Rakow & Co Logo Tax Accountants Jackson Township New Jersey - Header

The e-Commerce Inventory Management Guide

If you’re thinking about starting an ecommerce store you will want to read this ecommerce inventory management guide before you do.  

It might sound easy to get yourself setup on Amazon, Etsy or Ebay, but the reality is that when a customer clicks on the ‘add to cart’ button, you better be prepared to ensure there is actually a product ready to ship.

What Is E-Commerce Inventory Management?

So what is inventory management and how does it apply to the ecommerce industry?  Ecommerce inventory management is the process of tracking and managing inventory for an online business.  It includes monitoring stock levels, placing replenishment orders, and forecasting future inventory requirements.

ecommerce inventory management

To get a better understanding of why you need ecommerce order management, picture this scenario. 

You’ve been running a home decor store on Shopify. You’re providing a wide range of goods from rugs and furniture items to smaller trinkets like candle holders and placemats. You’ve never really monitored your inventory levels, profit margins, turnover periods and other key numbers closely before. You’ve always just ordered stock based on what you like and what you have a ‘gut’ feel will sell. 

As the year rolls on you start to realize that, while the rugs may be very profitable, they’re hard to sell. Now your free cash is tied up in inventory that’s sitting in your spare room. You don’t have money to order faster moving goods, especially as you head into a busy online shopping season. In the end you have to discount your ‘high-ticket’ items just to get cash back into the business.

At Rakow & Co we’re here to help you avoid these situations with good ecommerce bookkeeping and advice.  This is why we’ve come up with this E-commerce Inventory Management Guide.

Common Ecommerce Inventory Management Issues

There are a number of common problems that e-commerce store owners struggle with. Let’s take a look at them and what you can do to resolve these issue.

1. Not Being Able To See Your Inventory

One of the main issues that comes with running an online store is that, unlike a regular store, you can’t just walk into the back and count how many cans of soup or shoes you have.  Ecommerce business owners have to make use of bookkeeping software to be able to tell what is and isn’t available and predict what is needed.  It can be a real challenge to manage your sales orders against your inventory.

The bigger your business grows the more this issue becomes prevalent.  You might find that your suppliers  have the same issues managing their warehouses against your and other sellers orders.  Some ecommerce stores even use drop shipping, a system whereby the order is fulfilled directly by the supplier.  In drop shipping you lose complete control of your ecommerce order management as you rely on the supplier to ensure the delivery is completed.

ecommerce inventory stock

2. Overselling And Stock-Outages

While it may sound like a wonderful situation to be in where you can’t keep up with sales because of demand, in reality it is one of the quickest killers of online businesses.  Not being able to fulfill an order or long delays in getting purchases to customers will tarnish your reputation.  It allows your competitors to sell to your prospects and pull them away from you. Even if the stock outage is temporary, it is very difficult to rebuild your image when you have a ton of 1 star reviews from disgruntled customers.

3. Overstocking

The other side of ecommerce inventory management is equally as bad.  While it won’t destroy your reputation, having too much stock can destroy your bank balance.  

Not only does it mean that you probably aren’t making enough sales, storing stock can also come with a large price tag.  Whether it is in physical storage costs or stock that either goes to waste through deterioration or timing e.g. seasonal goods or fashion items, there is a cost to overstocking.

In the end, if you’ve been sitting with too much inventory and decide to clear it out on sale, the return on your investment and your time is likely to be discouraging.

4. Poor Forecasting

Businesses that have been operating for a while have the luxury of being able to look backward to predict what will happen going forward.  If your winter sales have been growing by 5% for the last 5 years, you can reasonably expect them to increase by 5% again this year and ensure you have the appropriate stock on hand.  You know which lines to invest in and which to hold minimal stock of. That makes ecommerce inventory management a lot easier!

Ecommerce startups or even online businesses that have been operating for a while might not have the experience to do sales forecasting and so make poor predictions that can land them in either the stockoutages or overstocking situations mentioned above.

5. Product Returns

Just when you thought you had a great sales month, 20% of your customers decide to return their purchase as there was an issue with the product description.  Not only do you have to reverse the sales, but now you are sitting with extra stock you hadn’t planned on.

