Inventory Strategy - [Complete Guide to Understand Inventory Strategy]

Introduction

Building a brand name requires careful planning and foresight. Part of what brings so many customers to online shopping is the consistency of product availability and variety. None of this is possible without an excellent inventory strategy. 

Brands need to prioritize inventory before other aspects to maintain a healthy supply chain that does not face any snags. There are a number of ways in which inventory can be managed for better financial outcomes.

Let’s look into why having an inventory strategy is essential for today’s businesses and how to create one for your online shop. 

What is Inventory Strategy?

An inventory strategy is the series of processes a retailer creates to ensure the smooth flow of products throughout the supply chain. It is essential for all companies that deal in products, i.e., vendors, merchants, suppliers, distributors, importers, etc. 

The right inventory strategy differs from business to business, but the goal is always the same. 

• To establish clear manufacturing, procurement, stocking, and dispatch operations. 
• To ensure stock is neither surplus nor deficit.
• To meet customer demands without fail.
• To add accountability across the supply chain.
• To optimize production, shipping, storage, and recurring overhead costs.

Benefits of Implementing an Inventory Strategy

Many retailers don’t consider having an inventory strategy an absolute necessity. However, in today’s fast-evolving eCommerce sphere, where more and more sellers are adopting the omnichannel approach, inventory strategy becomes crucial. 

Without an efficient inventory management plan, all aspects of the supply chain would suffer, and businesses would end up losing money and customers. This is because an inventory strategy ensures stocks are replenished on time and businesses don’t end up with more or less inventory than needed. It also leads to a faster inventory turnover rate and reduces losses arising from dead stock. 

Moreover, planning your inventory can help you anticipate spikes in demand trends and give you better control over how much of every SKU you order. In all, an inventory strategy helps in the systematic running of business operations.

6 Inventory Management Strategies for Ecommerce Stores

No matter how you sell your products online, in-store, or both, there’s definitely an inventory strategy to help you sort things out. Below we talk about some of the widely used inventory strategies in the business world.

1) Just in Time (JIT) management

Just in Time management is an inventory strategy where goods are not reordered or manufactured until necessary. The main motto of JIT is reducing inventory holding costs and waste. 

If a business also manufactures the products it sells, then in the JIT approach, it has full control over its inventory. However, if they source finished products from elsewhere, they need to consider lead times provided by manufacturers and work accordingly.

2) Materials Requirement Planning (MRP)

Materials Requirement Planning is a data-dependent process that uses a software program to maintain inventory levels, schedule production times, and meet customer demand.

It is a highly effective inventory strategy for businesses looking to automate inventory management, but it is also the costliest. MRP is heavily data-driven and allows next to no room for errors and miscalculations. It significantly cuts down administrative costs and increases efficiency.

3) Economic Order Quantity (EOQ)

Economic Order Quantity, like the other inventory strategies discussed above, aims to limit holding costs by determining the ideal product quantities. Measuring the EOQ is beneficial for any business that buys or sells merchandise in bulk. 

It helps owners assess and allot capital for every aspect of their business. EOQ becomes especially relevant when suppliers or distributors provide huge discounts on bulk buying and need a figure to reign them in. 

4) Days Sales of Inventory (DSI)

DSI is a metric to evaluate the number of days it takes a business to fully sell its existing and work-in-progress (WIP) inventory. It helps retailers accurately estimate how long their current stock will last and when they need to schedule reorders.

A high DSI indicates either inefficient inventory management or unpopular products. DSI is also known as the average age of inventory, days in inventory, and days inventory outstanding. 

The formula to calculate DSI is - 

DSI = Average inventory/Cost of Goods Sold x 365

5) Safety Stock 

Safety Stock is the surplus inventory stored by any ecommerce business to protect against out-of-stock (OSS) situations. It is advisable to keep your safety stock SKUs low because, in many cases, these products may become obsolete.

The advantage of safety stock is that it enables businesses to meet consumer demand even if their inventories are not refilled timely, or a supplier backs out. Safety stock can keep merchants afloat during severe supply chain disruptions.

3 Most Common Problems of Improper Inventory Management Strategy 

We’ve been stressing how important inventory strategy is for any ecommerce business. Let’s look at some of the ways in which the lack of a strategy hinders businesses.

