The Ecommerce Inventory Management Guide
Everything you need to know to manage, prepare, and report on ecommerce inventoryRequest a Quote
Creating an efficient ecommerce inventory management system is one of the most important aspects of running a successful business. There’s a lot that goes into the process, but with full visibility of every phase and understanding best practices will help you prepare for the unexpected.
To help set you up for success, we’ve pulled together everything you’ll need to know about preparing, managing, and reporting on ecommerce inventory. Click on the links below to jump to a specific topic with detailed guides and information.
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Preparing ecommerce inventory
Before you establish an inventory management process, you’ll first want to prepare your inventory for the unexpected. Below you’ll find information on how to better forecast future orders and customer demand, plus the different options for inventory financing.
Inventory can be a company’s most expensive asset, requiring investment before you have any sales. Inventory financing ensures continuous business growth through an asset-backed line of credit or short-term loan for purchasing more product.
If your ecommerce business is in the midst of growth (new product offerings, more sales, etc.), then you’ll highly benefit from having a plan in place for possible cash flow gaps, especially if a majority of cash is going towards production. If not, it may lead to problems with inventory accounting. A few inventory financing options include equity finance, WIP finance, AR financing, crowdsourcing, and merchant cash advances.
Inventory forecasting calculates the inventory needed to fulfill future orders. Using historical sales data and other macro-level trends, you can make smarter, more accurate predictions on what products will sell over a specific period of time. There are several benefits of inventory forecasting, including less inventory needed on hand, more sales from fewer out-of-stock items, less manual labor, and more efficient production cycle.
Managing ecommerce inventory
Effectively managing inventory is one of the most critical aspects of running a successful ecommerce business. If you don’t, you risk losing money or failing to meet customer demand. The following information provides insight on how to establish an accurate, efficient, and cost-effective inventory management process.
An inventory audit is an analytical procedure that checks a company’s inventory and confirms the financial records and actual count of goods match. It helps ensure accurate stock levels and reporting, and prevents stockouts. An inventory audit can be conducted by doing a spot check (i.e., counting physical stock to see if it matches how much you believe you should have), or having a third-party auditor perform the procedure.
The inventory management process is an important aspect of ecommerce success. It refers to the management and monitoring process of a company’s stocked goods. The process includes everything from ordering and restocking your inventory to inventory forecasting. A proper inventory management process helps you prepare for the unexpected, such as running out of a product, miscalculating storage needs or space, manufacturing delays, and cash flow issues.
Inventory management software automates and streamlines the process by tracking inventory levels, orders, sales, and shipments across channels and locations. In today’s digital world, an inventory solutions system is a necessity for growing your ecommerce business.
The right inventory software will help automate several of the inventory management techniques and methods listed below, saving time and lowering the number of human errors. It is data-driven and provides real-time updates, rather than manual, one-point-in-time methods.
To ensure your ecommerce business has the right stock levels needed to fulfill orders on time, inventory control is a vital process that optimizes inventory storage. The primary goal of inventory control is to keep only the necessary units on hand without spending too much money upfront. The outcome of accurate inventory control leads to reduced costs, warehousing improvements, and satisfied customers.
When one fulfillment center isn’t enough, you may want to consider distributed inventory. Splitting your inventory across multiple fulfillment center locations is a great way to better serve your customers, especially if they’re scattered across the country or if you’re looking to provide 2-day ground shipping.
Other reasons to consider inventory distribution is if you ship a high volume of orders and/or your products or orders are heavy in weight. Many 3PLs provide multiple warehouses so you can deliver the fastest, most affordable shipping.
Order picking is the secret to a successful fulfillment process. A pick list is the customer order information that’s sent to the warehouse that indicates the items the picker will need to retrieve from storage. There are different types of picks lists, but they should all provide a recap of the items ordered and should be easy and clear to understand. A single pick list may contain a single item or several of a certain SKU. As soon as a pick list is generated, the order fulfillment process can begin.
To make the process of tracking inventory easier, a wireless barcode inventory scanner is a tool that’s worth the investment. The use of a barcode scanner is a great ecommerce inventory solution that can help automate and streamline the inventory management process and significantly reduce human error. Inventory scanners work by scanning the barcode found on the product. Similar to a shipping barcode, the information encoded in the barcode is read by inventory management software and tracked by a central computer system. Inventory scanners are wireless, which makes it easy to scan a product wherever it’s stowed.
Inventory tracking consists of knowing which SKUs you have in your possession, the locations in which you store them, and the quantities available at each location. An inventory tracking system will help you keep track of real-time inventory levels of each SKU for better inventory control across your stores.
