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inventory management

What is e-commerce Inventory Management: A Guide to Inventory Management for Online Businesses

If you are a small or medium-sized business owner in Australia with an online store, managing your online store inventory is essential.

This article provides a deep dive into e-commerce stock management, explaining why it is crucial for your business, various techniques you can use, how to choose the right inventory management software for your needs and much more. Let’s dive in.

What is e-commerce inventory management?

As the name suggests, e-commerce inventory management is a process by which a business sources, stores, tracks and ships its inventory (also known as stock or merchandise) across all its sales channels. 

When managed well, it provides real-time insight into your inventory levels, helps you make pricing adjustments, and indicates when more stock is required. This is particularly important when handling large quantities of inventory, fulfilling large orders, and managing a high volume of transactions.

Why e-commerce businesses need online inventory control

There are several benefits to having a comprehensive view of your business inventory. 

Understand when to reorder stock for your online store

If you run a business that sells inventory, knowing when to reorder stock is essential. 

Whether you offer a limited range of products or a wide array, it is important to have a clear understanding of your inventory status at any point in time. Real-time insight into inventory count, timelines and possible bottlenecks enables you to make relevant and informed decisions quickly.

Ordering too early can increase your holding costs such as costs for storage space, labour and insurance, On the other hand, ordering too late can result in stockouts (an out-of-stock event). This can leave customers unhappy, and potentially, lead them to your competitors.

The key concept here is the reorder point - the optimal time for new order placement. You can calculate the reorder point for your business using a formula that takes into account two factors: your lead time demand and your safety stock level. 

Or you can just use the Quickbooks’ reorder point calculator for a much simpler process.

Determine your inventory turnover

E-commerce inventory management helps a business determine its inventory turnover rate, that is, the frequency at which inventory needs to be replaced. Having items on hand for fewer days can indicate strong sales either due to high demand for the products at the desired price or significant discounts driving quick sales.

Your inventory ratio is crucial in helping you understand your return on assets (ROA), which is the revenue generated from the items you sell. 

There are two main methods to calculate your inventory turnover ratio: 

  • The Total Sales Method uses your total sales
  • The Cost of Goods Sold Method considers the cost of goods sold.

To calculate your average inventory, combine your starting inventory amount with your ending inventory amount for a given period and divide that total by two. 

While it’s good to be familiar with this formula, you can easily skip this. Use QuickBooks’ Inventory Turnover Calculator instead to calculate your inventory turnover ratio.

Determine your best-performing items

Effective inventory management involves implementing a tried and tested system and set of processes that can help you understand how your business is performing. This can be achieved through several key practices: 

  • Increase automation: streamlined processes reduce effort and error 
  • Consolidate data in a single format and location: this provides an all-in-one view of your business 
  • Rely on real-time insights: Gain accurate and up-to-date information that supports quicker and more accurate decision-making

With robust inventory management, your business can evaluate how each of your products is performing, gaining both a micro and macro view that highlights best-sellers (and poor performers), easily and quickly. 

E-commerce inventory management techniques

Here are six tips to implement for improved inventory management:

  • Use insights to inform your decision-making on reorders and pricing
  • Automate as much as possible
  • Use order tracking to ensure accuracy and improve customer satisfaction
  • Focus on maintaining consistency by adhering to established processes
  • Streamline all internal communication to ensure team efficiency and reduce error
  • Update your inventory management system periodically for improved functionality

Inventory auditing

Did you know that businesses can claim a tax deduction on most expenses incurred when buying, maintaining, repairing and selling business assets or stock?

To maximise your tax refund, however, you need accurate and reliable records. One of the best ways to ensure this is to conduct a thorough stocktake at the end of each financial year (also known as an inventory audit). 

Depending on the size of your business and the range of products offered, this can be quite labour-intensive. Using the right tools helps with a seamless and quick audit. 

Set a date for conducting this audit to allow for proper preparation of the stockroom. Your stock should ideally be categorised appropriately to maintain accurate records and minimise duplication or errors. Your audit method should also be clearly defined, outlining the process and workflow.

Stay organised with SKUs

When you have several product lines, a good way to track your inventory is by using SKUs (stock-keeping units). Retailers use SKUs to identify and track their stock through unique codes generated that represent distinctive characteristics of each product, such as the manufacturer, brand, colour or size.

When you use SKUs, you have a system to search, identify and track your stock across order forms, invoices, warehouse and more. You can track overall stock as well as individual variants. For example, you can track not just the number of mugs available but also, how many blue, red and yellow mugs there are.

A SKU typically contains letters and numbers, with each element representing important product information. For example, Rivette-330241-S-BL refers to the Rivette brand; product ID number, size ‘Small’ and blue colour.