1) Inaccurate Inventory Counts

The most common problem store owners face when they do not have a strict plan for managing inventory is incorrect item counts. The main culprit behind this is manual or physical counting methods that do not rely on any inventory management software. Wrong stock numbers affect product availability, reorders, and sales.

2) SKU Proliferation

The growth of an online shop is often accompanied by an introduction of new products or SKUs. This usually ends up benefiting sales by bringing in new customers. However, if left unchecked, SKU proliferation can lead to too many products gathering dust in the warehouse. 

Such items can run out of their shelf lives or become damaged or obsolete. An inventory strategy ensures all products are accounted for and sold as soon as possible.

3) Dead Stock and Stockouts

In the absence of a strict plan on how to treat inventory, retailers often end up ordering more or less than what is needed. These situations result in two of the most common unanticipated consumer demand problems - dead stock and stockouts. 

They increase inventory carrying costs, shipping charges, and production charges if things are needed on short notice. Additionally, they cause customer dissatisfaction and disrupt the flow of working capital.

How to Create a Successful Inventory Strategy in 5 Easy Steps?

Regardless of the methods you incorporate for managing your stocks, any inventory strategy must include the steps described below. 

1) Inventory Scanning

The first step of establishing an inventory strategy is keeping tabs on everything that gets stored in a warehouse. The best way to do that is by installing scanning machines at the entryways of distribution centers that register the SKU of every item and save it in the database. 

Many retailers, especially small business owners, opt for physical counting, which is not as accurate. We advise any vendor dealing with more than 20k monthly orders to shift to a warehouse management system. Businesses can also try barcode scanning along with RFID tagging for a proper scanning protocol.

2) Inventory Management

Once all your orders arrive at the storage facility, it’s time to put things in their right places so that they can be found by employees when needed. All items in a warehouse have their designated positions. Flatter items are stored in pallets, boxes are stacked on top of each other, and smaller miscellaneous products go into racks and bins. 

An inventory management software allots all items SKUs and includes information on where each item is stored. This is essential for correct product counts and estimating inventory levels. It’s also crucial for the picking teams who push the order towards packaging and dispatch.

3) Inventory Reporting

The way your inventory moves tells a lot about your customer’s shopping habits and whether your products are attractive to them. To gather this data, we need inventory reporting.

Since businesses deal with many numbers and figures, it’s nearly impossible to operate without a technologically advanced inventory management system. 

Such a system has information about all your SKUs and how each of the categories performs seasonally, quarterly, or annually. Without inventory reporting, businesses would be quite lost as to how much of each item they need to reorder based on demand trends. 

4) Inventory Auditing

Businesses need to understand whether they are in a cash flow-positive state by the end of each year. Budding ecommerce businesses often burn their capital in the initial years before figuring out customer trends and setting up a steady margin. 

Scheduling regular audits can help ecommerce entrepreneurs maintain their books regularly. Auditing will also help companies to see which products bring in the most and least revenue. Keeping that in mind, businesses can then revamp their product offering. 

5) Demand Forecasting

Most ecommerce retailers are familiar with demand forecasting, but only a handful truly leverage its power. Demand forecasting should be a  crucial part of any inventory strategy because it enables businesses to make informed purchase decisions. 

With tech-enabled demand forecasting, companies can always be prepared for a surge in sales. This will result in higher customer satisfaction and reduced confusion about stock levels.

Final Words

Running an online business is so demanding that most owners often lose sight of the most important things. Inventory strategy is something many merchants only come to realize later to be a major link to business profitability.

In this article, we’ve tried to cover everything we could about how sellers can slowly build a solid inventory strategy. We’ve also listed the benefits of doing so. We hope these insights help you manage your inventory better and keep customers in the long run.

FAQs

1) Is inventory strategy important for both online and offline retailers?

Yes, having an inventory strategy can help all businesses, whether they operate through online or offline channels. Since most vendors store products in a warehouse, an inventory strategy can help them reduce losses and lost items and better allocate their resources.

2) Is inventory planning the same as inventory strategy?

Inventory planning and inventory strategy differ minutely from each other. Inventory planning involves careful estimation of the number of items needed to run a successful season or quarter. Inventory strategy, however, refers to the overarching process of managing a supply chain for maximum profit.