8 Inventory Management Best Practices for eCommerce Small Businesses

One way to grasp the importance of inventory management for small business is to consider inventory as money in another form. Just as cash left sitting in a checking account earns no interest, poorly managed inventory can result in an array of costs for any small eCommerce company.

On the other hand, disciplined inventory management allows a company to track inventory from purchase to sale and make informed decisions about what, and how much, to buy. It can also help businesses adjust stock levels based on consumer trends, seasons, locations, and a variety of economic data.

At SkuNexus, inventory management software is a key part of the systems we offer to clients, and we understand the difficulties that small businesses may face — it is a complicated subject area. Achieving success can be challenging and requires a combination of organization, information, and the right technology. 

Here, we will discuss 8 best practices for any small business eager to institute the best inventory management for its eCommerce operations. These inventory management techniques can be applied regardless of whether the business model is online retail, B2B, or manufacturing.

1. Determine the Correct Valuation Method for Your Business

As a small business owner, it's important to have a clear understanding of your inventory and how it is accounted for. Several inventory accounting methods exist and it's essential to determine which one is right for your business: FIFO, LIFO, Specific Identification, or Weighted Average Cost.

FIFO stands for "first in, first out." Just as it sounds, this method assumes that the cost of inventory purchased first will be recognized first. Because It aligns current inventory costs with the actual flow of products out of a business, FIFO provides the most accurate picture of real-time inventory cost. 

LIFO, on the other hand, stands for "last in, first out." The mirror image of FIFO, this model assumes that the most recent items placed into your inventory are the first items sold. Working under the inflationary idea that recently-purchased items will cost more than older ones, LIFO may lower profits, but can also minimize taxable income. Most online retailers would avoid LIFO as there’s generally no justification for selling recent items before older, outdated inventory.

The specific identification method assigns costs individually vs. grouping items together. It is used by businesses with high-value products (automobiles, collectibles, luxury goods). However, it can also be beneficial to any company that wants highly-specific data and has the capacity to track each individual item (serial numbers, RFID tags, etc.) 

Weighted Average accounting does not differentiate between different items. The total cost of all inventory is simply divided by the number of units. This is the simplest approach to use and is best employed by merchants with high volume and inventory turnover.

2. Employ Demand Forecasting

Accurate demand forecasting is a critical component of inventory management. Being able to predict future demand for their products allows merchants to maintain an appropriate level of inventory to meet current customer demand without overstocking or running out of stock.

Too much inventory can be costly for businesses for a variety of reasons. It ties up capital that could be used for other purposes, can lead to storage and handling expenses, and incurs the risk of stock expiring or becoming obsolete. Conversely, running out of stock can result in lost sales, disappointed customers, and a damaged reputation for the business.

As with many facets of inventory management, comprehensive data is crucial here. From sales histories to supply chain lead times, the range of impactful information is extremely broad, but it must all be taken into account for accurate predictions to be made.

3. Identify Items with Low Demand or Slow Sales

Low-turnover stock can be costly for a small business in several ways. It ties up financial resources, takes up inventory storage that could be used more efficiently for other purposes, and the possibility of product expiration/obsolescence increases significantly over time.

Multiple steps may be taken to address the issue(s) presented. After identifying low-turnover inventory, a small business can reduce/halt the ordering of such items, adjust prices to encourage sales, or find new uses or markets for the items. 

This is one of many areas of an inventory system for small businesses where KPIs (Key Performance Indicators) can play a valuable role. Inventory sales KPIs help give powerful context to gross sales data and help specifically determine what is moving and what isn’t.

4. Monitor and Document Inventory Levels

Tracking the amount and type of stock you have, and establishing a reliable and consistent process for counting inventory, requires a combination of rigorous processes and inventory management software. 

Consistent barcode scanning as products make their way through the warehouse is an effective tool for visibility, accuracy, and inventory control. Its use helps increase efficiency, dramatically reduces errors, and the data can help inform ordering decisions. An automated inventory management system can play a key role in this. 

An automated inventory system will alert you when a product is running low on stock and reaching the reorder point or even automatically place a reorder for you. This type of automation can and should work seamlessly with other retail management tools — order management or point-of-sale software (POS) — to ensure real-time accuracy in inventory tracking across all sales channels.

Inventory management allows you to track the performance of each product and understand which items are over or under-selling, as well as how much profit you are making. By combining this information with demand forecasting, risk management, cash-flow projections, and projected profit margins, you can make more informed and accurate business planning decisions.

5. Do Not Dismiss Dropshipping and 3PL Fulfillment Solutions

Dropshipping involves having suppliers ship products directly from their warehouses to customers, eliminating the need for you to keep the product in stock. This reduces/eliminates warehousing and fulfillment costs, and your profit comes from the difference between the wholesale and retail price of the product, minus the costs of marketing and selling it. 

Dropshipping is also an extremely useful option in the event of demand surges and supply chain breakdowns. Routing orders to reliable backup vendors can provide inventory pressure relief and a crucial safety valve that may prevent customers from shopping somewhere else.

Re: 3PL (third-party logistics) solutions, the demands of eCommerce have fueled an explosive expansion of the industry. 3PL services span the full range of eCommerce fulfillment processes, from warehousing to pick and pack to shipping to returns. 

Whether a merchant is new to eCommerce or a seasoned veteran, the challenges presented by these logistics operations are immense, and outsourcing fulfillment services can be a wise move. Time saved here may instead be spent focusing on sales, marketing, product development, and everything else needed to build your brand.

6. Ensure Accuracy at Receiving

As the first warehouse management process, any errors here will only grow and spread. To establish initial inventory control, you must verify that the correct products were delivered, undamaged, and in the right quantity. The warehouse barcode scanner will make its first of many appearances here as received items are scanned into inventory.

Purchase orders are vital here. It is crucial to review and compare incoming inventory against the purchase order to verify that the correct items were received in the correct quantities and that the agreed-upon price was charged. 

While your technology can help with this, your staff also needs to be well-trained and understand the importance of accurate receiving. Ensuring accuracy at the beginning of the process helps to establish a strong foundation for your inventory management.

7. Implement a Point-Of-Sale System

Point-of-sale (POS) systems help small businesses manage inventory in real time. The software updates automatically as items are sold, displaying current inventory levels and the cost of goods on hand.

When integrated with an inventory management system, POS software helps businesses keep track of incoming and outgoing inventory, and can provide useful reports (e.g. profit margins for specific items, inventory turnover, etc.). By using POS technology, businesses can eliminate data entry errors and improve their inventory management.

8. Integrate Inventory Management Software

Considering their limited resources, effective inventory management is especially important for small businesses, and an investment in the right inventory management software will pay outsized dividends. It helps ensure sufficient stock is in the right locations to meet customer demand, improves efficiency throughout fulfillment processes, and can provide actionable data to help make important decisions across the entire business.

Moreover, an advanced inventory management system can save time, money, and increase sales by automating processes, accurately tracking incoming and outgoing goods, and reducing overstocks/stockouts.

Our work at SkuNexus focuses on helping eCommerce businesses of all sizes optimize the full range of their operations. The management software systems we design are built for maximum flexibility and complete customization. By constructing them with this architecture, merchants are empowered to tailor the system in any way that best suits their needs.

If you would like to get a closer look at what our software can do for your business, please schedule a demo.

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