What is inventory?
Simply put, the term ‘inventory’ refers to the total of all of the products, goods, and supplies that a company has in stock, and which it plans to sell to its customers. This applies both to physical as well as ecommerce businesses.
Some businesses store their inventory at the same location as their stores, whereas, particularly for online businesses, the inventory may be stored at a warehouse or similar location that is rented for that specific purpose.
Some businesses store their inventory at the same location as their stores, whereas, particularly for online businesses, the inventory may be stored at a warehouse or similar location that is rented for that specific purpose.
What is inventory management?
Inventory management is basically every step of the process between a seller receiving an item or batch of items that they plan to sell, all the way through storing and keeping stock of it, to the final stage of getting the item delivered to the customer who has bought it.
For any business, managing its existing inventory – knowing exactly how many pieces of each item are actually in stock, where they are located, how many of each item has sold in the past, and how likely it is to sell in the future when new items should be ordered, etc. – is crucial. It is also important to track how many – if any – have been returned or are damaged and therefore to be discarded.
The entire process of managing one’s complete inventory is called inventory management. It covers everything from the moment the stock is obtained or purchased, to the moment every item in stock is sold out. When done right, inventory management should positively affect a business, boosting sales and keeping clients satisfied.
Proper inventory management is important for both physical businesses as well as ecommerce. In particular, for sellers who may be putting their products for sale on multiple sites, it is essential to have a robust system in place to keep track of how many of each product has been sold on each site, as well as tracking all the variations in price, quantity, etc. offered.
For any business, managing its existing inventory – knowing exactly how many pieces of each item are actually in stock, where they are located, how many of each item has sold in the past, and how likely it is to sell in the future when new items should be ordered, etc. – is crucial. It is also important to track how many – if any – have been returned or are damaged and therefore to be discarded.
The entire process of managing one’s complete inventory is called inventory management. It covers everything from the moment the stock is obtained or purchased, to the moment every item in stock is sold out. When done right, inventory management should positively affect a business, boosting sales and keeping clients satisfied.
Proper inventory management is important for both physical businesses as well as ecommerce. In particular, for sellers who may be putting their products for sale on multiple sites, it is essential to have a robust system in place to keep track of how many of each product has been sold on each site, as well as tracking all the variations in price, quantity, etc. offered.
What are the steps involved in inventory management?
The steps involved in inventory management look different for every company and seller because each will have a different method or priorities based on their specific line of business. But, for the purposes of this article, it generally goes like this:
- An item or items is/are purchased by the seller (or manufactured by them in case they make their own products)
- The item then enters a chosen storage space
- It is then logged and reported in an inventory management system, which records the total number of items available, its location in the storage room or warehouse, and its identification numbers (barcodes or SKUs – which stands for Stock Keeping Unit, a unit used for product labelling) which can be added to the system.
- Over time, the number of units in stock is monitored
- This number of available items is then put up for sale online and the system keeps track of how many are sold
- A customer orders one or more products from the store
- As soon as the order is received, the required number of items is processed
- The items are then picked up from the storage location, packed, and sent out for delivery
- The system records that a certain number of items have now been removed from the inventory
- When inventory levels drop to a particular amount, the system triggers the need for a restock – this means the seller has to reorder a new batch or make a new batch of products
- Once the new batch is ready, the whole cycle repeats
Every stage of the process matters, and each part of the method and system used should be constantly revised and improved upon to ensure maximum efficiency.
Potential advantages of good inventory management
Inventory management, if done right, can help your business in many ways: it can improve your profit margins, increase your efficiency, and improve the overall quality of your business. It can also lead to improved customer satisfaction and experience, as well as optimised performance and output.
