive technology or go for inventory management solutions that are limited in their forecasting and data analysis functions. E-commerce vendors in an expansion phase will eventually be required to deal with renting or purchasing warehouse space and training staff to fulfill their orders accurately and on time, all the while expecting to come up with an inventory management strategy that keeps their inventory in line and their bottom line increasing. It’s a lot to handle without losing your competitive edge and customers when things don’t go as planned.

This is why many expanding e-commerce companies are opting to partner with 3PL companies, such as Phase V Fulfillment for their order fulfillment operations. Phase V’s proprietary software provides all of the tools you’ll need to automate your inventory.

Setting Reorder Points

To keep your business running smoothly, it’s important to know when to reorder products to avoid production shutdown and stockouts. In general, the reorder point formula works like this:

Reorder Point (ROP) = Demand during lead time + safety stock

Factor in how many units of a particular SKU are sold in a certain amount of time (perhaps per month for faster moving SKUs, and longer periods for slower moving units), then determine the lead time (the time it takes for your supplier to ship your order), and add that to the time it takes your warehouses to process your inventory reorder. This gives you an accurate time frame to automate reordering procedures, such as creating and sending purchase orders to your suppliers.

Working With Your Supplier

Before sending out automated purchase orders to your suppliers, it’s important to develop strong relationships with your suppliers, then finalize shipping agreements and payment schedules. It’s also important to work with your suppliers to agree on and document an estimated turnaround time for your products to arrive at your warehouses. And, it’s also wise to discuss returns and credits with your suppliers, in the event that products stop selling or you are unable to source another component of your product and need to change direction completely to get your product to market.

Smoothly Running Supply Chains Source Backup Suppliers

On the other hand, sourcing several suppliers for different components of your products or various finished products helps ensure that you will have enough raw materials or finished products on hand to avoid production stoppages and stockouts from damaging your business.

Forecasting Demand

3PLs offer e-commerce companies sophisticated data-powered tools to forecast demand for upcoming cycles, such as for the holiday season. According to Projectline.ca, Predictive data analytics has several benefits including:

  • Increasing cash flow by reducing inventory investment
  • Improving customer service by providing more accurate product availability
  • Predicting the right inventory quantities to meet demand
  • Improving profit margins by limiting the discounting or scrapping of old stock

Accurate sales analytics tools can also help you better target specific customer segments with ad campaigns that get your message to the right people at the appropriate time.

More Effective Forecasting With Sophisticated Tools

Accurate demand forecasting relies on many factors unique to your company. Seasonal demand, upcoming promotions, and influencers can dramatically affect your demand forecasting. While it’s difficult to know when an influencer may cause a sudden increase in your sales of certain products that may increase product demand, two main inventory forecasting models can hugely affect your profits.

  • Quantitative forecasting uses past sales data to predict future demand. The more data you have at your disposal, the better you will be at determining demand.
  • Qualitative forecasting is based on less measurable factors such as potential demand and market forces predicted by industry experts.

Measuring Your Outcomes

Using the sophisticated data analysis tools 3PLs provide to measure SKU performance and monitor the movement of your products through your supply chain can help you better manage your inventory, showing you when you may need to offer slower-moving products as promotions or bundle them with other faster-moving products to create gift sets or limited time promotions. These insights about your products can also give you better insights into your customer base and how to get to know and target your audience better.

As an e-commerce business, developing your inventory management strategies is essential to maintaining a competitive edge on the competition and growing your business. Keeping your inventory lean but effective relies on automating your inventory processes with advanced real-time data-powered technical solutions that include setting up reorder points, automating your reorder processes, developing supplier relations, sourcing additional suppliers, enabling safety stock for emergencies, plus tracking and monitoring product performance to adjust where needed.

Phase V Fulfillment & Your Inventory Strategy

E-commerce businesses on the brink of expansion can easily sidestep the growing pains of moving into their next successful phase, investing in expensive ERP systems, leasing expensive storage space, and training crews to fill orders by partnering with a reputable 3PL fulfillment provider, such as Phase V fulfillment, to optimize their inventory management strategies, streamline their fulfillment operations and generate better customer experience rankings.

Contact Phase V – a one-of-a-kind fulfillment partner that customizes your experience to meet your specific needs. From click to shipped, you can count on Phase V!

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