6. Supply Chain Management

The more complex the product that you are selling is, the more moving parts in the business “machine”.  The more moving parts there are, the higher the risk of something breaking.  

Consider what is involved in getting canned apples to a customer.  You are at the mercy of the farmers who might have droughts or labor strikes.  Then there is the canning factory who in turn might rely on the suppliers of tin.  Then you have the shipping companies, customs and the like.  

Any problems that arise at any one of these points can result in you not being able to get stock in time. Conversely, a smaller, simpler business where you’re responsible for production and distribution will be less vulnerable to supply chain management problems.

online store inventory

Ecommerce Inventory Management Solutions

Now that we’ve looked at some of the common ecommerce inventory issues, let’s see how you can solve them.

1. Use Technology

As with most things these days, why do something that a computer can do for you?  By using inventory management software you can keep on top of your stock levels by tracking your ecommerce inventory throughout the entire process, from order to final delivery to the customer.  

You can also use the data to improve your forecasting.  Things like barcode scanning at a warehouse level can increase accuracy.  Consider the many ways technology can improve your ecommerce inventory management.

Connecting your online sales platform to your bookkeeping system is a great way to improve inventory management and more accurately record costs and profitability.

2. Use ABC Analysis

ABC analysis categorizes your inventory into 3 different groups, A, B & C.  “A” products are high value products that are responsible for the majority of your revenue.  “B” are lower value items and “C” are the lowest value.  

Generally the number of items that are sold will increase from A to C as the lower the value or costs, the more you are likely to sell.  For example, your A items might be laptops, your B stock would then be laptop bags and your C item might be laptop stands. 

The idea is to prioritize your A items as they are responsible for most of your income.  If you run out of laptop stands it won’t be the end of the world, but if you run out of laptops, the repercussions will be much worse.

3. Use Safety Stock

Always keep some stock on hand for emergencies.  Having a backup will help see you through any short term spikes in demand or interruptions to your supply chain.

4. Use Sales Techniques

Knowing when to leverage different sales techniques is a great skill to learn if you want to successfully manage ecommerce inventory.  Ever notice all the sales at big retailers.  They know how to manage stock.  

When you see your stock levels growing try limited term discounts or sales where you bundle the stock as an add-on to another product.  You might lose out on your margins, but you can offset the loss against your storage or disposal costs.  Alternatively look for options to sell through additional channels. 

One popular method that big ecommerce retailers like Amazon use is suggesting complimentary products to customers. You can do that either in the moment, online, or by using email marketing automations.

5. Use Just-in-Time

Just-in-Time (JIT) is an inventory method whereby your stock is only ordered from the supplier when your customer places an order.  This method doesn’t work for all ecommerce businesses as a jump in demand can lead to delays, but if you have consistent orders this is a great way to reduce overstocking.

6. Use Drop Shipping

As mentioned above, drop shipping allows customers to be serviced directly by your suppliers.  The positive of this is that you don’t have to worry about inventory issues.  The negative is that you have no control over the customer experience and any failures by your suppliers will be perceived as a failure by your business.

The Next Step

Hopefully this ecommerce inventory management guide has given you something to think about if you’re starting your ecommerce business.  

At Rakow & Co we love to help small businesses thrive.  If you would like to know more about how we can assist you with your ecommerce business, please reach out to us to set up a quick discovery call.


What Are The 4 Types Of Inventory Management?

There are many types of inventory management. Here are four:

  1. Just-in-Time (JIT)
  2. Economic Order Quantity (EOQ)
  3. ABC Analysis
  4. Drop-shipping
Why Is Inventory Management Important For E-Commerce?

Inventory management is important because not having stock or having too much stock can negatively impact your business reputation, cash flow and future success.

What Is ABC Inventory Analysis?

ABC inventory analysis is the process of categorizing and prioritizing your inventory according to its value. A products carry the highest value.

What Is Inventory In E-Commerce?

Inventory is any items that are held by a business that are intended to be sold to make a profit.

How Can We Help?

More Articles For You

Why you should hire a bookkeeper

Why You Should Hire A Bookkeeper

When you hire a bookkeeper for your small business, you’re making a strategic decision that can impact your business positively. As a business owner, your

Read More »