Choosing the Right Inventory Management Technique for eCommerce


Published: | By Indiana Lee

eCommerce is among the most accessible ventures available today. No matter what level of start-up capital you have, there are options available to you. Nevertheless, ease of access doesn’t automatically translate to success.

One of the main things you need to strategize as an eCommerce entrepreneur is how you handle your inventory. After all, your stock is your bread and butter in this sector.

Various inventory management techniques can support eCommerce and have a positive impact on eCommerce conversion rate. Choosing the right one can mean the difference between a thriving business and just another struggling enterprise. 

Let’s look a little closer at some of the things to consider when choosing the right inventory management technique.


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Examine Your eCommerce Business Model 


Starting an eCommerce venture requires some significant planning before the launch date. This will include identifying your core product ranges and the market you intend to serve.


Go to your business model:

  • Retail
  • Dropshipping
  • Subscription

You’ll also need to commit to some market research to gain solid data on which to set your company’s short and long-term goals.

Alongside these elements, you need to establish what eCommerce business model you’re going to choose.

This is vital because it can also affect what approach to inventory management is likely to be most appropriate for you. 

  • Retail business model

The retail business model involves your customers purchasing goods directly from your business. This means that you handle everything from sales to shipping to returns, in most cases.

You tend to have greater leeway over what type of inventory management system you use here.

Particularly if you’re warehousing in your own premises, you can use the first-in, first-out (FIFO) approach, which ensures older stock goes to customers first.

If you have limited space, just-in-time (JIT) inventory management can be an option, as this revolves around ordering stock from suppliers only as needed.

If you don’t want to store on-premises, third-party logistics (3PL) fulfillment can put responsibility for storing and shipping goods in the hands of another company.

Implementing inventory days on hand calculation provides insights into how long current inventory will last based on average usage, aiding strategic decisions in restocking and preventing stockouts.

  • Dropshipping business model

Dropshipping is a popular eCommerce business model, especially among solo entrepreneurs who don’t have a great deal of start-up capital.

This model involves advertising products on your online store, but a third-party company manufactures and ships these.

There’s relatively little up-front outlay involved, but the profit margins can also be quite small.

The lack of inventory responsibility can also narrow your choices down as far as inventory management is controlled. In some instances, 3PL can be an option if you directly link your store to the third party’s site.

However, if you’re avoiding this direct connection, you can opt for a JIT approach.

This means that you’ll need to regularly check on your dropshipping third party’s current inventory levels and adjust your site’s product range as items move in and out of stock.

  • Subscription business model

A subscription-based model is especially popular among eCommerce businesses, and may be easier to manage than most people realize.

Customers will sign up for monthly or weekly products, so you’ll have a more predictable understanding of your inventory each month.

Most inventory techniques would work with this business model as well. 

Identify the Best Fit for Optimization 


  • JIT
  • 3PL
  • FIFO

Adopting strategies to optimize your ecommerce inventory in ways that fit your unique business can directly influence your success.

No matter the inventory management system you pick, you should use best practices that may optimize the process such as utilizing barcode scanning to keep an accurate count of stock.

You should also establish and review your periodic automatic replacement (PAR) levels, so that your software is ordering stock in line with demand.


Read more about how to automate your eCommerce business here.


When you’re choosing which inventory management technique fits your business, it’s worth looking at how responsive they might be optimized within your business.

  • Just-In-Time (JIT)

JIT inventory management can feel very much like a “flying by the seat of your pants” situation. 

Given how last minute this approach is, there are relatively few forms of optimization that are likely to mesh with it.

Regular PAR assessments are likely to be the most relevant technique. After all, the threshold upon which you trigger ordering in JIT is incredibly sensitive to demand and potential supply issues.

These influencers can change regularly. Therefore, frequent and thorough PAR assessments tend to be effective.

  • Third-party logistics (3PL)

3PL limits how much control you have over optimization techniques. Depending on your relationship with the third-party business, you may be able to discuss what optimization measures they use and perhaps suggest some.

That said, there are forms of optimization within your business that could mesh with this inventory management technique.

For example, auditing your supply chain to establish where inefficiencies are — either from suppliers or shipping — is still well within your power.

Ask your third party to provide you with data on the journey from manufacturing to delivery. Raise any concerns with them and ask about plans for adjustments.

If they refuse to make improvements, it may be time to either switch to a different model or select a new third-party collaborator. 

  • First-In-First-Out (FIFO)

FIFO is the model that tends to have the most scope for optimization. This is because you have full control over the process.

You can create product pricing hierarchies that are not just based on similar items, but also based on the oldest stock that you need to move.

Performing cycle counts to have full visibility of your inventory is considered a good way to optimize, too.

However, this should already be baked into your model as you need to keep track of the age of each item.

In addition, the previously mentioned PAR and supply chain audits are useful, as they can impact efficiency.

Commit to Effective Analysis 


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Your first choice of what inventory management technique could fit into your eCommerce business doesn’t necessarily make it the right system.

Your business will be subject to influences that aren’t necessarily related to the business model or optimization potential. 

Therefore, you need to regularly analyze how effective the inventory management technique is.

Wherever possible invest in inventory management software that enables you to track relevant key performance indicators (KPIs).

This could include how quickly your inventory is being sold and replaced (turnover), which can reflect how responsive your choice is to market demand. 

Order fulfillment metrics can also help you to see how efficiently your technique enables products to reach consumers. 

Regularly assessing these components enables you to be more agile as an eCommerce business.

With data in hand, you can start to plan shifts to alternative business models or inventory management systems well before they become a real problem.

Indeed, as your business becomes more successful and grows, your assessments help you understand how scaleable each solution is, too.

Conclusion

Various factors influence success in eCommerce, one of which is the technique you use to manage your inventory.

Given that there are various approaches to eCommerce, it’s important to choose the techniques that are well-suited to your business model.

You should also take the time to examine what techniques mesh well with other forms of optimization, as this can help you get closer to peak performance.

Remember, though, that a business is rarely static. You need to keep assessing your company’s approach to inventory to establish whether the techniques you use are still suitable, particularly as your business grows.

Beyond these techniques, you should leave an open door for your employees and supply chain partners to offer suggestions.

After all, they’re interacting most closely with your inventory and everything connected with it daily. This intelligence, alongside a strategic mindset, can help your company to thrive.

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