Let’s look at a few of these in more detail:
Let’s look at a few of these in more detail:
- It can help you avoid overstocking and reduce wastage
Overstocking is one example of an issue that may be caused by bad or careless inventory management. Buying more of a product than there is demand for can be harmful to a big business, and can even shut down a small one. In addition to added expenses on buying the items, you're adding more costs in terms of extra warehouse space – money that can be spent on buying other products instead of overstocking on one. Further, overstocking can lead to extra, unsold stock needing to be discarded or thrown away, as it takes up too much space in your storage warehouse. Similarly, buying more stock of a particular item than there is demand for can mean it takes you a long time to sell it. A proper inventory management protocol will help prevent both of these situations. - It helps you save money
By not checking and keeping track of stock, as explained above, you can easily run up your costs either by overstocking (buying more than you need) or overpaying for space (renting more than you need). A properly implemented inventory management system can help you keep a check on this by only ordering what you need and renting the right amount of space. By tracking demand and supply, such a system will also help you to order certain best-selling items in bulk, which will be cheaper than ordering smaller numbers repeatedly. This can save you a lot of money in the long run. - It can help predict demand for your products
Over time, regular monitoring of your inventory data and information can give you valuable insights about any rise and fall in consumer demand for certain products. You may even be able to tell which products will be in demand during which months – for example, children’s school products like bags and boxes are likely to be in higher demand towards the end of the holiday period, because many children will be going back to school immediately after, requiring them to purchase now. This is why many stores could opt to have large ‘back-to-school’ sales and even offers, which can help them move maximum products in a short period. - It can help you eliminate products that don’t sell
While inventory management can help you understand which are your most popular products, it can also help do the opposite: it can help you choose the right items to restock, and decide which products should be removed from your store or reduced in quantity in stock to make space for more popular products. This way, you don’t end up ordering more of items that haven’t sold well in the past, and instead, focus your finances on those that do sell. - It helps you avoid spoilage
Another problem that can be prevented by good inventory keeping is spoilage, which happens to any perishable item with an expiry date, like food items or cosmetic items, or supplements and medical items. You can track the expiration duration and date of products to ensure you can sell them before they expire and get thrown away, costing you money. This is particularly true for businesses that deal with organic or food-related items, but it applies equally to any products that could be damaged due to long exposure to certain kinds of weather. A lot of FMCG (fast-moving consumer goods) products also can only be stored for a certain period of time before they must be thrown away as per government or health department guidelines. Without proper inventory management, it is very hard to manually keep track of which item is going to spoil when, or when the expiry or sell-by date for a particular batch is near. However, with a good process in place, this becomes easy. - It helps avoid keeping products in stock that have become obsolete
This is specifically for electronics or other technology-related items which can become obsolete over time. If you have more of such products in stock than what you can actually sell during a particular period of time, you may end up with products that customers no longer want because newer models are available. Then, you will have little option but to sell them at a discount, or completely discard them, both of which will be a potential loss for you. - It helps you detect mismanagement
Businesses of all sizes can potentially undergo losses because of mismanagement: either deliberate mishandling or misplacing of goods, or inadvertent mistakes due to improper methods and procedures. Unless you personally supervise every aspect, it would be impossible to figure it out until it is too late. However, this is something that will show up in a properly managed inventory management registry: if you notice that more items are being listed in stock than what is actually available, or that you run out of items when the system says you should have more, then you know something is wrong and you can investigate. This can also save money in the long run. - It helps you manage larger inventories (which can’t be handled manually)
As your business grows and you start offering more and more kinds of products, manual tracking of inventory – recording every order, purchase, delivery, and returned item – becomes impossible. Similarly, for businesses that operate across multiple locations, keeping track of everything centrally can be a challenge. In this case, having a central inventory hub with a system that is regularly updated is not just useful, it becomes essential.
Thus, inventory management is useful for businesses of all sizes. In fact, the bigger your business, the more crucial it becomes.
Potential problems with inventory management
Not every system is infallible. Despite the best interests of everyone involved, there are some potential pitfalls to be aware of.
- Dead stock can be a problem due to improper entries
This is the opposite of what is described above, where you have items showing in your inventory system, but they are missing in your storage due to deliberate or inadvertent mismanagement. Here, items exist in your storage, but there is no entry of them in your inventory system. This is known as ‘dead stock’. Since the items remain unaccounted for in your inventory tracking system, you are not aware that you need to put them up for sale. Not only can this make you lose out on the money you could have made by selling those items, but you can also run the risk that those unaccounted products could very well spoil in storage by the time you find out you have dead stock. - Upgrading software can be expensive – and time-consuming
Many inventory management systems are actually software modules that need to be installed. But, like every software, inventory management modules also undergo multiple iterations. In days past, companies used to rely on manual inventory tracking, or on simple software programmes. As time goes by, that software becomes obsolete or is no longer supported by the developer. Therefore, older, legacy systems may need to be upgraded, or the entire system may need to be given a thorough overhaul. This can, at times, be a costly affair that could take some time, particularly if you have a large and complex inventory to track. - You may need to invest in training for your employees or staff
Many inventory management systems are complex and require a certain amount of training in order to be operated efficiently. After all, not using the system to its full potential is as bad as not using it at all. So, if you’re using some of the more modern systems, it is a good idea to invest in some amount of training for all your employees or staff members who will be using the system. This way, you can avoid costly mistakes. - Integrating software across the business service can be complex
As mentioned before, some of the software that runs inventory management is quite complex in nature. But, to work properly, they need to be integrated across all the various functions of your business. This can be quite a complex undertaking, particularly for businesses that operate across multiple locations and offer a wide range of products across different verticals.
