As a company grows, inventory management becomes a significant focus area. Inventory accuracy can be a major cost differentiator, or a cost center, depending on how well or poorly it is managed. Poor inventory management can lead to unbelievable storage costs, cause shipping problems, and revenue issues. Small companies trying to scale should take steps early on, so the foundations of success are there.
I have spent the past 7 years working with a 3PL company that helps eCommerce merchants leverage industry-leading inventory management procedures. Here are some of the physical and digital components of excellent inventory management that we’ve learned over the years.
1. Continuously Improve your Forecasting
It all starts with predicting your demand for the future. While there is software out there that can help with this, building your own models is often more effective. Data on sales history is also extremely valuable when forecasting, so make sure you’re tracking sales by item in a way that will be easy to analyze. For example, changing the SKU when releasing a new version, or selling the same item under different SKU’s or in different bundles, makes it more challenging to get a clear number on total sales of the item.
As you go along, you can compare actual sales to what you had forecasted, identify where your models were off and why, so you can further train them. The more accurate your forecasts are, the more confident you can be in them – allowing you to not have to buffer your numbers to air on the side of caution, which causes inventory to balloon.
If you’re just starting and have no sales history, try to keep it simple and make small bets to help build data and history.
. “A successful inventory plan should also involve your marketing, catalog, eCommerce, and merchandising departments.” – Steve Warren, MultiChannel Merchant
Ecommerce, specifically eCommerce startups need to plan well ahead of time. Steve Warren’s insight on managing the many aspects of operations together is part of a more significant trend in business. Bring together the many aspects of your business and plan your success thoroughly.
2. Sing Your ABCs
Joffrey Collignon and Joannes Vermorel of Lokad explored ABC inventory management methods thoroughly. They discussed the benefits of rating items with A being the highest in consumption and C items as the lowest. This method is helpful when making purchasing decisions, as well as item placement in the warehouse once it arrives. You want your hot items (A’s) as close to the packing station as possible. You also may want to cycle count you’re A items more frequently since they have higher turnover and are more error-prone.
“… the supply manager can identify inventory hot spots, and separate them from the rest of the items, especially those that are numerous but not that profitable.” – Joffrey Collignon and Joannes Vermorel
3. Consider Your SKU Naming Scheme Carefully
How you name your items is important in many ways. You want SKU names that are easy to read and hard to miss-spell. A good naming scheme could allow you to know crucial bits of info such as the size, color, department, etc. of an item just by reading the SKU. A bad naming scheme leads to confusion when talking about items, ordering items, picking items in the warehouse, etc.
Depending on your business, you may also want to consider segmenting your inventory by season. Some companies have highly seasonal items. Managing these items will be much easier if you can tell the season from the item SKU or description. Chris Guillot, the founder of the Merchant Method, explains the opportunity to plan for residual inventory and cost control during inventory implementation.
“Create season codes with style number when you enter items into your inventory management system.” – Chris Guillot
Essentially, by creating season codes when you’re establishing your system, you can segment your slow-moving stock based on the season rather than sales.
4. Use Technology To Create an Ecosystem
There are so many software solutions out there that can either track or impact your inventory. You likely need to build an ecosystem of systems to handle everything, and when you do you need to make sure the pieces fit together.
One important consideration when building your ecosystem is how inventory will sync between sales channels and your master inventory. Once you decide where your master inventory will reside, make sure that the system can integrate inventory to your sales channels effectively. The more real-time, the better. An inventory system that has an API is best because that allows you to write your own integrations as well, which you may need to do at some point.
Whether you’re using a 3PL or your own warehouse, consider how you will get an inventory feed from the warehouse into your master inventory system. While 3PL’s are great at managing your inventory, they are often not the best solution for syncing to your sales channels in real-time. A better approach might be to have your 3PL sync to your master inventory software solution and let that software handle sales channel syncing from there.
Image by Mohamed Hassan from Pixabay – source – https://pixabay.com/illustrations/angry-businesswoman-conflict-3233158/
5. Managing Multiple Inventory Supplies
Using multiple warehouse locations can save you a lot on shipping costs and allow you to deliver goods faster (which leads to higher conversions on your site). Multi-warehouse fulfillment is more complicated than it appears, however, especially for companies with large SKU footprints.
Adding locations adds complexity. You have to know how much inventory to supply each facility with, how to send orders to the correct warehouse for fulfillment, split orders, and sync inventory by location. Make sure your software ecosystem is ready for this, even if your business is not there yet. We often recommend startups start with one location and transition to using additional warehouse locations as volume increases.
If you have multiple locations, you’ll need to be able to analyze inventory on the whole as well as independently. When choosing inventory management software, or a 3PL partner, consider how you’ll manage inventory across multiple warehouses.
