E-commerce Inventory Management Terms and Methods for Retailers

ECommerce Inventory Management February 13, 2021

Chloe Henderson

Writer

Balancing supply and demand means finding the happy medium between over and understocking products. When done correctly, retailers can increase sales while minimizing inventory expenses to boost profitability.

With e-commerce inventory management, online retailers can govern product activities throughout their extensive supply chain to meet their ever-fluctuating customer demand.

What is E-Commerce Inventory Management?

General inventory management involves balancing stock procurement, storage, and sales to maintain profits. By balancing these elements, retailers can minimize inventory expenses, such as warehouse and shipping costs.

E-commerce inventory management is similar, as it assesses the amount, pricing, range, and location of items. However, e-commerce businesses tend to use various providers to source and house products, such as warehouses, fulfillment centers, and third-party logistic providers (3PL).

This makes e-commerce inventory management particularly challenging, as managers must actively track stock levels at all locations. However, collecting inventory data enables retailers to determine

Reorder points
Economic order quantity (EOQ)
Optimal on-hand inventory
Turnover rates
Top-performing suppliers

Adequate inventory management gives companies a holistic view of their workflow, performance, and financial health. It also enables businesses to improve other internal processes, such as marketing, employee management, and supervision practices.

Inventory Management Terms

Inventory managers should familiarize themselves with standard inventory terms to ensure they can adequately control stock activities.

Inventory refers to products, goods, or merchandise that businesses sell to their customers.

Stock Keeping Unit, or SKU, is an identification code used to classify and categorize inventory.

Variants refer to different product options, such as size, color, edition, model, or feature.

Units of Measurement are a standardized way to quantify stock, such as pairs, dozens, pounds, inches, and bundles.

Supply Chain consists of the processes that manufacture, distribute, and store products.

Dead Stock refers to the inventory that remains in stock for so long it becomes obsolete and the business can no longer sell.

Buffer Stock is a set number of extra products kept on-hand to minimize the impact of supply chain risks, including stockouts and late deliveries.

Minimum Viable Stock is the minimum stock level that companies must keep in order to satisfy customer demand without delay.

Reorder Point, or ROP, is a calculated stock level that, when reached, triggers a procurement order to prevent overstocking and stockouts.

Lead Time is the time it takes the supplier to fulfill an order, starting when the order was placed and ending when the package is delivered.

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ABC Analysis is a method used to categorize existing inventory into three groups. Group A consists of high-profit products with low sale rates, group B holds medium-profit items with moderate sales, and group C refers to low-profit products with high sale rates.

First In, First Out, or FIFO, is an accounting method where inventory that is acquired first must be sold first. Depending on the type of inventory, the FIFO technique can reduce food waste, inventory expense, and dead stock.

Just-in-Time, or JIT, is a fulfillment method where products are ordered on an as-needed basis, keeping cash flow circulated rather than tied up in stock.

Drop Shipping is a fulfillment method where all inventory is stored off-site and packages are shipped directly to the customers from a third-party.

Centralized Inventory Control is software that controls stock activity across multiple sales channels, from in-store to online.

Inventory Management Software is a tool that allows managers to actively track stock activities, streamline back-end processes, automate repetitive tasks, and collect data.

Cost of Goods Sold, or COGS, refers to the total cost of inventory that is sold within a specific accounting period.

Carrying Cost, or holding cost, is the expense of keeping inventory on-hand compared to the products' value.

Inventory Auditing is the manual counting of inventory to ensure physical products match the recorded stock levels.

Inventory Forecasting is the prediction of future inventory needs, such as reorders, based on historical trends.

5 Essential Inventory Management Methods

Inventory management varies depending on the type of inventory the company handles. However, there are five essential methods that all businesses should utilize.

Keep Safety Stock

Supply chain disruptions are often unexpected and hard to mitigate, causing a domino effect throughout the network.

With safety stock, retailers can satisfy demand changes while resolving their supply chain issues. While this is not a permanent resolution, it gives businesses enough time to locate reliable vendors and procure inventory.

Balance Inventory

Organizations must find the balance between under and overstocking to meet customer demand without inflating storage costs. Swaying too far to either end of the spectrum can significantly limit profitability.

With inventory management software, companies can automate stock counts, reorders, and the procurement process to ensure inventory is balanced at all times. Advanced solutions can even trigger reorders on their own once products dip below healthy levels, eliminating the need for manual purchase orders.

Implement a Kitting Technique

The kitting technique allows businesses to get rid of slow-moving products by grouping them under a discounted price.

For example, many retailers run Buy One, Get One Free deals to get rid of overstocked items to avoid completely losing profits. The kitting technique also boosts the average order value (AOV) while customers take advantage of the price reduction.

Reference Past Purchases

By referencing historical inventory reports, businesses can make data-based decisions on future orders. Depending on products' previous performance, managers may need to increase or decrease reorder quantities.

Optimize Storage

It is necessary to optimize the physical storage of inventory for quick retrieval and order fulfillment. Product locations should be based on their sales trends and travel time.

For example, popular items should be located near the order fulfillment area, whereas slow-moving stock can be kept in the back of the warehouse.