No matter what size your ecommerce business is, inventory management is key to your success. If your business is small or you have a start-up ecommerce business, tracking inventory is not that difficult. For those of you that have larger companies, forecasting inventory can seem like a daunting task.
The truth of the matter, inventory is a key pillar of your business and one that demands accuracy and timing at every step of the process.
As your business grows and you need larger quantities of products to meet demand, proper inventory planning becomes extremely important. This is one of the main reasons larger ecommerce companies outsource order fulfillment to a third-party-logistics (3PL) provider.
Most companies don’t have the correct infrastructure in place to handle rising demand and sales growth. If you don’t have the resources to manage inventory, inventory turnover, shipping, and ordering, outsourcing to a fulfillment center is an immediate solution.
Forecasting Your Inventory
It’s near impossible to forecast your inventory without the right data. The key to knowing how much inventory to order is knowing how your inventory behaves historically. Having the right order management software to track all of your multichannel sales in one centralized location is key.
Here at Thill, our OMS allows you to opportunity to monitor all of your on hand inventory and units sold per day. You’ll have the ability to track all your SKUs, run reports and see which sales channels are performing the best.
3PL fulfillment companies also have software that can notify you when you need to recorder products, which is another benefit you get partnering with a 3PL company.
Besides historical inventory data, you’ll need to keep seasonal trends and the holidays in mind when forecasting inventory. Furthermore, you’ll need to adjust inventory based on marketing, seminars or television appearances. If you’re planning outsourcing 3PL fulfillment, you need to make sure you let your fulfillment partner know ahead of time of such events.
In total, there’s a lot of different things that can affect your inventory.
- Seasonal Inventory
- Supply Chain Factors
- Events, Seminars, Trade Shows, Sports
- Law Changes
- Technology Failure
How To Forecast Inventory
Each SKU has a specific workflow. You can forecast inventory if you know each level per each SKU you have.
- Maximum Stock Level – This is the max stock level for any specific SKU you have.
- Reorder Point – Your reorder point is when you place a new order for inventory. You have to keep in mind how long it takes for you to get new orders to the warehouse and stocked.
- Low Stock Warning Level – This level is your warning for a SKU that is going out of stock.
- Restocking Level – This is the level after reordered product is delivered to your warehouse.
Your SKU catalog would have each level per SKU. In your supply chain, keeping track of your inventory levels is vital. The more SKUs you have, the bigger the challenge. It’s easy to see why having inventory management software is important but necessary.
Let’s go a little deeper on reorder points as they’re vital to all ecommerce businesses. Your reorder point is the answer to “when you need to reorder a product.” This is the level that triggers an action to replenish your stock.
Now, the lead time refers to the time it takes products to be delivered. You have to take this into account. We’ll talk about this more in just a minute. You can use a basic reordering formula as follows;
Reorder Level = Average Daily Usage Rate X Lead Time (In Days)
Some ecommerce companies will keep safety stock on hand. This gives you extra stock on hand just in case there’s a rise in demand.
We touched on this just a second ago, but when you place an order to your supplier, it can take time for that inventory to reach your warehouse. The time that it takes in between is your lead time for that product. It’s important to keep record of this per SKU so you know in advanced of ordering.
If your suppliers are local, your lead time is going to be less than that of a supplier that’s far away. If your supplier is overseas, it can take weeks to get your order. The rule of thumb is making sure you have enough inventory on hand to last during the lead time.
Another word you need to become familiar of is lead time demand.
Lead Time Demand – This refers to what you expect to sell during the lead time period.
There’s 3 more terms we want you to become familiar with.
- Base Demand – Your base demand is the starting point for forecasting inventory, usually based off your current demand for any given SKU.
- Trending – Trending refers to increases and decreases in demand over a period of time. If you can identify trends, your forecasting will be more accurate.
- Forecasting Duration – This refers to your forecast period, which can differ from one company to the next.
Monitoring Inventory Levels
Inventory control is extremely important, you always want to make sure you’re monitoring your inventory levels. Once again, relying on your inventory management software is essential.
Monitoring your SKUs will help you identify what products are selling the best, which products are selling slower and which products are not selling at all so you can make the proper adjustments to inventory.
This is why real-time inventory software plays a big role.