Inventory tracking is the backbone of any high-selling e-commerce brand, especially for Amazon and Shopify sellers. Whether you’re a retail or wholesale business, maintaining accurate inventory levels can be the defining factor in your success. Besides keeping tabs on stock levels, inventory tracking helps sellers find the “sweet spot” between overstocking and stock outs, meeting customer demand seamlessly.
As a small business owner, you may already know the pain of having to re-train team members to adapt to new inventory tracking systems. This process can be time-consuming, costly, and can damage the flow of your unit. But don’t worry. Here’s a list of 7 best practices for inventory tracking to help Amazon and Shopify sellers improve their supply chain!
1. Remember Your ABCs
When it comes to managing the inventory for e-commerce sellers, the first step is to remember your ABCs. It is an inventory management method that groups items based on their importance and value for the store. Based on the Pareto principle, the ABC analysis suggests that around 80% of effects come from 20% of causes.
In inventory management, this means that a small percentage of your stock accounts for a large portion of your business value. The ABC analysis involves categorizing your inventory into three groups, including:
- A-items: These are high-value items, which represent around 20% of your inventory but make up around 80% of your revenue. The A-items should be managed with extra attention and care, with maximum resources allocated to them.
- B-items: This group includes medium-value items, usually accounting for around 30% of your inventory and 10% of the revenue.
- C-items: These are low-value items that make up around 50% of the inventory but only contribute to 5% of the revenue. E-commerce stores carry high volumes of these items, and they require minimal reordering, contributing the least to profitability.
To implement ABC analysis, start by categorizing your inventory into A, B, and C groups based on how much they contribute to your overall revenue. Then, allocate resources and management attention based on these groups. For example, you should always aim to keep A-items in stock for fewer backorders and happier customers. Likewise, C-items should never be overstocked to save on storage costs and reduce the risk of wastage.
2. Decide an Inventory Tracking Method
There are multiple methods for inventory tracking, including LIFO, FIFO, AVCO, JIT and many more others. However, FIFO (first in, first out) is by far the most used for e-commerce businesses, especially Amazon and Shopify sellers. This approach believes that the oldest inventory items are used or sold first, helping you earn higher profits over a low investment.
It is particularly useful for companies dealing in perishable goods, like makeup, flowers, cosmetics, or food — countering the risk of selling expired or outdated products. That said, the best way to implement the FIFO approach is to add new products from the back of the warehouse so older stock is at the front.
You may also use inventory management software for this purpose, which tracks the arrival dates of each batch, pushing notifications when it’s time to sell the older stock.
3. Maintain Buffer Stock
In an ideal world, stock levels would perfectly sync with demand, eliminating the need for a safety stock. However, e-commerce stores often face unpredictable variables, like sudden hikes in demand, production problems, and delays in supply shipments. Having a safety stock works as a buffer against such events, ensuring smooth operations in the face of uncertainties.
However, it’s important to maintain the right levels of safety stock. While having too little buffer stock can make you vulnerable to stock outs, having too much can tie up capital and increase storage expenses.
That said, here’s how you can determine the sweet spot for buffer stock:
- Historical Data: Use past sales data to understand demand patterns, like having high stock for products with high demand variability.
- Supplier Reliability: Check how consistent your suppliers are with delivery times. If they have longer, unpredictable lead times, it’s better to have a higher buffer stock.
- Order Frequency: Analyze your order frequency; more frequent orders mean less need for large buffers.
4. Utilize Batch Tracking
Batch tracking, also known as lot tracking, is a method used to manage inventory by grouping items that share the same production date, manufacturing location, or expiration date. Each batch has a different identifier (or code), which helps you trace back items as per their relevant details (origin, production, or expiration date).
This strategy makes it easier to locate products in case of recall or manufacturing defects, facilitating smooth quality control. Plus, when it comes to perishable goods like packaged milk or yogurt, batch tracking helps manage inventory based on expiration dates.
To do this, start by setting up a consistent method for creating batch numbers. For example, in “20230601-ABC123”, 20230601 shows the production date, while ABC123 represents the product code. Then, use barcodes or RFID tags to label each batch, ensuring easy scanning and tracking within your inventory.
5. Reordering and Economic Order Quantity (EOQ)
Like any online business, e-commerce sellers have to replenish stocks when the inventory levels drop below a certain threshold. But how much should you order to minimize holding and storage costs? What is the right balance between overstocking and stock outs? How to meet demand without overextending your resources?
Economic Order Quantity (EOQ) can help you find all those answers. It is defined as the purchase quantity a seller should order to minimize the total cost of managing inventory. In other words, EOQ helps sellers meet demand without overstocking. This way, businesses are able to find the ideal order quantity that keeps the total inventory costs low, including ordering, holding, and stock out expenses.
The EOQ formula is: EOQ = √2DS/H
Where:
- D is the periodical demand for the item
- S is the ordering cost for each order
- H is the holding cost per unit for that period.
When used effectively, the EOQ formula can help e-commerce sellers optimize their cash flow by tying up less resources in inventory expenses. This frees up your cash reserves, which can be invested in other aspects of the company, like expansion or strategic planning.
6. Identify Low-Selling Stock
If you have products that have been sitting on the shelves for the last six to 12 items, it’s certainly wise to clear off that inventory. See, items that don’t sell tie up your cash and capital, apart from taking valuable storage space. Add warehousing, insurance, and the risk of obsolescence, and these products may cost your e-commerce store more than you think.
The best option in this case is to clear off such inventory and improve your day-to-day cash flow, thereby streamlining your operations.
Here are a few strategies to get rid of low-selling inventory:
- Offer discounts (flash sales or seasonal promotions) to sell these slow-moving items
- Bundle low-selling items with popular products to increase the perceived value
- Donate items to charities or liquidate them to recover some costs (and tax benefits)
- Repackage or rebrand them to be used for/with other similar products
- Sell them on online marketplaces like eBay or Amazon to reach a broader audience
- Introduce contests or commissions to motivate your sales teams to sell these items
7. Use an Inventory Management Software
One of the best decisions you can make for your business is to ditch the old manual-counting-and-spreadsheets approach and shift to a cloud-based inventory management software. After all, who has the time to conduct inventory checking and predict reorders in the fast-paced business world?
A good small business inventory management software helps streamline and automate the entire inventory process, reducing the likelihood of errors (and returned orders). It provides a central dashboard where you can track your stock items, manage orders, and generate forecasting reports — all in real-time.
Best of all, using an inventory management software reduces the reliance on human labor and systemizes the entire inventory process. This means that you can even train a low-skilled staff member to keep check of your stock levels, thereby streamlining operations. Here’s a list of 8 Best Inventory Management Software to help you stay on top of inventory.
Final Thoughts
Effective inventory tracking is essential for e-commerce sellers, especially those who want to maximize their resources and streamline operations. By using these tried-and-tested methods, you can ensure that your inventory levels are always up to par, avoiding over or under stocking. Remember, having a well-managed inventory translates into happy customers and an even happier bottom line.
However, the secret recipe for success in the e-commerce world goes beyond inventory management. You need to stay on top of your books to facilitate data-driven decisions, budgeting, and financial forecasting. Don’t have the time or expertise to manage the bookkeeping aspect on your own? Don’t worry!
We provide comprehensive bookkeeping services designed to take this burden off your shoulders. Our team of experienced professionals handles everything from daily transaction recording and payroll management to preparing financial statements and tax filings. Contact us to handle the numbers today while you focus on achieving your business dreams!
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