Omnichannel / Shipping & Fulfillment

Inventory Management for Scaling ($1M+) Businesses: Techniques You Need to Know Before You Go Bust

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You probably already know how important inventory management is. Optimizing it can help you to:

  1. Save money
  2. Ship products to customers in a timely manner
  3. Keep your ecommerce store running as smoothly as possible

Inventory ties into every element of your store, from supply, to warehousing, to order fulfilment and customer satisfaction.

But, great inventory management can also increase your sales.

How? Managing your inventory properly across all of your sales channels helps to lower your product cost and increase shipping speed – ultimately earning you increased customer loyalty and love.

This is the Amazon model –– and it isn’t out of reach for your business.

If you scale too quickly without the proper inventory management setup, you may find yourself running out of stock (or having to raise your prices to avoid selling out, resulting in unhappy customers), losing track of your inventory (which warehouse was that in again?), or losing profit margins to inefficient processes.

Here are the most important methods, concepts, and techniques that you can employ right now to ensure that doesn’t happen, and your inventory management solution is an asset not a liability, for your business.

Use Data to Make a Difference

Managing inventory creates data, which you can use to streamline processes and improve your inventory and order management.

If you know how much you sell, when you sell it and hopefully why –– you can use that data to calculate how much stock you should have and when. That way, you can switch to more effective management options, predict sales, and manage your actual stock to create value.

At Think Crucial – my personal ecommerce venture –– we used inventory data to scale a small Amazon store into a multi-channel ecommerce business, driving $5 million in revenue per year.

We looked at sales by channel, per period, turn, costs, profit per product, and average product lifespan. The data enabled us to improve inventory management and to forecast sales, which reduced unnecessary stock and cut costs.

Like Think Crucial, you can use inventory data to calculate how much stock you need throughout the year.

Connect with Skubana Now

Want to use Skubana to help manage your multi-channel inventory? There’s a one-click app for that.

Forecast Sales

Sales forecasting is a skill that will allow you to use your existing data for future predictions.

While you can use statistical analysis or a tool for the purpose, simply projecting your current sales data (hopefully 1-5 years) onto a line chart and following the line up at the same rate of increase will allow you to make reasonable predictions.

For example, if you have sold product A for 18 months with an average sales growth of 1.2% per month, you can estimate that you will continue to see that same growth.

This tells you how much of each product you are likely to sell for any given period, because you can use the previous year’s sales for that month or week to predict your sales for the coming year.

If you are a BigCommerce merchant, you can use BigCommerce’s out-of-the-box analytics to drill down into your individual product or SKU sales over various periods –– and use that to forecast.

Here’s what that looks like on the backend:

You’ll likely need to update your forecast model once per quarter –– adjusting based on actual growth versus expected growth to improve future predictions –– which is where the export tool comes in handy.

Effective forecasting can be thrown off by abnormalities in one sales channel, so the better your grasp on your demand generation, the better you can predict overall trends.

Here is a view BigCommerce merchants can use to drill down into channel activity:

Identify Trends

Sales trends include events like holidays, cold and hot weather, and popular opinion that drive sales up or down for one product or another, as well as trends in behavior.

For example, an ecommerce store specializing in selling teddy bears with hearts could expect to see a rise in sales around Valentine’s day, but also throughout spring, when couples tend to get engaged or married.

Identifying your sales trends should be a simple matter of identifying spikes in sales and pinpointing why — then adjusting inventory levels accordingly. If you can identify why sales have gone up, you can decide if that spike is a one-time thing or will happen again next year under the same circumstances.

For example, a spike in sales for rain boots before a hurricane means that you can probably skip using that trend in forecast data, but the same spike in May, which is typically a rainy month, probably means it’s a seasonal trend.

Beyond identifying trends that are driving up sales for inventory management, it’s smart to identify trends beforehand and prepare marketing campaigns to drive even more revenue.

Here’s a basic calendar for the U.S for 2017. You can see other countries here.

Know Your Par Levels

Par levels, or Periodic Automatic Replenishment, is the minimum stock you can have on hand when you place a new order.

Par is basically safety stock, which prevents you from selling out in between orders.

You can calculate your Par level using:

  • Lead time
  • Sales forecast
  • Seasonal demand
  • Any back orders you may have

If you don’t have backorders and you’ve calculated seasonal demand into your sales forecast, par level is a simple calculation.

