Maintaining perfect inventory levels for your growing eCommerce business is easier said than done. Consumer demand can be unpredictable, and supply chain disruptions and rising costs add complexity.
Stock too much and you risk increasing your costs, but stock too little and you risk running out of a product entirely. Striking the perfect balance is by no means an easy feat.
Finding that balance while monitoring orders, customer trends and business performance is a challenging feat.
Like Goldilocks, you want to discover what’s “just right.”
Let’s review how to both reduce stock levels and avoid stockouts so you can manage inventory effectively and scale your business.
What are stockouts?
A stockout (aka an out-of-stock situation) occurs when you lack product availability.
This can mean you have zero inventory of a certain SKU or that you’re unable to meet customer demand because of low stock levels.
Common causes of stockouts
There are several reasons stockouts might occur, and only some of them are under your direct control:
- Lack of forecasting: You didn’t predict customer demand accurately, so you didn’t order enough inventory.
- Supplier issues: Your supplier was unable to provide the products you need on time.
- A sudden increase in demand: You had a surge in sales that you weren’t expecting, leading to depleted stock levels.
Consequences of frequent stockouts
Regardless of the causes of stockouts, they are bad news for eCommerce businesses; they can lead to lost sales and negative customer experiences.
Consequences of stockouts include:
- Your customers might go to a competitor to find the product they need — and not come back.
- You might lose sales during peak seasons.
- Your seller reputation might suffer, limiting your ability to acquire new customers for months after the problem is resolved.
3 benefits of reducing stock levels
In theory, you could prevent stockouts by keeping lots of inventory on hand. But that strategy would come with its own costs.
The modern retail landscape is fast-paced and highly competitive. To thrive, you must optimize your operations and reduce costs wherever possible.
One opportunity to do this is through an inventory reduction strategy that reduces costs, frees up storage space and increases your efficiency.
Too much stock is expensive. You incur costs when you keep excess stock on hand, so reducing stock levels is an easy way to reduce costs and free up capital.
The amount of stock you have on hand can affect how much you spend on warehousing space and storage fees, as well as on stock that might have a shorter shelf life or is seasonal.
More storage space
Reducing stock levels frees up storage space, which is particularly important for eCommerce companies that sell products that are bulky or difficult to store.
Reducing inventory levels can help you optimize the space you do have, improve stock turnover and make it easier to keep products organized and accessible.
High inventory levels can be inefficient because of the extra time and resources needed to manage them.
Reducing stock levels can streamline inventory management processes and increase your flexibility and adaptability.
Strategic inventory planning empowers you to be more responsive to changes in consumer demand, allowing you to quickly make adjustments, without sitting on too much inventory.
The true cost of poor inventory management
It’s estimated that poor inventory management costs retailers billions of dollars each year in lost sales, wasted inventory, and other inefficiencies.
Decreased customer satisfaction
Poor inventory management can lead to decreased customer satisfaction due to stockouts or long wait times for products to be restocked.
Customers who have a negative experience with a retailer are less likely to return in the future and may share their negative experience with others, further damaging the retailer’s reputation.
Lack of control over the supply chain
Retailers who do not have a solid inventory management system in place may lack visibility and control over their supply chain.
This can result in overstocking, stockouts, and other inefficiencies that can lead to decreased profits.
Increased carrying costs
Overstocking can lead to increased carrying costs, including warehousing fees, inventory insurance, and the cost of maintaining and storing excess inventory.
These costs can quickly add up and eat into a retailer’s profits.
Decreased profit margins
In addition to increased carrying costs, poor inventory management can also lead to decreased profit margins.
When retailers are forced to mark down items to clear out excess inventory, they may not be able to sell those items for as much as they originally paid for them, resulting in a loss of profit.
Missed sales opportunities
When retailers do not have enough inventory on hand to meet customer demand, they may miss out on potential sales opportunities.
Customers who are unable to find a product they want in stock may go to a competitor instead, resulting in lost sales for the retailer.
Poor inventory management can lead to inefficiencies in a retailer’s operations. For example, if inventory is not properly organized and labeled, it may take employees longer to locate products and fulfill orders.
This can lead to longer lead times, decreased productivity, and decreased customer satisfaction.
By implementing a proper inventory management system and optimizing their inventory levels, retailers can avoid these negative impacts and improve their overall efficiency and profitability.
Poor cash flow management
When a company experiences a stockout, it means that they are unable to fulfill orders and make sales.
Obviously, this results in lost revenue and can lead to a decrease in cash flow.