Using inventory analytics for remote monitoring
Inventory management for stock being sold online is usually done remotely. This means you can keep track of your stock using inventory analytics, which are tracking metrics that make note of the numbers and sales of your products. One of the biggest potential benefits of a remote inventory management system is that you are not restricted to using it only on one system in your office, for example – you can access it anywhere. This saves you a lot of time and effort, both in terms of manual labour as well as hardware-related challenges.
Updating your stock and inventory information using analytics involves the use of warehouse management systems (WMS), which are a type of software designed to optimise the process of managing your stock, and making it more efficient.
There are different types of Warehouse Management System for ecommerce based on the needs that different businesses and retailers have, but their main function is to collect data regarding what enters the warehouse, and what is packaged, sold, and delivered. A major benefit of utilising software is that more accurate data can be obtained faster, giving you the ability to base decisions about your inventory on solid information.
Choosing the right inventory management system that works for you as a retailer or online seller depends on many factors, like the kind of warehouse or storage you have, your range and quantity of products, how you plan to track orders and deliveries, the cost of the software, its customisation and optimisation options, etc. Make sure to understand each aspect fully before you make your choice.
Updating your stock and inventory information using analytics involves the use of warehouse management systems (WMS), which are a type of software designed to optimise the process of managing your stock, and making it more efficient.
There are different types of Warehouse Management System for ecommerce based on the needs that different businesses and retailers have, but their main function is to collect data regarding what enters the warehouse, and what is packaged, sold, and delivered. A major benefit of utilising software is that more accurate data can be obtained faster, giving you the ability to base decisions about your inventory on solid information.
Choosing the right inventory management system that works for you as a retailer or online seller depends on many factors, like the kind of warehouse or storage you have, your range and quantity of products, how you plan to track orders and deliveries, the cost of the software, its customisation and optimisation options, etc. Make sure to understand each aspect fully before you make your choice.
Inventory management on Amazon
Tools to implement inventory management can be hard to find for first-time users, which is why Amazon has created a full suite of inventory tools for registered sellers who are using FBA (Fulfilment by Amazon). Using FBA, sellers can store all their products in Amazon warehouses (also called fulfilment centres) and rely on Amazon to take care of the complete packing, shipping and delivery of products. Amazon also provides robust customer service and can handle returns.
Along with this, registered FBA sellers get access to a comprehensive inventory management system with tools that can be used for everything from listing products to creating shipping plans, adding or removing items from Amazon’s fulfilment centres, as well as sending, tracking and monitoring all your shipments, both in the UK as well as between the UK and Europe.
Along with this, registered FBA sellers get access to a comprehensive inventory management system with tools that can be used for everything from listing products to creating shipping plans, adding or removing items from Amazon’s fulfilment centres, as well as sending, tracking and monitoring all your shipments, both in the UK as well as between the UK and Europe.
Inventory terms you need to know
Managing your inventory with Amazon requires knowledge of some basic terms that are often used in the process. Knowing what these mean can help you better understand the data you’re getting from your inventory, which is important for your decision-making process.
- FBA's Manage Excess Inventory: Excess inventory is when an item is sitting in stock unsold because the seller bought more of it than there is demand from the consumer. Amazon’s system will alert you if you have such excess items in stock, and will also provide useful suggestions on how to deal with it.
- FBA's Excess Inventory Percentage: This is the percentage of your inventory that is deemed as excess or not in demand from customers.
- FBA sell-through rate: The FBA sell-through rate is calculated as units sold over the past 90 days compared to initial inventory. It gives you a measure of how your sales are doing compared to the total quantity of products you initially bought.
- FBA restock tool: The FBA restock tool helps sellers calculate how much inventory should be sent to Amazon fulfilment centres, and when it should be sent. It is based on current inventory levels and data about the product sell-through rate, coupled with other data and trends.
- FBA in-stock rate: FBA's in-stock rate is based on SKU (stock keeping unit) and 60-day sales velocity (the number of units sold for each SKU the past 60 days). It is calculated as the percentage of the past 30 days an SKU was in stock times 60-day sales velocity, divided by 60-day sales velocity.
Understanding your inventory dashboard
The inventory dashboard gives you a quick glimpse at various metrics that Amazon measures for you as a seller. These will help you understand:
- When you should restock: This number will tell you how many of your items will run out in the next 28 days so that you can place orders well in time to replenish your stock.
- Estimated loss of sales: Based on how many items have gone out of stock in the past month, Amazon’s system can tell you how much you could potentially lose in sales.
- SKUs of items that went out of stock: This is yet another metric which tells you specifically which items have already gone out of stock so that you can re-order only those from your supplier or retailer.
The machine-learning-based system also helps sellers by recommending the best-predicted levels for items available in the inventory and predicts shipment timelines based on current stock levels, reorder timelines, and restock timelines.