Lead Time x Expected Sales Per Period = Safety Stock

See this in action

If you sell an average of 10 units per day and have a lead time of 21 days, you must have a minimum stock of 210 units when you place a new order.

10 x 21 = 210

 However, you should add an additional safety margin.

You might still need some time to add the new stock to your inventory, the order might be delayed, you might have returns, and you might have an unexpected surge in sales.

For this reason, you should calculate at least 10% over your minimum safety stock. In this case, 221 units would be enough to ensure that you won’t sell out under normal conditions.

210 x .1 = 21

210 + 21 = 221

Tools like Skubana allow you to automate this process by setting automatic reorder points based on par levels, so your inventory never dips below par. These levels are set automatically by the system and changed constantly based on how your items are selling.

Par levels need to be reported out on a business level, across channels — including Amazon, physical store, and your webstore. Failing to account for one of these can throw off your ability to fulfill and manage orders from any sales channel.

On BigCommerce, you can see revenue from your various channels, including storefront, Amazon, Instagram, Facebook, eBay, etc. To see orders from those channels and measure Par levels, you’ll need to export your order list.

Keep an Eye on Sales Turns

Sales turnover for your industry can help you to better understand how much product you should keep on hand based on the industry.

If you have access to trade benchmarks for your industry, you can use those.

Otherwise, Benchmarks.com offers free industry standards which you can use as a guideline. Simply find the inventory turnover for your industry, and divide the period in a year you want to use by that number.

For example, let’s look at days, weeks, or months.

If we were to apply that with the category “online shopping” which has an average inventory turnover rate of 5.5, we could calculate that a turn is 2.18 months, 9.45 weeks, or 66 days, which is the maximum inventory supply you should have on hand.

That is:

12 months / 5.5 = 2.18

52 weeks / 5.5 = 9.45

365 days / 5.5 = 66.36 

Once you have calculated your turns, you can use this rate to directly calculate your maximum inventory per period. This rate is simply your calculated sales for the period x the turnover period.

In most cases, you should not have more than 1 turns worth of inventory on hand at any one time.

Chances are that you already have the data to perform these calculations.

The Just in Time Inventory Model

You can also use these same calculations to integrate new multichannel inventory management models.

For example, JIT or Just in Time inventory is a model that focuses on reducing costs by stocking the minimum amount to prevent a stock out event.

This allows you to reduce warehousing volume, take some of the burden off inventory management, and reduce total inventory storage costs.

Toyota is possibly one of the largest and most notorious companies to implement JIT inventory. Using it, Toyota was able to reduce costs, reduce storage costs, improve lead times, reduce waste, and reduce employee man-hours spent in counting and quality checking stock.

Is Low Inventory Always the Solution?

While it can be tempting to think that keeping your inventory as low as possible is the easiest way to save money, you must also consider your supplier or manufacturer.

Ordering to the manufacturer’s EOQ or Economic Order Quantity allows you to save considerably on product purchase costs. If you order less, you will pay more per product, which may not offset the cost saved in warehousing and inventory management. If your demand is over EOQ, this is likely not a consideration.

Great inventory is about keeping enough stock on hand to meet customer demand so that you can fulfill quickly, while keeping it low enough to reduce costs and the burden on your warehousing.

And with customers making purchases from more touchpoints than ever before, you need to have the infrastructure to support multi-channel fulfillment.

Grant Yuan, President at CuttingBoard LLC, attributes much of his business’s growth to proper inventory management across channels:

Prior to inventory management software, we would manually sync our inventory levels each night using spreadsheets. It was tedious work that no one wanted to do.

Plus, once CuttingBoard.com became bigger and we carried more SKUs, we started getting issues with stock outs and overselling product on places and having to cancel shipments.

It resulted in an extremely poor experience for our customers.

We realized we needed an automated system to update our inventory on the fly. Luckily, after testing a few systems, we found Skubana and have been with it ever since.

Now, we use Skubana to pull in our BigCommerce, eBay and Amazon orders into one centralized platform, which saves countless hours versus logging into each system separately.

I am a firm believer in embracing technology and tools that make our store deliver a superior experience for not just our customers, but my staff using our systems. This one in particular makes me very happy.

The CuttingBoard.com webstore homepage.

Understand Actual Profits

While great inventory management can help you to reduce total costs, it can also help you to understand them so that you better understand your minimum sales points, which will allow you to make better use of repricing automation, marketing, sales and offers, and other tools to streamline sales.

