Unlike e-commerce web design, marketing, traffic generation, conversion optimization, and brand recognition, inventory management is a backend or behind-the-scenes activity. That storage area filled with “stuff” affects customer satisfaction, cash flow, and ultimately your competitiveness as an e-commerce business. Poor inventory management has caused the demise of many businesses and has stifled the growth of others. Unless you intend to use drop shippers for all of your order fulfillment, it’s vital to develop or hire expertise in this area.
The Essence of Inventory Management
Inventory is a “necessary evil” because it ties up your money, yet is essential for quick customer order fulfillment. Too little of it means you run the risk of a stockout (being out of stock) and losing sales because customers unwilling to wait for backorders go to your competitors. If this happens too often, you risk getting poor online reviews, which may cost you further business.
On the other hand, excessive inventory ties up your cash, which means there is less available for running your other operations. This makes your business less nimble and less competitive. You also risk losing this cash through inventory damage, degradation, obsolescence, pilfering, and drop in demand for the inventory items. Therefore, finding the inventory levels that are optimal for your business is critical.
Here are explanations of four key inventory management concepts for e-commerce:
Drop shippers are suppliers who do your order fulfillment for you. This allows you to avoid buying and managing an inventory. However, drop shipping comes at a cost in that you have no direct control over your drop shippers’ inventories. If they run out of popular items during a critical period such as the Xmas holiday season, you are out of luck. If they make late or inaccurate product deliveries, your reputation will suffer.
Profit margins are often thin because relaying your customer orders to your drop shippers result in high numbers of small orders, which cost more than fewer numbers of large orders. Additionally, when your competitors use the same drop shippers, it’s difficult to differentiate your product lines from theirs. Success with drop shippers is never a given.
Just-In-Time Inventory Management
For businesses that can manage it, just-in-time (JIT) inventory management allows them to operate with very little inventory. This requires highly accurate demand forecasting and exquisite supplier management so that goods arrive in the right quantities, just as they are needed. This kind of efficiency allows you to out compete inventory laden businesses. However, this leaves you vulnerable to supply chain disruptions, natural disasters, and other unanticipated events.
Just-In-Case Inventory Management
When people anticipate a big storm such as a blizzard or hurricane, they often run to the stores to buy more food and provisions than they actually need to weather the storm. They are building up an extra stockpile just in case the storm knocks out access to these goods for an extended time.
Businesses do the same when there is a high degree of uncertainty in either demand or supply or both. This just-in-case inventory management strategy gives companies the ability to continue business as usual in the face of natural disasters, unreliable suppliers, demand spikes, and other uncertainties. The resilience made possible by just-in-case inventory management comes at the price of costly inventories.
Most e-commerce businesses use inventory management methods somewhere between the two extreme strategies of just-in-time and just-in-case.
Supply Chain Management
Your e-commerce business depends on getting reliable and accurate shipments from your suppliers. This requires a good working relationship with them and high reliability on their part. An unreliable supplier can lead to fulfillment problems with your customers, and requires that you compensate by adding extra padding (extra safety stock) to your inventory. Because of its costliness, extra inventory is a poor solution. The best solution is finding reliable suppliers even if it means paying more.
Sometimes, even reliable suppliers have problems such as a warehouse fire or a labor strike. In addition, their suppliers or those further up the supply chain can experience disruptions that will impact you. To avoid being caught unprepared, carefully monitor your entire supply chain and keep a list of backup suppliers just in case.
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