In addition, if customers are unable to get the products they need from a company, they may turn to competitors to make their purchases, further reducing the company’s revenue and cash flow (and hurting their reputation in the process).
How to calculate ideal stock levels
Calculating ideal stock levels is a key part of avoiding stockouts. You need to know how much inventory to keep on hand, and this will vary depending on the product and customer demand patterns.
There are a few different methods you can use to calculate ideal stock levels, and the best one for you will depend on your specific situation. However, some of the most common methods include ABC analysis, just-in-time inventory, and forecasting.
ABC analysis is a method of classifying inventory based on its importance.
- Class A items are the most important, and make up most of your inventory.
- Class B items are important, but make up a smaller portion of your inventory.
- Class C items are the least important, and make up a small portion of your inventory.
Just-in-time inventory is a method of keeping only the inventory you need on hand.
When an order comes in, you only produce or purchase the amount of inventory needed to fill that order.
Forecasting is a method of predicting future demand for a product. This can be done using historical data, market trends, and other information.
How to prevent stockouts
Maintaining optimal inventory levels is a crucial task for growing ecommerce sellers. Here are a few key strategies with your inventory system you can implement to reduce stock levels and avoid stockouts.
1. Improve your demand forecasting
Accurate demand forecasting based on historical sales data and consumer trends helps retail businesses order the right amount of inventory at the right time.
Forecasting demand accurately also reduces stock levels and their associated costs.
Predictive data analysis also helps you make more informed business decisions, particularly related to shifting industry trends and seasonal patterns.
Inaccurate forecasts lead to over-ordering and excess inventory, which can tie up working capital and increase carrying costs.
On the other hand, if you don’t order enough inventory, you risk stockouts, which can lead to lost sales and unhappy customers.
2. Develop strong relationships with your suppliers
An important part of maintaining accurate inventory levels is developing strong relationships with your suppliers. Good communication with your suppliers will help you ensure that you have the inventory you need when you need it.
This communication should include letting your suppliers know about any changes in your business that might affect your inventory needs.
For example, if you’re launching a new product, you’ll need to make sure your suppliers are aware of the potential increase in demand so they can adjust their production levels accordingly.
3. Calculate reorder points for each product
The reorder point is the stock level that triggers the need to replenish a product. An ideal inventory reorder point accounts for selling speed and how long restocking takes.
There are three steps involved in calculating your inventory reorder points:
The reorder point formula is as follows:
(Average daily usage rate x Lead time) + Safety stock = Reorder point
While that formula is helpful for most product categories, you’ll probably see differing reorder points based on each product’s demand and replenishment rates.
4. Optimize your lead times
Your lead time is the time between placing an order with a supplier and receiving the products. Lead time influences how much inventory you need to hold to meet customer demand.
By carefully managing your lead times, you can improve your inventory accuracy and reduce the risk of stockouts through better supply chain management.
The shorter the lead time, the less inventory you need to keep on hand, which can help reduce costs and avoid stockouts.
To optimize lead times, work with reliable suppliers who can deliver products promptly and efficiently. By carefully managing lead time, you can improve inventory accuracy and reduce the risk of stockouts.
5. Automate tasks with modern inventory management software
Automating tasks with inventory management software saves time and reduces the risk of inventory errors and stock out issues.
Examples of automating routine tasks in your inventory management process include:
- Automatically updating stock counts when a sale is made of a particular product.
- Setting auto-triggering reorder points.
- Generating sales reports.
6. Try vendor-managed inventory (VMI)
Vendor managed inventory (VMI) is a program in which retailers share data with their suppliers. In return, suppliers maintain a specific inventory level for each product.
Pros of VMI
VMI benefits retailers by allowing them to focus on their business instead of daily inventory management and reordering.
VMI also makes sure that there is a steady stream of inventory and less risk of stockouts. Retailers will usually need less safety stock because the supplier manages resupply lead times.
Cons of VMI
There are some potential drawbacks to VMI that retailers should be aware of. One is that it can be complex to implement, and it may not be the right solution for every retailer.
Another potential drawback is that it can give the supplier too much control over the retailer’s inventory.
Retailers should weigh the pros and cons of VMI before deciding whether it is right for their business.
7. Implement a just-in-time inventory system
Just-in-time (JIT) inventory management is a popular inventory management technique for maintaining the lowest possible level of on-hand inventory, instead ordering product only at the moment you need it. JIT means having the right products at the right time and in the right place.
Pros of JIT
There are several advantages to using JIT inventory management to satisfy demand over traditional inventory practices.
