An e-commerce entity’s sizeable resources and capital, if not most, are poured into the business’ inventory, elevating the need to keep your stock levels on a safe threshold. To help you achieve this, consider using inventory management techniques in maintaining your optimal operations.
Before an inventory translates to revenue, you need to have a strategy that keeps your product mix available and relevant to your market. In our previous blog, we introduced you to the basics of e-commerce inventory. For our second installment, we now go to the different types of inventory management, the variations of inventory management techniques and other useful practices for handling your stock in the long run.
Types of inventory management techniques
There are four overarching categories in e-commerce inventory. They are:
- Raw materials
- Finished goods
- Maintenance, repair and operations (MRO)
All the items that are used to finish or manufacture a certain product are your raw materials. They can be sourced from external parties or made in-house.
They are categorized under two types: direct —specific materials used in producing goods like the leather used to make shoes, woods for cabinets, etc. — and indirect — those that are indirectly involved in the manufacturing process. They keep the process running and are usually part of the overhead costs such as the batteries, lights and electricity that keep a warehouse operational.
Work- in-process/progress (WIP)
Just like the name suggests, WIP inventory is the consolidation of the raw materials that you have and are moving under the production phase. It also includes the labor cost and the packaging elements needed (though they are not yet ready for sale).
Another straightforward concept among the inventory management types, finished goods are the final products that have completed the production stage and are ready for consumer purchase.
Maintenance, repair and operations (MRO)
MRO inventory, also sometimes called Overhaul, is moderately a part of the goods production, logistics and maintenance in a manner of supporting the minute details of manufacturing and shipment.
Examples of MRO are the machinery that you use in the warehouse, the sanitation supplies and safety equipment for the workers, among others.
Inventory management techniques
As your e-commerce company grows, so does the complexity of inventory you need to stay on top of. But if you know how to approach your increasing stock affairs, it gets less perplexing and eventually gets easier to work on.
We have briefly discussed some inventory strategies in our first blog. The second part of this series is dedicated to a full detail of these methods and to give you an idea of other schemes you can apply.
Build a bedrock foundation for your online business through the best inventory management techniques we have outlined below.
Minimum order quantity (MOQ)
MOQ is the lowest threshold for the products you willingly sell to your customers. It’s based on the total value of your inventory along with all the incurred expenses before landing on the profit, which means MOQ is ideal for profitability and steady cash flow.
If not met, then a purchase can’t push through. This is the minimum amount set not only to reduce inventory but to avoid haggling or bargaining from the shoppers as well.
Keep in mind that inventory items that cost more have a smaller MOQ, while cheaper ones have a higher MOQ since they’re more economical and cheaper to produce.
ABC analysis groups inventory into three classifications that gauges their costs and importance with A being [mostly] the high-priced items and valuable goods in your line; B containing relatively less expensive than those in A and sells regularly; and C with items that take up the bulk of your inventory but doesn’t make much impression on your bottom line.
Just-in-time inventory (JIT)
JIT is an as-needed basis inventory management technique that aims to avoid deadstock for a long time. An e-commerce practicing this method holds only little inventory since they only make the products when certain orders come through, then triggers an action throughout the supply chain of the business.
A great upside of this approach is the mitigation of risks affiliated with a large amount of stocks. On the downside, a company needs to be nimble in handling orders within a short span of time.
Bulk shipments are rampant in products with enormous demand and surely sell. When purchases and deliveries are made in enormous batches, they come cheaper. And this is what this technique relies on. Storing inventory in bulk is also included in this category.
If other approaches only reduce the cost of warehousing inventory, dropshipping completely eliminates this expense altogether. In this practice, orders are sent directly to the manufacturer who takes charge of everything from the production to the delivery of the goods to the customer.
Cycle counting is the process of regularly counting your inventory in small amounts. It tracks the accuracy of what you actually have in stock and what your records show. Should any mistake pop up, you can easily update them in your inventory management software.
Consignment inventory is a system where the consignor (vendor/ wholesaler/ supplier) holds a deal with a consignee (retailer) to place their stock with the latter without paying for it upfront.
In this arrangement, the consignor still [technically] owns the inventory, until a product is sold — at which point the consignee pays for the consumed item. Although it carries some risks, this setup can turn into a win-win situation for both parties when done in a proper manner.
For quality management, you might want to check out batch tracking.
Batch tracking is a technique of keeping tabs on all items that are under a similar classification. This allows for easier monitoring of the inventory origin, destination, price, expiration dates and tracing of defective ones to their launch batch.
If your e-commerce can take some risks and you’re confident you can fulfill your consumers’ demand, you can opt for backordering technique.
Backordering is an inventory management style that exercises an enterprise’s ability to hold a demand for a product that is currently out of stock. This means you can take orders and payments for inventory not yet available or that is still under production.
Applying this method in your business can root from various scenarios, like erroneous forecasts, exceeding demand for current supply, supplier issues and others. However, this still means an increased opportunity for sales because of the influx of orders. Some retailers can mask this method through schemes such as pre-orders so clients have the idea that they’ll be expecting their items for a little extended time.
Your e-commerce's longevity hinges on the inventory management techniques you practice. Assess which solution can work best for your entity and see how it further improves your stock oversight. However, it’s best to note that there’s no need to stick with a singular technique — if you think a mix of different approaches will be a comprehensive strategy for your e-commerce, proceed with it as you see fit. You can always dial back should any bottleneck presents itself along the way.
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