Developing an Inventory Management Strategy

As with so many aspects of running a business, there is no one-size-fits-all strategy. As we mentioned in Getting Started with Inventory Management, your strategy should encompass a variety of items.

At the start, you will want to ask yourself:

• What are your primary items to be ordered? What about secondary (supplemental)?
• What stock do I already have on hand?
• Where will I store my inventory and how will it be organized? How much will this cost?
• How will I track and manage my inventory? Do I need to track inventory by SKU or unique product IDs?
• How will I keep shoppers up-to-date on what inventory I have on hand?
• Is there any way I can alert interested shoppers when I get products back in stock?
• Do I want to offer the ability to pre-order?
• How will I know when I need to order more of an item? Can I set up notifications?
• What kinds of outside influences could impact demand for my products? Roughly when can those influencers be expected?
• Where and how will I source my products? How much will this cost?
• How can I forecast demand? Are there resources available to help me calculate this so I do not over create or buy too much inventory?
• How can I accurately report on my current inventory levels and assess inventory performance?
• Do I plan to sell in a variety of online marketplaces or in a brick and mortar storefront? How will I manage inventory across all of these channels?
• If I run into obsolescence, how can I get rid of inventory? Can I still gain revenue?

Working through this list of questions and calculating the cost of inventory will get you started with a solid foundation. In this chapter, you will find more details and tips on how you can best answer these questions and prepare to sell successfully to both online and offline shoppers.

Minimizing the amount of product you have to store while maintaining the amount of product you need on hand to fulfill orders is a core goal of inventory management. Having too much stock in storage ties up capital, while failing to have enough product can result in missed revenue and a poor customer experience.

Here are some of the more common factors that can influence your inventory you should take into consideration.

Seasonality
For many online retailers, seasonality can greatly influence your inventory. A simple example of this would be purchasing a large shipment of swimsuits from a vendor in Winter. They're unlikely to sell quickly, and these items would occupy storage space for an extended period of time. Instead, you could have used that space for inventory in higher demand during that time of year.

A thoughtful clothing merchant knows to buy swimsuits in the weeks or months leading up to summer, and heavy coats in the weeks/months leading up to winter.

Competition

Identify and keep a close eye on your competitors. Much like you, they are looking to claim a bigger share of the market, perhaps by cutting their prices or by introducing a new or improved version of a product.

Trends

It’s an unfortunate truth - when a product becomes unfashionable or becomes out of date, demand can quickly plummet. Additionally, it’s not uncommon for a market’s tastes and preferences to shift and have an effect on demand for a given product. Persuasive advertising is designed to cause a change in tastes and preferences and thereby can create an increase in demand. Conduct market and customer research regularly to stay ahead of the curve.

Preferences

Knowing your audience and their preferences can also play a large role in determining which products to keep in strong supply. For example, you can identify that the black version of a specific t-shirt style has the highest demand compared to the rest of your inventory. It’s likely you can keep a higher number of the black variation consistently available, but still maintain a limited supply of the other colors for those less frequent purchases.

Income

Product demand also depends on the income of the target buyer. Depending on your industry and product, knowing your target market intimately can have a significant impact on your business’s bottom line.

If you sell tools and hardware and your primary demographic are roofers in Barrow, Alaska, you will likely see a large dip in demand as this area won’t see the sun for 67 days during Winter. It’s a fairly safe assumption that construction workers find other employment when it’s dark and 15-30 degrees Fahrenheit below freezing. Likewise, if a drought were to occur, agriculture production typically falls with it, which means the incomes of farmers fall as well. As a results, farmers could demand fewer manufactured goods.

Keeping your ear to the ground as to what is occurring in the lives of your target market can help you prepare or even be proactive in sidestepping declines in the demand for your products.

Advertising

Advertising expenditure can greatly dictate product demand. However, if your paid ads don't have successful targeting and messaging, they run the risk of creating the opposite effect. Although bigger advertising budgets can help, an expensive, elaborate ad doesn't necessarily translate into sales. We've all experienced watching an engaging or entertaining television commercial, only to be left at the end unable to identify the product or service being advertised!

Advertising, when done well, can impact demand for your inventory. If you plan to run campaigns for your overall store/brand or for a specific product, be sure you have advertised items well stocked.

In addition, don’t neglect developing and applying an SEO strategy for your ecommerce business. Although this tactic takes some time to bare fruit, search engine marketing can become a lucrative marketing technique.

You will want to maintain a consistent stock of your top sellers, and store them separate from your secondary and less popular products. By keeping them separate, you can help organize your warehouse and optimize the storage and bin picking process.

For example, a business’s primary product may be laptop computers, but it also offers accessories like wireless mice or screen cleaner wipes. An inventory or warehouse manager would want to make sure the business’s primary go-to products are easily accessible and take priority. The laptops they regularly sell get prime real-estate in the warehouse, like being on the ground floor right next to the shipping staging area.

The size and location of where inventory is stored or housed also has a significant impact to your overall management strategy. Having the right amount of space available and having that space well organized creates a constant cycle of product flowing in from the vendor/manufacturer and out to the customer.

Space

Ideally, you want just enough space to address your expected volume. Too much space and you’re paying rent for empty square footage. At the same time, not enough space prevents being able to take advantage of unexpected vendor/supplier deals or offers, resulting in missed sales opportunities.

Location

Choosing the geographic location for a warehouse is equally important, especially to larger businesses that might need more than one. In some areas, there may be a chance at lowering your budget overhead by taking advantage of lower energy and labor costs. Having a warehouse located close to your vendor, supplier, or manufacturer may give you an advantage over the competition by getting new products and shipments before anybody else. A merchant may also consider locating a warehouse in an area where supply for their particular product is low, and they have the opportunity of filling a market void.

Scale

There is a growing segment of third-party logistics companies (or 3PLs) available to outsource your warehousing and other logistical needs. Depending on your particular model, 3PLs can save you time and money, help you further scale your operations, and allow you to focus on optimizing other aspects of your business.

Being able to provide fast and accurate delivery of goods is a proven method to improve customer satisfaction. One of the first ways you can improve this is by analyzing the handshake between your inventory management and order fulfillment processes.

Technology can free you and better enable your team to focus resources on streamlining and automating processes and eliminate the risk of errors inherent in manually managing fulfillment processes. In fact, in Order Management Strategy for Efficiency and Growth by NetSuite, ”Respondents identified performing inventory counts (32%) and sales order picking (20%) as the top two processes that could benefit from mobile technology.”