One is that it can help to reduce the overall amount of inventory that a company needs to keep on hand. Ordering inventory on an as-needed basis reduces your cost of inventory. You’ll likely need little to no safety stock, and your warehouse operates with continuously low stock levels.
This, in turn, can lead to cost savings in terms of both storage and inventory carrying costs.
Additionally, JIT can help to improve customer satisfaction levels by ensuring that products are always available when needed.
Finally, JIT can also help to improve communication and coordination between different parts of the supply chain, but only if you have an inventory management solution that can keep up.
Cons of JIT
JIT can also lead to some challenges and drawbacks.
First, JIT requires a high level of coordination and communication between different parts of a global supply chain. This can be difficult to achieve, especially for large and complex organizations.
Second, JIT can also be risky, as it can lead to disruptions in the supply chain if not managed properly. JIT can increase the risk of stockouts when there are supply chain issues, as seen during the COVID-19 pandemic. Supply chain operations were disrupted, which made it more difficult for retailers to succeed with a JIT approach.
As a result, many businesses were forced to carry higher-than-usual inventory levels. The alternative was facing stockouts, order delays and cancellations.
Finally, JIT can be expensive to implement, as it requires a high level of investment in technology and personnel.
While there are considerable benefits to JIT inventory systems, it’s important to plan carefully and closely watch your order and inventory levels. You can minimize this risk by developing strong relationships with your suppliers and continuously monitoring your inventory data.
8. Try consignment inventory
Consignment inventory keeps ownership of your stock with the supplier until it’s sold to the customer. Essentially, you don’t pay for a product upfront and you avoid holding on to physical inventory.
This approach reduces your stock levels and shifts inventory carrying costs to suppliers and manufacturers.
Consignment inventory is commonly used for large, expensive items, such as furniture. It can also benefit online retailers with uncertain customer demand.
9. Hang on to safety stock
One way you can mitigate the risk of stockouts for your business is by maintaining safety stock, which is extra inventory that’s carried to prevent stockouts.
Safety stock is best thought of as a buffer rather than a way to prevent all stockouts.
How to calculate safety stock levels (and avoid buying too much inventory)
The ideal safety stock level varies by seller and product. Some operations managers calculate a portion of cycle stock level (e.g., 10% or 20%), while others base safety stock on their experience and intuition.
It’s important to have the right amount of safety stock on hand, because too much can tie up capital and lead to higher inventory carrying costs.
On the other hand, too little safety stock can result in lost sales and unhappy customers.
There are a few different methods you can use to calculate the right safety stock level.
The most common is the safety stock formula, which considers the maximum daily demand, the lead time, and the desired level of customer service.
Another method is to use historical data to estimate the minimum amount of safety stock you need on hand to fulfill customer orders. This approach is best for products with relatively stable demand patterns.
If you’re not sure which method to use, you can always start with a small amount of safety stock and increase it if you find that you’re running out of stock more often than you’d like.
The most important thing is to have a system in place and real-time access to accurate inventory data so that you can quickly and easily adjust your safety stock levels as needed.
How to handle stockouts
We all know that an ounce of prevention is worth more than a pound of cure, but let’s face it: you will encounter stockouts in your business.
You can implement all the aforementioned best practices to prevent it, but at the end of the day, eCommerce is an unpredictable business. That said, here are some practical ways to handle stockouts in a way that minimizes damage to your reputation, customer retention, and overall bottom line:
How a good inventory management system prevents stockouts
A good inventory management system prevents stockouts by making sure that there is always enough inventory on hand to meet customer demand — but not too much.
This can be done through a variety of methods, such as keeping track of customer orders and using that customer data to predict future inventory needs, setting minimum and maximum levels for each inventory item, and automatically reviewing inventory levels to identify potential stockouts.
By taking these proactive steps, a good inventory management system can help to prevent stockouts and keep customers happy.
Goodbye, stockouts. Hello, happy customers.
Strong inventory management software is key to scaling your business while maintaining optimal stock levels (and giving you low stock alerts for when things dip into the red).
The right processes and platform for your business allows you to accurately track inventory counts across all of your sales channels. It improves forecasting by providing demand planners with real-time insights.
Finally, inventory management systems streamline processes so you can focus on growing your business.
Striking the balance and maintaining just the right amount of inventory for your business is no easy task.
Time and experience will help you learn how to perfect your stock levels. You’re on the right path when you understand your inventory levels and consumer demand, build strong relationships with suppliers, adopt automation and acquire safety stock.
Ready to say goodbye to stockouts and upset customers? Cure your back-order and stockout headaches with centralized inventory control.