How well you manage your inventory will ultimately determine the success and profitability of your online business.
Why? Because without it, you risk losing money as a result of dead stock and unnecessary carrying and storage costs, but worse than that, you stand to damage your reputation and face marketplace suspension.
The bottom line is, effective inventory management is a balancing act between having enough stock to facilitate demand, but not too much that it incurs hefty fees and takes up valuable warehouse space.
This article takes a deep dive into some of the most common inventory management techniques there are that will help you sell better, increase efficiency and reduce costs.
What is inventory management?
Inventory management, you might wonder, why is it so crucial? Here’s the scoop. If you’re in the ecommerce or retail business, it’s your key to operational efficiency. It’s about maintaining the right balance of stock, understanding what’s in abundance and what’s nearing depletion.
This ensures that our operations are streamlined and that all procedures are organised. The FIFO method is also useful for storing the stock due the nature of how products are rolled out.
Mastering inventory management means you’re less likely to be bogged down with surplus stock or, conversely, face the dire straits of an empty warehouse. Ultimately, it’s about streamlined operations, more stable cash flow, and satisfied customers who can always find what they’re looking for. No more disappointing “sold out” signs!
7 inventory management techniques to try
There are many different inventory management techniques available to manage your inventory effectively, we’ve included seven below that you should consider.
1. FIFO (First in First Out)
FIFO is a logical inventory management process approach and it’s a very common one. It functions precisely as its name suggests, the first items entering the inventory are the first to be sold. These inventory management systems organize stock in a way that the oldest, or ‘first in,’ goods are sold before the newer, or ‘last in,’ goods.
A FIFO inventory management system is particularly beneficial when dealing with perishable goods like food and cosmetics, where the item’s shelf-life matters significantly. By using FIFO, businesses ensure that the oldest inventory is sold first, thereby minimizing the risk of holding obsolete or expired stock.
This approach also contributes to maintaining fresh inventory, thereby reducing waste due to spoilage or expiry, and meeting customer expectations by delivering goods in their best condition.
What else does a FIFO approach offer?
Apart from maintaining inventory freshness, FIFO provides an accurate reflection of current market prices in financial statements, a feature especially crucial during periods of fluctuating prices.
It also simplifies record keeping by mirroring the natural flow of inventory – older items are sold first, then the next oldest, and so on. By prioritizing the oldest stock, FIFO helps maintain organized, efficient, and profitable inventory management.
The FIFO method in practice: a case study
Joe Bowab, CEO and Founder of Lobster Anywhere says that “Inventory management is the most crucial part of running an ecommerce business. It can help give you an overview of the stock you have on hand, what you may need to order more of, what there is an overflow of, and what is popular with the customers.
To have a near-seamless overview of your stock levels, it is very important to invest in an inventory software program due to the online basis of the business. It can display all the required information easily. However, it is also important to do a manual stock take, as there can always be errors when you are dealing with physical products.
At Lobster Anywhere, we deal with perishable items and when it comes to the management and rolling out of the stock, we apply the FIFO method – first in first out.”
Implementing FIFO in ecommerce enhances operations, customer satisfaction, and profitability, with efficient inventory management systems being crucial. These systems track goods, monitor arrival times, and ensure seamless progression from inventory to delivery.
Linnworks, a comprehensive solution, automates and streamlines these processes. Its robust inventory management aids in arranging inventory by arrival times, prioritizing the oldest stock per FIFO. This reduces manual tracking, maintains fresh stock, and optimizes order sequencing. By leveraging Linnworks, ecommerce retailers can fully utilize FIFO to improve the inventory management process and business performance.
2. LIFO (Last in First Out)
LIFO, in contrast to FIFO, is a strategic inventory management technique where the newest items in inventory are sold first.
LIFO assumes that the last products you received are the ones first out the door to the customers. This strategy is notably beneficial in industries where products are non-perishable or do not become obsolete.
One of the key advantages of the LIFO method is its effectiveness in times of rising prices or inflation.
How does this work in practice?
As prices increase, businesses often pay more for new inventory. By selling the more expensive items first (those ‘last in’), companies can record higher cost of goods sold, reducing their taxable income. In this way, LIFO can significantly aid in financial management during periods of inflation.
While it may seem counterintuitive, especially when compared to the logical flow of FIFO, LIFO inventory management can be a financially prudent strategy in the right circumstances.
However, it’s important to note that due to its impact on taxable income and reported profits, this method must be applied consistently and appropriately to maintain accurate and compliant financial records.
Effective implementation of LIFO in ecommerce relies on advanced inventory management systems like Linnworks. Tracking and prioritizing the newest stock, a task made easier by Linnworks ensures streamlined operations and accurate LIFO method application. With automated inventory processes and the categorization of incoming stock, Linnworks allows swift identification and prioritization of new items.