Accurate inventory tracking should take place throughout the entire supply chain, including tracking inventory from your supplier, returns from customers, and damaged goods. Using an inventory tracking system is the most efficient inventory tracking method as it ensures greater transparency and accuracy than other methods.
Periodic inventory is a system of inventory valuation where the business’s inventory and cost of goods sold (COGS) are not updated in the accounting records after each sale and/or inventory purchase. Instead, the account is updated after a designated accounting period has passed. In a periodic system, businesses don’t keep a continuous record of each sale or purchase; inventory balance updates are only recorded over a specified period of time (e.g., each month, quarter, or year). At the end of the accounting period, the final inventory balance and COGS is determined through a physical inventory count.
A perpetual inventory system is an inventory management method that records when stock is sold or received in real-time through the use of an inventory management system that automates the process. A perpetual inventory system will record changes in inventory at the time of the transaction. This system works by updating inventory counts continuously as goods are bought and sold. This inventory accounting method provides a more accurate and efficient way to account for inventory than a periodic inventory system.
Ecommerce inventory reporting
Get smart about your inventory by having a good reporting process in place. All ecommerce businesses, small and large, must be able to report on key inventory data points to continually improve and make better business decisions. Below you’ll find resources for inventory accounting and reporting.
(COGS + Ending Inventory) – Purchases = Beginning Inventory Formula
Beginning inventory is the total value of a company’s inventory that is for sale at the beginning of an accounting period, which means it’s the same amount as the ending inventory from the prior accounting period. Beginning inventory is an important aspect of inventory accounting that you’ll need to use in the following areas: Balance sheets, internal accounting documents, and tax documents.
Beginning Inventory + Net Purchases – COGS = Ending Inventory
Ending inventory refers to the sellable inventory you have left over at the end of an accounting period. When the accounting period ends, you take your beginning inventory, add net purchases, and subtract the cost of goods sold (COGS) to find your ending inventory’s value. Knowing your ending inventory value will impact your balance sheets and your taxes, so it’s important to calculate the value of your inventory correctly.
Finished goods inventory is the total stock available for customers to purchase that can be fulfilled. Using the finished goods inventory formula, sellers can calculate the value of their goods for sale. ‘Finished goods’ is a relative term, as a seller’s finished goods may become a buyer’s raw materials. For example, a textile factory may produce materials that can be used in clothing such as cotton or silk. While these may be the textile factory’s finished goods, they can sell them as raw materials to apparel retailers who will create them into new finished goods: clothing.
Inventory accounting is a process that tracks and accounts for changes in the values of inventory over time as it relates to manufacturing and costs of goods sold. When new products are purchased at a different cost than before, the inventory value will change. Inventory value will vary based on how much product you have on hand, how much you are selling, and any changes in supplier pricing. Inventory value will also change when products are damaged, expired, or outdated.
An inventory report shows the amount of inventory on hand at a given time. It displays numbers that represent product(s) you’re able to sell now, inventory you are ordering, or inventory you need for internal business use. A well-organized inventory report will you help you avoid over-ordering inventory or running out of inventory when customers buy your products online.
It can be created in physical or electronic form, but a best practice is to connect the systems that utilize your supply chain and customer order data. However, if you’re looking to create your own reports to track your inventory, get started with our free inventory report templates.
Cost of goods available for sale / Total number of units in inventory
Inventory weighted average (also known as ‘weighted average cost’) is one of the four most common inventory valuation methods used in ecommerce accounting. This method uses a weighted average to determine the amount of money that goes into COGS and inventory. To calculate the weighted average cost, divide the total cost of goods purchased by the number of units available for sale. To find the cost of goods available for sale, you’ll need the total amount of beginning inventory and recent purchases. The final calculation will provide a weighted average value for every item available for sale.
Inventory metrics, formulas, and terms
Understanding all types of inventory data will help you make better business decisions as you scale. To continue your knowledge on how to best prepare, manage, and report ecommerce inventory, below you’ll find inventory metrics and important terms you’ll want to be aware of.
(COGM – COGS) + Value of Previous Year’s Finished Goods = Value of Finished Goods
Finished goods inventory is the total stock available for customers to purchase that can be fulfilled. Using the finished goods inventory formula, sellers can calculate the value of their goods for sale and how much inventory is needed to prevent stockouts. Out-of-stock products and backorders cause customers to wait a long time for their purchase until an item is back in stock or cancel the order altogether.
Carrying cost is the sum of all costs related to holding inventory including warehousing, labor, insurance, and rent, combined with the value of damaged, expired, and out-of-date products. The carrying cost of inventory will depend on your products and storage needs, your total number of SKUs, your location, your inventory turnover rate, and whether you keep retail fulfillment in-house or outsource it.