Real cost of inventory is the total cost of the product, warehousing, delivery, marketing and merchandising.

  • Freight costs
  • Cost of backorders
  • Actual cost of inventory
  • Interest on money borrowed for inventory
  • Inventory damage/loss/theft
  • Management costs
  • Order management and inventory control
  • Dead stock
  • Warehousing costs (rent, maintenance, electric, gas, inspections, employees)

You can calculate warehousing costs by determining how much of your warehouse the product uses, and dividing total costs by that.

For example, if your top selling product is 1/100th of your inventory, 10% of your total warehousing costs belong to that product.

You can perform similar calculations to estimate freight costs per product. If you receive a shipment with 100 products, you can divide shipping costs based on product volume.

Your total sales per product minus the total costs of that product is your actual profit per product.

For example, if you have an inventory value of $100,000 for Product A, which will drive $500,000 in total sales, you could use the following example to see an idea of where your money might be going.

In this example, you are spending 26.8% of total earnings on inventory without considering marketing, merchandising, website costs, etc.

You can easily perform a full calculation, including items like:

  • Ecommerce software
  • Merchandising
  • Marketing
  • Inventory management software
  • Accounting
  • Website hosting

In most cases, your actual profits will go up and down depending on the time of year, market trends, seasonal demand, and other factors.

You can use your sales forecasts to calculate your total costs for each turn, which will allow you to make better decisions for marketing. Inventory costs are typically between 10 and 40% of total inventory value.

For example, if you know your total costs, you can set better minimum pricing, which will allow you to use automatic repricing. This can help you to maintain the lowest cost product without undercutting yourself, so that you can own Amazon buy box buttons, earn features on Walmart, and make Jet.com work for you.

Taking a step back to understand the whole supply chain can reveal insights you miss while head down in day-to-day operations.

Streamline Multichannel Inventory Management to Improve Customer Satisfaction

Inventory management plays a large part in customer satisfaction because it impacts:

  • Logistics
  • Order availability
  • Costs
  • Delivery times

For example, some ecommerce businesses attempt to reduce inventory as much as possible by working with drop shipping or by spot ordering, but this reduces your ability to turn fulfill orders so that the customer gets them as quickly as possible.

Jason Boyce, co-founder and CEO of Dazadi, understands this well –– and even cut his business off from $2,000,000 in revenue in order to increase customer satisfaction for the long run.

“We noticed our performance metrics, on time delivery and order errors were significantly higher with our drop shippers than they were with our own inventory, with our own fulfillment centers. We had to make a drastic change,” says Boyce.

“So, we set out to open additional fulfillment centers and end our drop shipping relationships.  Today, we have four across the country, excluding the stuff we send off to Amazon FBA. Doing this forced us to reduce how many SKUs we offered, but now, we can focus on each individual SKU as an asset and build it up with SEO and customer satisfaction from purchase to delivery.”

Good inventory management will allow you to optimize your inventory control to balance between being able to quickly fulfill orders while keeping warehousing and managing costs as low as possible.

Real Time Inventory

Integrating tools for real-time inventory management allows you to manage and track orders across sales channels, so that you always know your real inventory and don’t drop below par level.

This makes it easier to:

  • Track re-order points to prevent a stockout
  • Track actual sales
  • Prioritize fulfilment for popular items
  • Manage returns and replacement items.

Each of these will, in turn, boost your order fulfilment speed so that customers get the item they want as quickly as possible.

EDI

Setting up an Electronic Data Interchange (EDI) integration can save you money and allow you to speed up your inventory processes, because you can:

  • Communicate orders more quickly
  • Automate order forms
  • Automatically track shipments

This allows you to reduce lead times so that you have to carry less total inventory and can improve communication with customers, while investing less in manual data entry.

Here’s a quick overview of how to set up BigCommerce as a sales channel on Skubana. Find step-by-step instructions here.

  1. On the New Sales Channel popup, select BigCommerce.
  2. On the BigCommerce Integration page, click the link to your BigCommerce store’s Login page.

Connect with Skubana Now

Want to use Skubana to help manage your multi-channel inventory? There’s a one-click app for that.

Final Word

Good inventory management allows you to fulfill orders quickly, manage returns and exchanges more quickly, and prevent stock out events, all of which will greatly improve your customer service.

While quality inventory control and management typically requires investing in sales forecasts, technology, and data, it is well worth your time and money to do so. Inventory impacts your ecommerce store at every level, and improving it can save and earn you money for the long term.

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