Particularly during inflation, Linnworks’ sale prioritization of pricier, recent items calculates a higher cost of goods sold, reducing taxable income. Linnworks, supporting strategic methods like LIFO, provides a competitive edge in dynamic ecommerce environments.
3. JIT (Just in Time)
JIT (Just in Time), also known as lean manufacturing, is an inventory management technique that offers both efficiency and cost-cutting benefits. With JIT, inventory is ordered and received precisely when it’s needed, minimizing the need for excessive storage and reducing holding costs. Toyota is a great example of a company that has harnessed JIT inventory management to cut logistics costs and boost service.
But who benefits most from implementing a JIT inventory method? In essence, any company aiming to streamline its processes, cut unnecessary costs, and increase efficiency. It’s particularly advantageous for ecommerce retailers that create customized products – from furniture to luxury cars and unique jewelry.
How can Linnworks can support a JIT approach?
Linnworks’ innovative inventory management solution allows such businesses to effectively employ JIT strategies, improving their cash flow and freeing up warehouse space.
However, like any technique, JIT has its nuances.
Adding a step to the fulfillment process – purchasing products only once a sale is made – leaves little room for error. But with Linnworks, this potential drawback can be expertly managed. The inventory management software helps to avoid fulfillment issues and safeguards against potential price shocks, ensuring your JIT lean manufacturing process operates smoothly and efficiently.
Implementing JIT effectively in ecommerce requires a deep understanding of product lifecycle, sales trends, and robust supplier relationships.
Matt Haycox, Founder and CEO of Funding Guru states that “One of the things I’ve learned over time is to invest in supplier relationships. Your suppliers can make or break your inventory management so it’s crucial to keep a good relationship with them.
With a good relationship, you can request quick replenishment of fast-selling items, get better offers, and negotiate better payment terms. Not only that, but they’ll also prioritize you and offer good customer service.”
JIT strategy requires precise control over the supply chain, order fulfillment, and seamless communication between sales and purchasing departments, necessitating technology integration. While challenging, JIT, if well-implemented, can significantly boost an ecommerce business’s profitability by eliminating waste, improving efficiency, and meeting customers’ needs precisely when required.
4. ABC analysis
Product demand varies across inventory, and understanding this variation is key to successful inventory management. This is where ABC analysis comes into play, a technique that organizes your inventory into three categories – A, B, and C, based on demand, value, and cost significance.
Linnworks can help you implement and manage this ABC approach, allowing you to prioritize your inventory management efforts effectively.
Category A items are the crown jewels of your inventory – high-value products with low sales frequency. They may be fewer in number but contribute significantly to your overall turnover. Linnworks ensures these products are handled with utmost care, facilitating secure storage to avoid damage and obsolescence.
These crucial items typically represent about 10-20% of total inventory but account for around 70-80% of annual consumption value.
Category B items are moderately valued with moderate sales frequency. These items, making up roughly 30% of the inventory and 15-20% of consumption value, require balanced stock levels.
Lastly, Category C includes low-value, high-frequency items. Even though they make up a substantial 50% of total inventory, their annual consumption value can be as low as 5%.
With Linnworks, you can effectively employ ABC analysis, ensuring optimal inventory control, focusing on high-priority items, and ultimately, boosting profitability.
Efficient ABC analysis implementation necessitates robust data and a flexible inventory management system. Ecommerce retailers must continually analyze sales data, adjusting item classifications in categories A, B, and C as market conditions and customer preferences shift.
An up-to-date, perpetual inventory system supports informed decisions on procurement, sales promotions, pricing strategies, and warehouse organization. ABC analysis is dynamic, requiring frequent updates to align with the market. An automated system, adapting to changing conditions and continually monitoring sales, will automatically categorize products, ensuring ABC analysis stays relevant and responsive to real-time business needs.
5. Cycle counting
In the realm of inventory management, cycle counting is a tried and tested approach to maintain optimal inventory levels.
This approach emphasizes a systematic, regular process where a small subset of inventory in a specific location is counted on a designated day. Instead of attempting a full inventory count which can disrupt daily operations and tie up resources, cycle counting breaks down the task into manageable portions.
One of the main advantages of cycle counting is its ability to quickly identify and rectify discrepancies. Regular checks on different parts of your inventory provide a constant stream of feedback on the inventory’s health.
This means problems are caught and corrected faster than they would be during an annual or semi-annual full inventory count.
How else can cycle counting help your business?
This method also significantly helps businesses to maintain inventory accuracy. With cycle counting, you’re regularly verifying the number of items in stock, ensuring data in your inventory management system matches the physical reality.
Maintaining accurate stock levels is essential in minimizing stockouts and overstocks, allowing for more efficient order fulfillment.