Inventory Holding Cost = (Storage Costs + Employee Salaries + Opportunity Costs + Depreciation Costs) / Total Value of Annual Inventory
Inventory holding cost is the sum of all costs involved in storing unsold inventory, including warehousing, insurance, labor, transportation, depreciation, shrinkage, obsolescence, and opportunity costs.
Calculating inventory holding cost is relatively easy, as long as you’ve determined your storage, employee, opportunity, and depreciation costs. Once you know those subtotals, add them together, and then divide that sum by the total value of your annual inventory (the combined average value of all inventory that you move in a year). That number, when expressed as a percentage, is your inventory holding cost.
It’s impossible to predict the unexpected, especially changes in buying patterns and last-minute issues with suppliers. However, there are ways to help avoid an out-of-stock situation by understanding the inventory safety stock formula. Safety stock is extra product you keep on hand in case of an emergency or supply chain failure. It provides a safety net in your inventory to ensure you don’t run out of items.
Inventory turnover rate = cost of goods sold (COGS) / average inventory
Measuring inventory turnover can help you better manage your supply chain and sales channels effectively, as well as improve inventory forecasting. It’s the ratio that indicates how many times inventory is sold and then replaced in a specific time period.
High inventory turnover rate may indicate that you’re selling a product in a timely manner while low inventory turnover rate may indicate that certain products are not selling. Whether your inventory turnover is too high or too low, by learning how to best measure, you’ll be able to better regulate the issues as they arise.
Days on hand = (average inventory for the year / cost of goods sold) x 365
Inventory days on hand (or days of inventory on hand) measures how quickly a business uses up its inventory levels on average, and allows you to minimize stockouts. With accurate stock levels, you can ensure customers are going to be able to purchase what they need without needing to subscribe to “Back in Stock” notifications.
You can use this measurement combined with inventory forecasting to determine how quickly your products are being sold on average and accurately predict future inventory levels. In general, the fewer days of inventory on hand, the better.
Reorder point formula = demand during lead time + safety stock
Reorder point is the minimum unit quantity that a business should have in available inventory before they need to reorder more product. Understanding the inventory reorder point formula helps to ensure you order at the right time and don’t risk ordering too late and run out of stock. It’s done at the SKU level so you acknowledge that each product has a different sales cycle, so it’s data-driven and accurate. Solutions like ShipBob can help automatically setup reorder points to remind you it’s time to order more inventory.
Inventory shrinkage rate = (recorded inventory – actual inventory) / recorded inventory
Inventory shrinkage is when actual inventory levels are less than accounting has them recorded as. The four most common causes of inventory shrinkage include consumer theft, employee theft, inventory damage, or management errors. There are several ways to prevent inventory shrinkage.
Writing off inventory is the process of removing the cost of a portion of inventory from accounting records. This is done when inventory loses value and cannot be sold due to damage, theft, loss, or decline in market value.
Just in Time (JIT), commonly known as the Toyota Production System, is a supply chain management method designed to cut costs, increase efficiency, and decrease waste by receiving goods when they are needed. The method entails having enough inventory available to meet customer demand and the remainder is quickly stockpiled thereafter.
The JIT inventory method is most commonly used in manufacturing, but it can apply to ecommerce stores. Some advantages include reduced storage costs, improved communication, less waste, and smaller inventory investments. Some disadvantages include difficult implementation, greater risk of supply chain failure, more planning, and higher probability of stockouts.
Optimal Reorder Quantity for a SKU = Avg. Daily Units Sold x Avg. Lead Time
Reorder quantity is the total number of product units you request from a manufacturer or supplier on an inventory replenishment purchase order. The exact amount should not be so high that you have too much capital tied up in inventory and subsequent warehousing costs, but not so low that there’s not enough safety stock and you risk selling out before you can get the next batch of inventory.
Beginning WIP Inventory + Manufacturing Costs – COGM = Ending WIP Inventory
Work in process (WIP) inventory is a term used in production and supply chain management. It refers to the total cost of unfinished goods currently in production. It’s different from what’s considered ‘finished goods,’ which refers to items ready to be sold as is. Businesses that sell highly custom products (e.g., hand-made products on Etsy) are more likely to oversee the WIP inventory process than a business that purchases finished goods directly from a supplier or manufacturer.
Ecommerce inventory made easy
You don’t have to do it all alone. When you choose ShipBob as your 3PL partner, you’re given the support, resources, facilities, and tools you need to make inventory management and ecommerce fulfillment easier.
Easily connect your online store, ShipBob supports many popular ecommerce platforms such as Shopify, Ebay, Amazon, BigCommerce, and more. Once you connect your store to our technology, you send us your inventory, and ecommerce orders will automatically be fulfilled after your customers make a purchase.
Grow your ecommerce business by partnering with ShipBob.
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