What You Need to Know About eCommerce Inventory Optimization
eCommerce inventory optimization involves maintaining a perfect balance between supply and demand to keep logistics expenses low and avoid issues such as overstocking, stock-outs, and backorders. In short, you want to ensure you have the right items in the right place at the right time, but you must do that efficiently and cost-effectively.
You oversee the business process tasked with ordering, handling, storing, and moving product by solely managing inventory. But when you incorporate optimization, you improve inventory management by balancing capital investing and service-level goals with supply and demand volatility. Although you need to consider several elements when optimizing inventory, one thing you cannot miss out on the list is whether you have the right amount of cash flow on hand to buy stock.
Read on to learn more about eCommerce inventory optimization and how to get it right.
Key Considerations for eCommerce Inventory Optimization
eCommerce inventory management refers to supply chain management that supervises products flow from production to storage and onto the proper sales channels. Inventory optimization starts with inventory management. Let’s look at some of the crucial considerations for inventory management.
eCommerce business owners must be sufficiently agile to respond to any demand fluctuations in the dynamic eCommerce marketplace. However, responding to market change is not everything since you may have inadequate stock to meet demand surges or miss out on a trend. A great way to be ahead is to anticipate fluctuations proactively.
Although you may use historical demand data, it is insufficient to predict future demands and avoid stock-outs, especially if you sell products with sporadic and erratic demand. The best way is to use statistical demand forecasting. It analyzes historical demand at stock-keeping unit levels and assigns an ideal algorithm to calculate need depending on the product’s demand patterns.
This forecasting is efficient, considering that each item in the warehouse has different demand and variances. Therefore, you need to treat replenishment, safety stock, and forecasting differently to prevent stock-outs.
Minimum Viable Stock Levels
Understanding the demand fluctuations for your product category over time is the first thing you must do for efficient inventory management. When you have a good insight into your product demand and the duration it takes to replace your inventory, you can establish a minimum viable stock level for every product you sell.
A minimum viable stock level or par level is the lowest stock an eCommerce business can hold and still meet demand without delay. When you know the number for each product, you can ensure you restock immediately if the quantity falls below the minimum threshold. Determining minimum viable stock levels is a regular activity since the number is subject to change as demand for the product shifts or your business grows.
The manufacturing schedules of your product can also determine how you set the par levels. For instance, if you have an item that, on average, sells a single unit daily and their manufacturing and fulfillment process takes 30 days, your minimum viable stock level must be more than 30 units.
Related: Amazon Inventory Management in 2022
Right Inventory Management Technique
Your inventory management technique is fundamental. One popular inventory philosophy among eCommerce businesses is the just-in-time technique, where the business stocks an item each time a client requests it. With this approach, the volume of inventory and the number of fulfilled orders are approximately proportional.
eCommerce businesses embrace this technique since there is a reduced possibility of having revenue held up in dead stock. The companies reduce storage expenses since they require less room to store their inventory. However, the just-in-time technique is terrible for eCommerce inventory optimization since it falls victim to demand and supply shocks.
For instance, demand shocks can occur when companies cannot handle a sudden surge in demand for an item due to dissatisfied customers or unexpected delays. On the other hand, supply shocks can occur when there is a sudden decrease or increase in raw materials or manufacturing facility closures.
Some of the eCommerce inventory optimization strategies you can adopt are:
Third-Party Logistics (3PL) Fulfillment
eCommerce businesses can choose 3PL to reap powerful benefits, including those they would have gotten from the just-in-time technique. 3PL is the practice of handing over eCommerce logistics to other companies. Besides logistics, this practice can help handle warehousing, fulfillment, and inventory management. It can help you save costs on labor, warehouse rent, and shipping materials. Besides, you can access expanded warehouse infrastructure that opens up new customer bases and gives you more time to focus on high-level responsibilities.
First-In, First-Out Technique
eCommerce organizations in the food supply and foodservice sectors might find it challenging to let go of the just-in-time technique if they deal with perishable products. But they can instead adopt the first-in, first-out (FIFO) technique to address the challenge. With the FIFO technique, the business first focuses on selling older products in its inventory. This eCommerce inventory optimization technique is also ideal for companies that do not sell perishables.
For instance, a clothing eCommerce business can focus on selling certain clothes based on season changes. They may push swimming suits in May and winter apparel in December since those are the times when the items are relevant. It enables them to avoid dead stock and the issues that may arise, including wear and tear due to aging, storage costs, the strain on their systems, etc.
Dropshipping is another tactic that can help in optimizing eCommerce inventory. Typically, the eCommerce owner does not touch the product but instead fulfills it directly from the manufacturer when a customer places an order. This technique is excellent, especially for eCommerce owners seeking to enter the market but cannot afford storage facility costs.