You can easily create SKU numbers using QuickBooks’ free SKU Code Generator.

Determine economic order quantity

Determining your Economic Order Quantity (EOC) involves identifying the ideal quantity of units to have on hand to meet demand while minimising associated inventory costs. Managing stock typically incurs costs for holding, ordering and dealing with shortages.

Additionally, it is important to determine your minimum order quantity (MOQ)and invest in building strong relationships with suppliers, manufacturers and customers. Understanding your minimum order quantities is crucial for effective inventory management.

Category analysis

A product category refers to a group of products that share similar characteristics, whether these relate to the product features or its benefits. Categories can be defined with varying levels of precision. For example, a broad category could be skincare but depending on your range of offerings, you may have subcategories such as sunscreens, exfoliators, moisturisers, masks, and treatments.

Category analysis is typically conducted to better evaluate your product offerings and to research what the competition offers. This analysis can ensure that your products have sufficient differentiation, enabling your marketing to respond to identified demand for certain products and helping identify opportunities for cross-promotion or upselling.

Just-in-time (JIT) inventory 

Just-in-time inventory is desirable because it arrives precisely when needed, thereby reducing costs associated with holding inventory. While it represents an ideal scenario, it requires effective supply chain management and oversight of all aspects of your business.

Safety stock

Safety stock, as the name suggests, is extra inventory held to avoid the risk of stockouts due to fluctuations in supply and demand. Maintaining safety stock reduces the customer’s frustration when they can’t purchase the product they want. Achieving an optimal balance between supply and demand is challenging because of many factors that are beyond one’s control. 

You could improve inventory tracking. But sometimes, this is still not enough. 

To offset this issue, you could allow back ordering, where customers purchase out-of-stock items with delivery expected on restocking. This can partly satisfy the customer but is not a complete solution. 

Safety stock offers an optimal solution without significantly increasing costs. The key is understanding how to calculate it accurately. 

To calculate your safety stock, you will need four key figures:

  • the maximum daily usage (MDU)
  • the maximum lead time (MLT) in days
  • the average daily usage (ADU)
  • the average lead time (ALT)

The safety stock calculation is: (MDU x MLT) – (ADU x ALT).

For greater convenience and speed, QuickBooks offers a Safety Stock Calculator.

Inventory kitting technique

Kitting is an interesting and useful technique where various but related products are assembled, packaged and shipped together as a single ‘kit’. When you hear of a “buy 2, get 1 free” or “buy 1 and get the 2nd one at half price”, this is kitting in action. 

Inventory kitting, therefore, involves organising inventory into kits for sale. Its advantages include:

  • increasing revenue through additional product sales
  • reducing costs because multiple products are shipped together
  • enhancing customer satisfaction through convenient bundles

Businesses with diverse product offerings can benefit from reviewing their product range and identifying complementary offerings, ideal for kitting. 

Choosing the right online store inventory management software

While brick-and-mortar businesses may opt for manual inventory management, online businesses require more efficient systems to support growth and minimise errors. Leveraging technology, such as specialist accounting software for e-commerce and cloud solutions, is essential for streamlining operations and ensuring peace of mind.

QuickBooks Online offers a robust system to manage your projects but also includes comprehensive inventory management features, including integration with several inventory management apps such as SOS Inventory. SOS paired with QuickBooks Online, for example, means that you have a fine-tuned manufacturing, sales order and inventory engine!

But that’s not all. 

QuickBooks integrates seamlessly with popular e-commerce platforms such as Shopify, eBay, Amazon and Etsy. This allows you to track inventory, orders, and payments in one platform.

For example, you can connect your QuickBooks account with your choice of e-commerce platform through the free QuickBooks Connector (also known as OneSaas) app. Accepting and making payments in over 145 currencies is accounting software developed especially for the e-commerce industry.

Let’s take a quick look at how easily an e-commerce platform, such as Shopify, integrates with QuickBooks. QuickBooks Connector typically integrates inventory levels between e-commerce platforms and QuickBooks Online by pulling product data from both sources (including the SKU and product name) and matching products between the two systems. If the stock level option is selected, inventory levels can be checked. You may also be able to set up alerts when there are inventory level updates.

If your business uses Shopify, the Shopify Connector by Intuit, for example, allows you to easily and automatically sync e-commerce sales. These integrations allow you to effectively manage inventory, streamline operations and focus on business growth.

Learn more on how to add inventory to QuickBooks

Streamline your e-commerce inventory management with QuickBooks

QuickBooks Online Plus is a one-stop robust e-commerce solution with an inbuilt inventory management feature allowing you to keep a finger on the pulse for all your business inventory.

Stay stocked for continued success with a free 30-day trial today.

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