Managing Inventory Efficiently: Avoiding Stockouts and Overstocking

Managing inventory can be a difficult task for any business, but it creates a special challenge for an ecommerce website. Poor inventory management can can result in stockouts and lost sales, or overstock (excess inventory) and the added cost of storing products long term. Finding the sweet spot of stocking the right amount of inventory optimizes your sales to its fullest potential.

Here, we’ll explore and share some of the industry’s best practices for online inventory management to maximize revenue.

Analyze Sales Trends

The first step is finding patterns in your current and past sales. Collecting and analyzing this data can help you identify what products are performing well and customer shopping habits throughout the week, month, and year.

Forecast Demand

After analyzing your sales trends over time, you’ll have a good idea about future demand. You’ll be able to predict what times demand spikes and what products are more in demand when. This informed prediction is important for knowing how much inventory to order and when.

Use Online Inventory Management Software

Inventory management software allows you to track your inventory in real-time with each order purchased. A lot of ecommerce sites have online inventory management software built in, but you can always use your own preferred software. Good online inventory management should allow you to sort products in a way that makes sense for your business, update stock levels automatically online, and set reorder points based on your current and forecasted demand.

Have a Safety Stock

Even with a good inventory management online system, demand can increase without warning and differ from your forecasted demand. A safety stock is a safety net for you and your customers, with a little extra stock stored just in case you sell out. Knowing how much safety stock to have will depend on the strategic decision of your company, how much storage room you have, and weighing the risks and benefits of carrying extra stock. Sometimes you can forecast safety stock if you have had previous high, out-of-character outliers in your past sales.

Calculate Your Reorder Point

Your reorder point is the point at which you need to reorder your stock from your supplier. Ordering too late or too little means out-of-stock items and lost sales, while ordering too early or too much results in storing extra inventory you may not have the space for. The calculation for your reorder point is:

Reorder Point (ROP) = (Average Daily Sales x Lead Time) + Safety Stock

This formula requires you to have analyzed your past sales patterns for your average daily sales, knowing how long it takes to restock inventory (lead time) which is usually dependent on your supplier, plus the amount of safety stock you have.

Monitor Your Inventory

Even with management software, safety stock, and a well-calculated reorder point, it’s good to manually check your inventory by setting alerts when the stock goes below a threshold or when sales are much higher than expected so that you can act accordingly.

Have Reliable Suppliers

One of the most important parts of stocking your inventory well is working with reliable suppliers who deliver consistently on time. Online marketplaces and supplier directories can help you get in contact with suppliers. Recommendations from other businesses, supplier accreditations, interviews, prototypes, and audits can help you understand if a supplier is reliable and easy to work with. Create a well-written contract between you and your supplier to help prevent future issues.

Implement Dropshipping

Consider implementing dropshipping, where third-party vendors or your supplier directly ship to your customers. This prevents you from having to store overstock products and allows you to offer a wider range of products to your customers.

Use Promotions for Slow-Moving Inventory

Sometimes products you thought would perform well end up taking space for longer than you expected. When you need to move that inventory out, use promotions and discounts to increase customer demand and move it off your shelves more quickly.

Fast and Reliable Payment Gateways

Although payment gateways don’t inherently change your inventory levels, their role during the purchase process helps facilitate correct orders. A fast and safe checkout often ensures repeat purchases from customers. In addition, most ecommerce sites allow payment gateways to integrate with the online inventory management system to automate inventory right when a purchase is made, ensuring real-time inventory updates. A reliable payment gateway, such as PayPal or Stripe, can make a seamless experience for customers and merchants alike. 

Effective inventory management not only saves you money and reduces waste but it creates a better experience for your customers, which will only continue to increase your revenue long term.