Inventory is key to most businesses, but fewer more so than for distributors. Being a crucial part of the supply chain, they take on the responsibility of, among others, sourcing and disseminating the products and creating a network of suppliers, retailers, and clients. It’s a multifaceted process with many moving parts, but effective inventory management can make all the difference when it comes to the success of a wholesale firm.
In the United States, eCommerce wholesale trade sales were worth a whopping $2.87 trillion in 2019. That’s a lot of moving products and a lot of inventory to be handled. The management of said inventory has a significant impact across the business, right from its cash flow to customer retention.
What is inventory management?
Inventory management can be defined as the process of ensuring that the stock of products in a firm is optimized. This includes the storage, replenishment, sales, feedback, reverse flow, and more, following the product from its purchase to its consumption. The most effective inventory management methods make certain that stock levels are optimized while minimizing the costs incurred.
Why is inventory management important?
To call inventory management important for an eCommerce business may just be an understatement. Broadly put, it permits brands to consistently fulfill their commitments to the clients in a way that’s ideal for all parties involved. More specifically, the advantages of smart inventory management include:
The Right Big Picture
Accuracy is the difference between a good attempt and a bullseye. Inventory management allows a clear and accurate understanding of the eCommerce firm, instead of forcing them to rely on approximates, or worse, incorrect data. Whether it’s order fulfillment or managing warehouses, those statistics are key especially since inventory has the potential to impact the entire business cycle.
Inventory management provides eCommerce businesses with clarity in terms of the movement of stocks in and out of the firm. This in turn helps them strategize more efficient means of planning out purchases, understanding which products are popular and which aren’t, along with which locations are seeing a better movement of products. It also helps identify opportunities to cut costs such as those incurred by product mishandling.
No one likes to wait longer for deliveries. Understocking can often lead to delayed deliveries, which in turn reduces customer satisfaction with your brand. Inventory management helps point towards what this right amount of stock is for different locations, ensuring that brands can provide the customers with the products they need as they need them. This, while also ensuring that the brands themselves don’t keep too much stock and thus save the associated costs. The best part? Happy customers tend to become loyal ones.
Here for the long run
Given the crucial role inventory management plays, it is not an exaggeration to say that it has an important hand in the longevity of the business. A business failing to leverage any one of the above advantages cannot hope to continue doing so, and stay successful in the long run. The very nature of eCommerce business mandates evolution, flexibility, and incremental growth for success and inventory management has a big hand in ensuring all three.
Inventory management techniques
There is no one true method to successful inventory management. There are several techniques mapped out that can help you, but the best one for your eCommerce distribution would vary depending on many factors. Here are a few such techniques:
This technique divides the inventory into three categories, where A is the highest and C is the lowest in terms of value, i.e., which products are most crucial to overall profitability. It is based on the Pareto Principle, which according to Investopedia, “specifies that 80% of consequences come from 20% of the causes, asserting an unequal relationship between inputs and outputs.” This method helps identify products that contribute most to inventory costs.
Just In Time (JIT)
As the urgent nature of the name would suggest, this method involves procuring supplies from vendors only as the need arises. It is preferred when the aim is to reduce holding costs for the inventory while increasing turnover. While it also helps bring down inventory waste, drawbacks of this method include an over-reliance on the timeliness of the suppliers as well as the lack of “rainy-day” inventory in the case of any disruption in supply.
FIFO and LIFO
Both are financial methods of measuring the cost of production. First In, First Out (FIFO). This method most closely resembles the flow of products and is preferred for that reason. FIFO assumes the products that have most recently been added to the stock are shipped at the very end, prioritizing older stock and uses their costs to measure inventory.
On the contrary, Last in, First Out (LIFO) goes against the logic of production processes. It prioritizes the sale of products most recently added to the inventory over older stocks and measures costs against those goods.This runs the chance of older stock becoming obsolete and is thus not preferred by many companies.
Economic Order Quality (EOQ)
A company’s EOQ is defined as the ideal order quantity that minimizes the costs incurred in ordering, demand, and holding the inventory. It assumes that these costs remain constant for a business and can be calculated as:
Q = The Square-root of (2DS/H)
Where ‘Q’ represents the EOQ units, ‘D’ is demand in units, ‘S’ is order costs per purchase order, and ‘H’ is the holding costs per unit, per year.
The EOQ can help determine the ideal amount of goods to place in stock, along with the reorder point, i.e., the least amount of goods before the need to replenish the inventory.
This method has the wholesaler place the products in the inventory of the retailer before sale. The wholesaler thus retains ownership of the product until sold by the retailer, after which the latter would complete the payment due. This method prevents inventory carrying costs and streamlines the supply chain. On the other hand, the consignment inventories are harder to track accurately, may lead to higher costs on unsold stock, and relies on the wholesalers and retailers sharing a good working relationship.
Cross-docking eliminates the need for storage arrangements as part of the supply chain. Instead, the procured goods are directly sent for distribution lower down the supply chain. It leads to reduced storage and labor costs and higher turnover rates, although demands smooth coordination and reliable transportation.
Supply Chains and The Bullwhip Effect
Also known as the Forrester Effect, this is a distribution chain phenomenon that sees supply chain inefficiencies caused by incorrect demand forecasts. Due to the inconsistent nature of consumer demands, inventory is often stocked based on statistics or trends, including buffer stock. When this effect is in action, demand distortions and inventory fluctuations are observed moving upstream, i.e., from consumer to manufacturer, with the impact worse with each progressive level in the supply chain.
Vendor Managed Inventory (VMI)
One means to reduce the impact of the Bullwhip Effect is the Vendor Managed Inventory (VMI) approach to inventory management. This model was successfully pioneered by multinational retail giant Walmart. In VMI, the manufacturer/distributor (vendor) is responsible for optimizing the inventory held by the distributor/retailer (buyer) and assumes the role of planning the inventory. Often, entire replenishment decisions are made by the vendor, with them even possibly assuming financial responsibility for the stocks.
The vendor is better placed to schedule the replenishment, and can thus ensure optimized re-stocking at the buyer’s end, thus ensuring a smoother flow of products down the chain. It also reduces the scope for stockouts, with replenishments happening on a timely basis. The model relies on clear and timely communication between the partners. VMI does lead to a certain level of reduced control caused by shifted responsibilities. Disruptions in the chain could also potentially lead to stockouts.
Inventory Management and Tech
As businesses expand, managing inventory manually exposes the business to heightened risks of inaccuracies and greater costs. The monitoring and control of inventory can be done through the deployment of Enterprise Resource Planning (ERP) software, Warehouse Management Software (WMS), or Inventory Management software.
Bringing in tech solutions can help to organize inventory data better and allow for the reallocation of resources towards more productive areas of business. Once deployed, the software can provide accurate measurements of stock, tracking of its movement, and the elimination of costly manual processes, paving the way for further business growth.
A comprehensive, customized approach to your inventory management can help set your eCommerce business up for new avenues of success. There are many tried and tested methods and tech interventions to smoothen this process as well; now, it’s only a matter of finding the right fit for your business goals.