Chapter 2: Top Inventory Management Methods
Table of Contents
eCommerce inventory management systems are ways to track inventory and sales. These methods are designed to help businesses stay organized and manage their inventory better, enabling a more streamlined operation. However, the same system won’t work for every company. Business owners must consider their unique needs when choosing an inventory management method. For example, an eCommerce store that only sells five types of hand lotion will likely need a different approach than a retailer that offers beauty products, clothing and accessories.
If you’re not sure which method to choose, this chapter provides some guidance. We’ll explore inventory management methods for eCommerce businesses, including counting and valuation techniques. If you need assistance finding the best inventory management system for your eCommerce store, let us know at Finale Inventory, and we’ll be happy to help.
The Two Inventory Counting Systems
Before choosing an inventory management method, you need to decide how often you want to count your inventory. This mainly depends on your company’s size, goals and preferences. To help you decide, here are the two systems businesses typically use to track inventory:
1. Perpetual System
With a perpetual inventory management system, retailers use point-of-sale (POS) technology combined with inventory management software to track items as sales occur. This system adjusts inventory levels in a database immediately after transactions so you can track inventory constantly. It’s the ideal way to monitor goods if you’re a rapidly growing eCommerce business or manage a wide variety of products.
By using inventory management software that integrates with POS systems, you can access detailed, accurate reports to view how much of a particular item you have in stock and whether you need to order more. If you always know how your inventory looks, you can prevent stockouts and overstocking.
2. Periodic System
With a periodic inventory management system, businesses physically count inventory at the beginning and end of a period. They might count inventory and record updates monthly, quarterly or annually. Some retailers ask employees to count a portion of inventory every day. Like the perpetual system, companies use periodic counts to see if they’re running low on stock and need to order more inventory.
If you have a small inventory or low sales volumes, you might feel comfortable using a periodic system. However, the perpetual system is a more popular option because it provides real-time data and allows businesses to make informed decisions in the present.
Inventory Management Methods
Whether you manage inventory in a warehouse or your home’s garage, you may find it useful to apply inventory management techniques. The following methods can help you gain better control of your inventory and stay on top of your customers’ demands:
1. ABC Analysis
An ABC analysis grades your stock’s value based on the revenue it generates. It helps you recognize products that bring the highest profit and items that are the most costly to store so you can prioritize management tasks. Products are broken down into the following categories:
- A: Category A holds the most valuable goods that significantly contribute to a company’s success. These items typically have a high cost or high sales volumes. In some cases, they may have both.
- B: Category B contains moderately valuable items. These products may cost less than Category A items or not sell as fast. Category B items make important sales but aren’t as valuable as Category A goods.
- C: Category C is for the least valuable products. These lower-priced items aren’t as important as the other categories, but they still impact profitability when sold in high volumes.
Once you know which items go under Category A, you can prioritize reordering these products. You’ll want to ensure you always have enough of your most valuable stock on hand.
2. Just in Time
The just-in-time (JIT) inventory system coordinates demand and supply so raw materials and components arrive right before a business needs them. Manufacturers may use the JIT system to keep little inventory on hand, storing just enough to meet customers’ needs.
You might choose the JIT method to reduce the cost of storing and maintaining inventory. JIT can also help your business decrease waste. With this method, you’ll need to forecast the demand for your products accurately so you can deliver finished goods to customers quickly.
3. Setting PAR Levels
You can set periodic automatic replenishment (PAR) levels or reorder points for each product to help prevent stockouts. A PAR level is the minimum amount of the item to be kept in stock. If the item’s quantity falls below the set PAR level, you’ll know it’s time to order more. Inventory management software with a reorder point calculator can help you determine and set the right PAR levels.
You might use a two-bin system along with PAR levels to help your store stay organized. With the two-bin system, you’ll use a product’s set PAR level to determine how much to put in two separate bins and then stack the bins on top of each other. When the last item is removed from the top bin, it gets set aside to be replenished. In the meantime, the bottom bin takes its place. Retailers often use the two-bin system for smaller-tag items they can easily store in bulk.
4. Demand Forecasting
Demand forecasting is an essential part of any inventory management system. It involves estimating how many products customers will buy from you so you can plan for the future. Demand forecasting has many benefits, such as reducing stockouts, avoiding overstocking and making your customers happy.
You can predict future demand for your products by looking at last year’s sales and considering market trends, seasonality and upcoming promotions. You may also consider social, political or economic factors and how they might influence demand for your products.
5. Kitting and Bundling
Kitting and bundling allow you to group and sell multiple items together in a package known as a kit or bundle. Bundles typically cost less for customers to buy than if they purchased the items individually. By selling multiple items in a single lower-cost unit, you can quickly move products off the shelves and reduce inventory storage costs. Kitting and bundling can also help you save on packaging and shipping expenses.
To manage product bundles, you can assign a new SKU to the group of items. Enter the SKU into your inventory management software to track each group and individual products inside the bundle.
6. Data Analysis
To forecast demand for your products, you first need to collect and analyze sales data. You’ll want to see a history of what customers bought, when they purchased the items and where they were when they placed their order and compare it to your most recent sales data. You’ll also want to consider which items did not sell well and identify products with high return rates so that you can adjust your inventory accordingly.
Cloud-based inventory management software makes it easy to collect valuable information and gives you real-time insights into your eCommerce business. With accurate data at your fingertips, you can make informed decisions quickly.
No matter what method you use to keep track of your stock, you’ll want to audit your inventory by physically counting products at least once a year. A physical count can show any discrepancies between actual inventory numbers and your computer system. For example, you might discover that inventory is missing or damaged during an audit. Overall, an inventory audit ensures you get the most accurate count possible, which will help you figure out your taxable income.
Understanding Inventory Management
Inventory management is an involved process, but it’s essential nonetheless. And, it doesn’t have to be as complicated as it seems. To help you organize your thoughts, here are key aspects to understand for effective inventory management:
- The types of inventory you need to manage
- How you’ll forecast demand
- When and how you’ll order new stock
- How you’ll store inventory
- How you’ll use data to make decisions about your inventory
- The techniques employees will use to fill customers’ orders quickly
- How you’ll track inventory over multiple channels
- How you’ll record inventory on financial documents
- How you’ll use software to automate processes
Do you still feel like your inventory’s too much to handle? We’re here to help. Finale Inventory makes it easy to track and manage your stock levels and forecast demand. With access to multiple integrations and vital metrics, you can streamline inventory management and focus on your company’s growth. Contact us today to learn more about our cloud-based inventory management software!