The website can also monitor products that have an expiry date and provides a sell-through date. There are also storage optimisation plans recommended based on each seller’s specific metrics to ensure they’re making the most of their space in the Amazon fulfilment centre.
Finally, inventory management with Amazon can help you fix stranded inventory and “no listing” errors, maintain sufficient inventory levels for a specific time period, and deal with inventory items in bulk. You will get regular inventory reports that give you detailed information about inventory items daily and monthly, archived inventory items, reserved items, details about inventory movement, and any adjustments and inventory event details.
All FBA sellers can explore each of these features through the Seller Central page for FBA inventory.
The website can also monitor products that have an expiry date and provides a sell-through date. There are also storage optimisation plans recommended based on each seller’s specific metrics to ensure they’re making the most of their space in the Amazon fulfilment centre.
Finally, inventory management with Amazon can help you fix stranded inventory and “no listing” errors, maintain sufficient inventory levels for a specific time period, and deal with inventory items in bulk. You will get regular inventory reports that give you detailed information about inventory items daily and monthly, archived inventory items, reserved items, details about inventory movement, and any adjustments and inventory event details.
All FBA sellers can explore each of these features through the Seller Central page for FBA inventory.
How to know if your inventory management is working
You can tell if your methods of managing inventory are working out by keeping an eye on the data you get from your warehouses and storage spaces. Here are three key metrics that will give you a good understanding of how you’re doing:
- Sell-through rate: In short, this tells you how much you’ve sold in a certain period. It is calculated as the number of products sold, within a specific time period, versus the overall inventory received or purchased at the beginning of that time period. It is represented as a percentage: the higher it is, the better you’re doing.
- Inventory turnover rate: This is the rate at which the items are leaving your inventory, whether through use, by being sold to customers, or being replaced. It is calculated by dividing the number of items sold during a specific time period by the average inventory level during that same period. Again, a higher turnover means more sales.
- Inventory performance index: Also known as IPI, this is a metric that measures your efficiency in managing your inventory. IPI is affected by factors like excess inventory, ageing inventory, long-term storage fees, listing problems, imbalances in inventory levels when compared to customer demand, etc. You might be able to improve your IPI score by avoiding excess inventory and ordering only what you need for a specific time period. You may also improve your IPI by keeping popular items stocked and fixing stranded or unlisted items.
Tips for better inventory management
Putting together the inventory management system that you want and consider best for your business may seem a little challenging, but it can be done if you go through your requirements and needs, and choose what works for you best.
- Keeping accurate records right from the start can help prevent several discrepancies and issues later. So, make sure you and your staff always maintain accurate inventory, no matter what system, protocol or software you use.
- Use the 80/20 rule for successful inventory management, as it entails stocking the least amount of goods that will bring you the maximum amount of profit. This means that 20% of your products will be responsible for 80% of your profits. So, prioritise your best-selling products and eliminate items that have not sold well based on past data.
- Conduct regular inventory audits as they can be a great help. Look at your physical versus on-system inventory levels, and check your turnover rates, current costs, previous costs, and more. You can do the audit yourself, or hire a professional auditor.
- Learn how to calibrate economic order quantity for the items you are selling. This goes for reordering or restocking as well – don’t wait on your vendors to alert you. This will help you order exactly what you need when you need it while keeping up with consumer demand.
- Have contingency plans in place for any sudden changes in customer demands. It is better to be prepared than to be caught unawares.
- Last but not least, don’t follow what others do to manage their inventory. Each business is different: understand your data so you can put together the best possible management system that yields the most effective results for you.
FAQs
Why do I need an inventory management system?
An inventory management system is important to keep track of how well your business is doing. Done right, it can tell you which items to stock, which items are selling or not selling, when to re-order, when certain items are going to spoil, and much more. It can help you streamline your business and save money in the long run while optimising for profit.
How can I manage my inventory on Amazon?
Sellers who have signed up for Fulfilment by Amazon (FBA) get access to a full suite of inventory management tools. If you are not signed up for FBA, there are also other third-party inventory management software or services you can avail yourself to help you manage your stocks. These services automate a lot of the work for you, like maintaining levels and preventing spoilage.
What is inventory control?
This term refers to keeping track of your inventory to make sure you have enough products to fulfil orders.
How can I access inventory management tools on FBA?
These tools are available on the Seller Central FBA Inventory page. They can be accessed from many devices, enabling you to manage inventory on the go.
What is the Amazon inventory performance dashboard?
The inventory performance dashboard is provided for FBA members as part of the site’s inventory management tools. This helps the seller track some key performance metrics about their inventory.
How can I improve my Amazon IPI score?
You can improve your IPI by removing inventory items that aren’t selling, reducing excess inventory, and reducing long-term storage fees by removing items before they stay 365 days in the Amazon fulfilment centre.
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