A Guide To Inventory Management
May 21, 2021
The quality of a brand’s physical product and the materials used to create it are critical to maintaining a satisfied customer base. The minute a product’s quality noticeably deteriorates, customers are bound to react, negatively affecting every other aspect of the brand and company—from employee morale to revenue generation and marketing strategy. But the availability of a product and the way it’s managed and stored are just as important to customers as product quality.
Even the biggest e-commerce brands—especially direct-to-consumer (D2C) brands like Chewy and StitchFix—must compete with online retail giants like Amazon, which has more than 110 active fulfillment centers in the United States alone. Because it boasts a massive inventory and one of the largest workforces on the planet, Amazon has had to create its own internal inventory management system and make it available to brands selling on its website. This is just one way the company is able to fulfill approximately 1.5 million packages every day—seemingly with few hiccups. It’s also how it keeps up with increasingly demanding customers.
For smaller e-commerce brands, managing inventory is generally less complex and risky — but the basics remain the same, and they are essential to understand.
What Is Inventory Management?
Inventory management is the ongoing process of managing a company’s inventory of products, the components used to create those products, and the materials used to create components. Suppliers usually accomplish this through warehousing and processing finished products, but even those can be broken down into specific methods.
Why Does Inventory Management Matter?
Creating a strategy for managing inventory saves money, time, and energy in the long run. It allows brands to focus on improving products and workflow rather than salvaging depreciated, spoiled, or decayed inventory that is no longer fit for sale.
Tracking inventory in a coherent way ensures that supply keeps up with demand in relation to a given sales cycle.
Here are a few reasons that effective inventory management is important for the success of any brand:
- Improves merchandising and marketing decisions: Inventory management gives brands a real-time look into what’s selling well and what isn’t. With this information, brands know exactly where to increase supply or manufacturing orders and what products to de-prioritize.
- Increases customer retention: Today, customers are more demanding than ever. A customer that places an order only to find out a week later that it is out of stock is unlikely to make a repeat purchase. This is where effective inventory management can make or break customer retention and a brand’s reputation.
- Minimizes costs and maximizes sales: Unsold inventory left to languish in a warehouse or on store shelves is probably one of the worst ways a product can spend its life. It can also make it difficult to sell new products—with warehouses filled with unsold inventory and no extra space, companies often make the difficult decision of marking down items or removing them altogether. Efficient inventory management helps keep this unwanted surplus of inventory from blocking product flow to the consumer and decreases the cost of warehousing.
How Can You Manage Inventory Efficiently?
Taking a “one size fits all” approach to inventory management will surely lead to frustration. It’s essential to look into what each method involves, what would work best in the current workflow and sales practice, and then pick the technique that provides the best possible outcome.
Here’s a quick breakdown of some of the most common techniques used by brands all over the world:
- Economic order quantity (EOQ): This method, also known as EOQ, is based on a formula that determines the ideal amount of a product to have on hand given a set of variables typical to that company’s workflow.
For example, variables considered often include total cost, production demand, and other factors associated with the business. The driving factor is to keep costs down and minimize excess spend, and the EOQ method is built on that mindset. The formula generally considered in EOQ also factors in final delivery cost and invoiced purchase orders.
- Minimum order quantity (MOQ): This method of inventory management, also known as MOQ, is determined by the absolute minimum of any given product or unit that someone is willing to sell. An MOQ is most often put in place within the context of a production run, but that’s not the only instance.
Let’s say you run a company that manufactures and sells specialty coffee beans, and you supply several companies with coffee for their offices and events. You’ve calculated that manufacturing approximately 1,000 bags of coffee beans per month is more than enough to distribute between all of your existing clients and will provide a surplus for new clients, too. However, you’re counting on all of your existing clients to purchase a minimum number of orders each month. Otherwise, you could end up with an unexpected surplus of bags and few places to sell them on short notice. Establishing a MOQ on commercial orders for bags of coffee beans will keep this from happening.
- Safety stock inventory: This method revolves around the idea that you want to make sure you’re always prepared for an influx of high demand that you could not have foreseen given traditional inventory management strategies.
The effects of the COVID-19 pandemic on consumer product demand illustrate just how valuable a safety stock inventory can be. When consumers first began practicing safety measures meant to mitigate the risk of spreading COVID-19, one of the first products they turned to was hand sanitizer. Consumers completely cleaned out store shelves of all hand sanitizer brands in a matter of days, leaving many suppliers scrambling to get back in stock. These companies learned the hard way: If they had an adequate safety stock inventory in place, circumstances may have looked different.
- Bulk shipments: This method is exactly what it sounds like—purchasing and shipping goods in bulk, mainly under the assumption that it's cheaper to do so and will pay off with a huge ROI. In many cases, that is true. Using the bulk shipments method has a high potential for profitability, especially if there’s certainty that the bulk product or good will be sold fast. But for brands operating in volatile markets, such as luxury goods, the bulk shipments option is probably the worst method of inventory management. Not only is it difficult to manage bulk inventories when demand fluctuates, but warehousing costs increase due to holding such a large volume of product.
- ABC inventory management: Last on this list is ABC inventory management, named for its method of categorizing inventory by importance or value, with A being the most valuable and C being the least. ABC analysis, which is how inventory value is calculated, starts with dividing inventory into categories based on the 80-20 rule, or the Pareto principle. In simple terms, this calculation provides a basis for prioritizing and managing inventory groups separately and selectively. Not all inventory is created equal.
These methods are only a few of the ways companies manage inventory, whether it’s one brand selling one product directly to consumers, or an online retailer selling products from several brands. There is no “one size fits all” approach to inventory management.
The Bottom Line
Inventory management is an ongoing process that helps brands prioritize product value, supplement initial growth stages, and fulfill orders from clients. All of these issues will not only affect your bottom line but will hurt your reputation with customers, too.
Inventory management requires financial planning and budgeting, and that's where Settle comes in. We can help free up cash flow so that brands can purchase more inventory to grow their business, without having to pay for it upfront. Schedule a demo with us today to learn more.