Also, if you already have multiple locations, you’ll want to “… identify opportunities to transfer stock between locations to improve sales or save on purchasing costs.” – Meaghan Brophy, FitSmallBusiness. You can save significant amounts of shipping expenses by optimizing inventory allocation to the correct warehouse locations that are closest to the consumer. But it’s a balancing act because the more locations you have, the more inventory you need to hold to keep them stocked.
6. Plan Around Lead Times for Holidays
Most businesses have some seasonality, and for many consumer products companies, Q4 is the peak. We have some customers who see up to 6x sales volume from Black Friday until Christmas every year. This is a make-or-break time of year, and we recommend customers give careful consideration to lead times during this time of year.
“Especially if you don’t own your means of transportation, transfers, and shipping to stores can be unpredictable.” – Andrew Chittron, Stitch Labs
Build these lead times into your inventory planning and management early on so that they become ingrained within your business’s core. Shipping optimization is another thing to map out when you are dealing with difficult or long holiday lead times. We see many customers switch shipping services from slower/cheaper methods to more dependable/expensive methods, to ensure their products get delivered by their expected delivery dates.
7. Focus on your Physical Processes
The physical processes your warehouse runs will largely impact how accurate your inventory is there. Receiving, replenishment, returns, and cycle counting are all key.
Receiving: The put-away or receiving process is a crucial first step. Outer boxes and inner boxes should be marked with at least the SKU, item description, and quantity. Different SKUs should not be mixed in the same box or jumbled on the same pallet. Merchants and 3PLs need to verify that what was sent matches what was received. If you work with a 3PL warehouse, check if they have an Advanced Shipment Notification process. ASNs help to automate and streamline accountability in receiving.
Replenishment: This is a key process for maintaining bin accuracy (and order picking efficiency). 3PLs should be running replenishment to bring inventory from overstock locations to forward pick locations. For products with expiration dates, the replenishment process is also how 3PLs can institute first-in-first-out (FIFO) logic. The replenishment process can also red flag problematic items/locations for cycle counters.
Returns and Damages: Maintain dedicated storage locations for damaged and reserved items, to keep them separate from available inventory. Clear procedures for processing returns and handling damaged items should be agreed upon, as merchants have different standards of acceptability. 3PLs do not like to store damaged products because it can quickly fill up a warehouse, though it is easy for clients to forget about this. There should be agreed-upon procedures for how to handle damaged products – discard it, ship it somewhere, or fix/repair it, once the quantity hits a certain level.
Cycle counting: Periodic cycle counting is an important procedure. For startups, an annual cycle count is likely enough. For larger companies, we have instituted quarterly or monthly counts. Cycle count results are the key performance indicator of inventory accuracy.
8. Measure Your Inventory Accuracy
Decide on your key performance indicators for Inventory Accuracy and have your warehouse or 3PL partner track them. We believe “bin accuracy” is the best measure of accuracy. Bin accuracy is the percent of locations whose inventory count is accurate. This is because if all locations have accurate inventory counts, then not only will total inventory be correct but pick and pack processes will also be efficient. Conversely, the total inventory count of an item could be correct but if inventory counts by location are not also correct, there are likely issues in the picking process.
Other possible measurements include “average bin variance” which is the average quantity variance by location across all locations. Or “average item variance” which is the average quantity variance of all items.
Strong “bin accuracy” measures are typically 98% or above.
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9. Advanced tracking: Lot Numbers and Serial Numbers
For some companies, tracking additional data such as lot numbers and serial numbers can be a huge help to the business.
If you have a food or medical product, you should be tracking inventory by lot numbers. You will need to know which consumers received which lot numbers, in the event that you need to do a re-call. Knowing a lot of numbers can also facilitate issue investigation with your manufacturer. You can track down issues to specific manufacturing runs, and look for trends that might explain why they occurred in that lot or batch.
If you sell high-value items such as expensive electronics or jewelry, you may want to track inventory by serial number. Doing so allows you to know specifically which customers got which unit. You can see exactly when each serial number was manufactured, received at the warehouse, and which customer it was eventually shipped to. Serial number tracking creates accountability at the individual unit level.
These advanced techniques are not necessary for many businesses but can be crucial to inventory management for others.
- Set Your Sight on the Future
When creating inventory systems, many people focus on needing to know what’s happening at that very moment. Managers want to know what’s available today, and why something wasn’t ordered yesterday. That’s not forward-thinking, though. Jane B. Lee, a contributor for Inbound Logistics, calls out the pitfall of most ERP options.
“To manage inventory proactively, however, you must know projected inventory levels for the future.” – Jane B. Lee
She urges managers and owners to strategize with the future in mind to cut down on restock lead times, supply variability, and errors on forecasting. Bearing this in mind while you map out your inventory plan can garner a lot of support for management when it comes time for implementation.
About the author
Chris is the Technology Lead at Excelsior Integrated, a 3PL Fulfillment company serving high growth eCommerce clients from warehouse locations in Massachusetts and California. Chris has been with Excelsior for 7 years, through an exciting period of evolution. He now lives in New York City.
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