Cycle counting can also reveal patterns in errors, helping to identify the root causes of inventory discrepancies. Whether it’s an issue with a supplier, a particular product, or even a specific warehouse location, consistent cycle counting can highlight where problems are arising, enabling focused and effective corrective action.
By integrating cycle counting into routine operations, businesses can enhance their inventory accuracy, improve order fulfillment, and ultimately provide a superior service to their customers.
For effective cycle counting, ecommerce retailers can leverage automated systems like Linnworks’ inventory management software. This system schedules cycle counts, selects items based on set criteria, and analyzes count data to identify inventory trends and issues. It highlights recurring discrepancies tied to specific products, locations, or suppliers.
Linnworks facilitates the cycle counting process and leverages gained insights for decision-making. By employing this tool, businesses can maintain accurate inventory, refine inventory management practices, improve customer service, and enhance profitability.
6. Demand forecasting
Demand forecasting, far from being a mystical prediction, is a data-driven, analytical cornerstone of inventory management.
It uses a combination of historical sales data, market trends, and future promotional plans to provide an accurate estimate of future product demand. And this is where Linnworks shines, streamlining this process and turning your raw data into actionable insights.
Forecasting customer demand with inventory management software
With Linnworks, you can master demand forecasting, optimizing inventory levels to avoid the pitfalls of overstocking or understocking. Holding excess inventory not only ties up crucial resources but also leads to increased storage costs. Conversely, inadequate inventory can result in missed sales and customer dissatisfaction – two issues no business wants to face.
Linnworks assists in using demand forecasting as a strategic tool beyond inventory management. It aids in planning production schedules, allocating workforce resources, setting budgeting requirements, and designing marketing strategies.
By predicting future customer demand accurately, Linnworks helps identify growth opportunities, giving your business the competitive edge it needs to thrive in a bustling market landscape.
Using machine learning to analyze past sales, customer behavior, and seasonal trends, tools like Linnworks accurately predict future product demand, anticipate peak periods, and help scale inventory and operations.
However, success necessitates a proactive approach toward data analysis and market research, with regular review and adjustment of forecasts based on new data, trends, and business goals. Given the dynamic business landscape, a demand forecasting strategy should also be adaptive. Integrating these practices allows ecommerce retailers to effectively utilize the process, enhancing business growth and customer satisfaction.
7. MOQ vs EOQ
MOQ (Minimum Order Quantity) and EOQ (Economic Order Quantity) are key concepts in inventory management. MOQ is the smallest amount of a product a supplier is willing to sell, which businesses need to factor into their purchasing decisions.
EOQ, on the other hand, is the number of items that a company should order to minimize its total inventory costs. By understanding these quantities, businesses can optimize their inventory management strategies, keeping costs low while meeting customer demand.
These inventory management techniques offer various ways to manage inventory more efficiently, each contributing to better customer service, improved cash flow, and increased profitability when implemented correctly.
By understanding and applying these methods, businesses can craft a bespoke inventory management strategy that suits their specific needs and drives their success.
Effective implementation of MOQ and EOQ requires a comprehensive understanding of business dynamics. Analyzing order history, understanding sales cycles, and identifying peak and off-peak seasons assist in establishing realistic MOQs and EOQs.
For MOQ, negotiate with suppliers to lower quantities or match your demand forecast. For EOQ, consider ordering and holding costs, and demand rate to minimize total inventory costs. Using an inventory management tool like Linnworks aids in these analyses, automating calculations, and providing insights. Successful MOQ and EOQ implementation relies on data analysis, supplier relationships, and effective technology utilization.
Optimize inventory control and order management with Linnworks
Navigating the labyrinth of inventory management can be challenging, but the right tools can transform it into a path toward business success. Throughout this article, we’ve explored several proper inventory management techniques, including FIFO, LIFO, ABC analysis, cycle counting, and the balancing act between MOQ and EOQ.
Each technique has its merits, and understanding when and how to apply them can significantly improve your business’s efficiency, profitability, and customer satisfaction.
However, implementing these techniques requires an effective inventory management system, and this is where Linnworks steps in.
How Linnworks can help you implement an effective inventory management system
Linnworks simplifies the entire process by offering an all-in-one inventory system that’s tailored to your business needs. It helps optimize inventory levels, facilitates efficient order management, and much more, putting inventory control back in your hands.
Seeing is believing, and what better way to understand how Linnworks can revolutionize your inventory management than by experiencing it first-hand?
Dive into our self-guided, interactive product tour. No sales reps, no sales pitches, just a straightforward, 3-minute exploration of how Linnworks works.
Witness how effortlessly Linnworks can help you develop an effective inventory management process and help steer your business toward growth and profitability.