ABC analysis helps significantly in eCommerce inventory optimization since it clarifies the items with the most significant effect on inventory cost, so you know where to direct your focus. The analysis is based on the Pareto principle and breaks inventory into three categories. This principle implies that 80% of your eCommerce sales result from 20% of your customers.
Break your products into categories:
A: High-value product with low sales frequency. The items deliver about 80% of the inventory value and probably comprise 20% of the inventory.
B: Moderate-value products with a moderate sales rate. The items deliver about 15% of the inventory value and comprise 30% of the inventory.
C: Low-value products with high sales frequency. The items deliver about 5% of the inventory value and comprise 50% of the inventory.
If high-value products with low sales frequency (A) account for most of your eCommerce business revenue, losing those clients would cost more than the other two categories.
You need to calculate the ABC inventory analysis for the entire inventory to determine the items with the highest value. The annual consumption value of each product is a product of the annual number of units sold and cost per unit. After getting your categories, you give priority to group A items when replenishing orders.
Right Cash Flow
While the above eCommerce inventory optimization strategies, including forecasting demand, establishing minimum viable stock levels, identifying priority products, etc., are essential, cash flow is king. Running out of cash can deal your eCommerce businesses a big blow. You require adequate cash flow to cover the current expenses, including purchasing inventory. Unfortunately, many companies take a long time to convert stock into cash and thus can quickly run out of funds.
The solution is to find financing options that can provide cash to the business. But you should avoid funding options such as line of credit, inventory financing, and credit cards. They are not ideal for eCommerce businesses due to their high-interest rates, limiting requirements, and lengthy approval periods.
Instead, choose a financing option built specifically for eCommerce businesses. Such a funding option is tied to actual sales, thus no need for collateral and minimum payments. You don’t have to worry during slow months since the funding option won’t bill you. Instead, you’ll repay only after selling a product.
Also, a funding option built for eCommerce businesses understands the unique challenges and thus has features to make their processes more manageable. For instance, you can integrate your store and get prequalified quickly without obligation. After that, you just link the store and receive funds within days. The cash flow solution can also offer the professional and technical support your eCommerce business needs to succeed.
Related: A Key to eCommerce Success: What is Inventory Funding?
Seasonal Aspect of Inventory
When someone mentions a seasonal business, you may think of landscaping, pool cleaning, and other companies that rely on the weather or other temporal factors to operate. However, eCommerce businesses also undergo seasonal fluctuations.
There is safety stock, cycle stock, and seasonal stock in eCommerce. Cycle stock is the regular working inventory, while safety stock is the extra inventory stored to reduce the risk of stock-outs due to unanticipated shifts in demand and supply. On the other hand, seasonal merchandise is the stock bought, gathered, or held to respond to the need of a particular season.
ECommerce’s seasonality occurs due to various reasons, such as income availability, weather conditions, recurring shifts in population levels, and customs and traditions. Some items depend on certain such factors to become available. For instance, ice cream and cold drinks are available during the summer. Some custom-driven seasonal products include pumpkins on Halloween and Eggnog on Christmas.
Recurring shifts in population levels are a seasonality factor that drives up demand based on the present population levels. For instance, demand for rental homes in resort towns depends on the holiday season, attracting tourists every year. Income availability is a more subtle seasonality factor, but people often spend more cash on the days around their payday.
Challenges Resulting from Seasonality
While you may have planned your inventory purchases for your eCommerce business way before, seasonal changes can affect your stock levels. Therefore, you should consider all seasonal factors before stocking your business. The challenges that you may face due to seasonal changes include:
If you fail to replenish your stock before the peak season, you may experience stock-out scenarios, and ultimately your unhappy clients will run to competitor stores.
There are situations when demand for your items may be less or zero. If you hold too much stock in your warehouses or fulfillment center, you can hurt your cash situation. You might face a dead stock situation if the inventory fails to sell for a year which translates to losses for your business.
When you understand the seasonal aspect of the inventory, you can stock products based on the demand, i.e., maintain smaller inventory during slower seasons and stock back up during busier months. You can also change the items you stock to meet seasonal needs. For instance, if you sell outdoor furniture in summer, you can switch to area heaters during the winter months.
The Wall Street Journal notes how companies are trying to establish a good way to balance their post-pandemic inventories after learning the dangers of having too little or too much stock during the pandemic.
Get eCommerce Financing to Sustain Healthy Cash Flow
The proper cash flow to purchase stock is vital for eCommerce inventory optimization. Although traditional financing options can help, they are not ideal due to their high-interest rates, limiting requirements, long approval periods, etc.
Fortunately, Onramp is a cash flow solution developed specifically for eCommerce and recognizes your business’s unique challenges. Schedule a call with Onramp today to learn more about how we can help.