Inventory management: The secret efficiency hack for scale-ups

Do you want to decrease dead stock? Better forecast future demand? Or generally run a more efficient e-commerce business? Then inventory management is a skill you need to master.

More on the specifics of how you can do that later. But right now, I'm going to let you in on a secret. Something that you need to accept if you're planning to read past this introduction.

Effective inventory management can't be built on an Excel or Sheet when your business scales up. Instead, you need inventory management software tailored to your business needs.

Keep scrolling for inventory management techniques and best practice tips from real retail business owners (who found this out the hard way).

What is inventory management?

If you search "inventory definition" on Google, you get the following result:

inventory

A complete list of items such as property, goods in stock, or the contents of a building

But inventory management entails much more than the management of a list of stock. Here's what it's all about:

Inventory management is a form of supply chain management that encompasses a range of processes, including sourcing, using, selling and storing inventory. If you make your products yourself, your approach to inventory management needs to account for raw materials and finished goods. If you don't, it'll just include the latter.

The best types of inventory management use custom inventory management software to track all these components in real time, allowing you to react to market conditions. Importantly though, it also leverages historical data to generate trends, meaning you can make more informed decisions about your entire inventory.

Why is inventory management important?

In the first line of this blog, I fired some of inventory management's biggest benefits at you. But there are a whole lot more. And these are the best ways to explain why any growing retail business should invest in inventory management.

That's not to say there are no downsides to inventory management. In the table below, you'll get an overview of everything you need to know about the pros and cons of an inventory management system:

And here's more about each pro and con in depth:

Pros

Pro 1: Automation

Put simply, when you're managing a growing inventory on a spreadsheet, you run the risk of introducing human error.

This results in poor inventory management, where you're either under or overstocked. Plus, if you did it manually, you'd probably spend more time in an Excel or a Sheet than you would running your business or taking care of customers.

Automation solves all these issues, allowing you to sleep easy at night.

Pro 2: Better demand forecasting

With demand forecasting, you don't have to guess how a spike in customer demand at Halloween or Christmas will affect your business. By considering factors like seasonality and historical sales trends, software platforms help ensure that you always have optimal inventory levels.

As Todd Saunders, founder of online shopping platform BIG Safety, says:

"The most important thing when forecasting stock is to have a clear understanding of your historical sales data. This will help you identify patterns and trends that can be used to predict future and seasonal demand. Other important factors to consider are lead times, safety stocks, and minimum order quantities."

This means there's no need to worry about the next two things on this list…

Pro 3: Less dead stock

Remember those people who hoarded antibacterial hand gel and masks in the pandemic? Only for those items to become widely available for low costs in stores across the globe, leaving them with egg on their face?

That's a situation no e-commerce entrepreneur or small business wants to be in. Thanks to inventory forecasting, you can steer clear of any excess inventory disasters that eat into your profits.

Pro 4: Less overselling

By the same token, inventory management software helps ensure you don't oversell. It does this by providing real-time visibility of your stock levels, allowing you to list items as out of stock as soon as your inventory runs dry.

Pro 5: Reduced costs

There's something implicit in all the points above that I'm yet to really focus on. And that's the amount of money you can save with inventory management software. After all, not having accurate stock levels could sink your business if your mistake is on a big enough scale.

Plus, automated inventory management gives you a clearer picture of your cash flow, meaning you can see where your money is tied up.

Pro 6: Increased customer trust

Even worse than losing money from an inventory management mistake is losing the customer trust you've worked so hard to build. And when you're incapable of fulfilling orders, customers won't take long to check out your competitors.

Cons

Con 1: You need to invest

Inventory management is no different from other sophisticated software solutions, in the sense that it doesn't come cheap. Problem is, without it, you'll almost certainly end up losing more money than if you invest, as Todd explains:

"Automated inventory management systems can be expensive, but the cost is often offset by the increase in efficiency and productivity. I recommend using a cloud-based inventory management system that can integrate with an e-commerce platform."

Con 2: More storage may be needed

The better you anticipate demand, the more successful your business will be. And the more successful your business is, the more demand you'll get. It's a chicken and egg situation.

One of the natural by-products of that, though, is that you'll need more space to store inventory items. Which hits you in the pocket.

Con 3: Business appears less personal

Small businesses pride themselves on their ability to provide a human touch when serving their customers. And one of the natural downsides of automation is a lack of this. I mean, you don't buy from Amazon for their gift wrapping.

Above all else though, customers expect seamless experiences and responsive service. Inventory management changes none of that.

Three inventory management techniques you need to know

1. Just-in-time (JIT)

JIT inventory management does exactly what you'd expect. Instead of storing a ton of stock in case there's a spike in demand, companies order items as and when they need them.

2. Material requirements planning (MRP)

Make your products from scratch? Then MRP inventory management could be your golden ticket. It's focused on calculating all the materials and component parts you need to make your finished product.

On MRP, though, BIG Safety founder Todd adds some words of caution:

"MRP is a great inventory management technique that can help businesses save money and improve efficiency.

"However, it requires a significant investment of time and resources to implement properly – not dissimilar to JIT.

"I'd only recommend it to businesses that have the staff and budget to support such a system."

3. First in, first out (FIFO)

For those selling perishable goods, first in, first out inventory management prioritises older items first in order to keep them fresh. And Todd can attest to this technique's effectiveness:

"FIFO inventory management has worked great for us as an e-commerce business. Our turnover rate is high so most of our products have a short shelf-life.

"FIFO helps us keep track of our inventory and make sure we minimise the shelf-life of our products by selling them as soon as possible."

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Relevant resources

• E-commerce: How to make the most of your business's online shop

• From obscene to lean: How e-commerce automation unlocks growth

• 5 rubber-stamped ways to automate e-commerce returns in 2023