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How to manage and track inventory for your online shop

See why inventory management is crucial to the success of your online shop, and learn about managing inventory using forecasting, tracking and auditing.

9 min read

When you sell products in your online shop, it’s easy to let inventory management slide, as virtual sales happen without the need to lay eyes on your physical inventory.

However, knowing the basics of how to manage your inventory helps you avoid costly inventory issues that can leave your shop rushing to fulfil orders. By using a  few key components in combination with inventory management software you will be well on your way to setting up a smooth-running inventory system.

1. Forecasting online shop inventory

The trick to ordering inventory well is to not order too much or too little. With a quality inventory management system in place, forecasting accuracy should improve over time.

Regardless of whether your online shop is new or you’ve been in business a while, you need to come up with solid numbers when ordering items for inventory. Since you’re not a fortune teller, there’s no way to know for sure how many products are going to sell ahead of time, so you use a rough estimate. You can base your estimate on sales from the past three to six months, or longer. Forecasting is easier when you calculate using:

  • Current growth rate

  • Previous year sales

  • Market trends

  • Existing contracts or subscriptions

  • Upcoming advertising

The trick to good inventory tracking is to not order too much or too little. Order too many items, and you run the risk of having unsold items languishing in a warehouse, costing you precious funds that could be better spent elsewhere. Order too few items and your shop’s reputation might take a hit when orders cancel due to lack of supply. With a quality inventory management system in place, forecasting accuracy should improve over time.

2. Using the par inventory system

Par levels are a basic concept of inventory management, and this term refers to the minimum amount of inventory you have in stock for each type of product sold. Par levels fluctuate depending on how much stock you order and how much of it sells at any given time. Ideally, it’s a good idea to set up a system that automatically tracks this information.

Imagine how difficult it is trying to manually keep track of numerous inventory items month-by-month. Losing track of par levels can lead to your shop running out of a popular item, and in turn to angry customers who vow to never shop with you again. To avoid this scenario, make a point of checking par levels every few months so you can take quick action to increase stock before a sudden sales surge erupts.

3. Follow the first-in, first-out rule

As you continue to order items to beef up your inventory, older inventory may get relegated to a back of the warehouse shelf. This can lead to product spoilage, or products that lose relevance to customers, resulting in lost sales. The first-in, first-out (FIFO) rule is a simple method for ensuring inventory ordered first is sold before newer inventory. Many warehouses follow this rule, but you should double-check with your suppliers to ensure that all older inventory is moving out the door first.

4. Anticipate inventory problems

Inventory problems can sneak up on you. If you’re not ready, you may struggle to resolve these problems before they get out of control. Let’s say you invest in a “sure winner” that turns out to be a slow sale. How do you get rid of that stagnant inventory? What do you do when a supplier runs out of a product in the middle of the holiday shopping season? Consider all the things that might create an issue for your inventory, and create contingency plans for each scenario.

5. Classify inventory based on popularity

When you have inventory that doesn’t sell, it only makes sense to stop stocking it. This makes it important to use stock-keeping units (SKUs) to track items. It also helps you figure out how to clear your shelves of low-turnover products, such as by having a sale. On the flip side, make sure you have inventory on hand for your most popular items, especially if you anticipate a spike in customer demand.

6. Consider alternate storage options

Look into the possibility of storing some products in regional hubs so you can get orders to your customers quicker. You may be able to make storage deals with national chains that have warehouse space available. As you organise your warehouse, keeping popular items easily accessible can speed up your packing and shipping time.

7. Ongoing audits

Periodically, it’s a good idea to conduct inventory audits using quality inventory management software that produces a detailed report. Like many business owners, you may feel one audit per year is all you need. But doing audits every month, or every quarter, can help you stay better informed about the status of your inventory. Audit reports may also help with forecasting and risk management.

With real-time stock management software like QuickBooks Online, you can have up-to-the-minute information on the state of your inventory at any moment. The best inventory software does the following:

  • Assigns barcodes to each item

  • Updates inventory records whenever an employee scans that barcode, noting the removal of an item from the warehouse shelf

  • Updates your website immediately whenever you run out of any product

  • Provides tracking information during shipping, so customers know when to expect delivery

Inventory software can also provide you with valuable sales analytics data. Likewise, it can send you notifications whenever you run low on a product-by-product basis.

8. Review your inventory budget

As you go over your inventory numbers, it’s smart to compare them against your budget and make tweaks as needed. Perhaps the products you order regularly have undergone price changes that affect your budget. Make sure your planned inventory order falls within your budget. You may need to allocate funds intended to cover one category of products to another once you compare your inventory and sales budget.

9. Manage inventory-related costs

Using smart inventory management software is a good step toward minimising the carrying costs involved with your inventory, but you can also take other steps to keep costs under control. If you have inventory you can’t sell, you might see if your vendor is willing to take it back. Other options include sales that offer drastic discounts on under-performing items. You might even consider holding markdown or liquidation sales for product lines you plan to eliminate from your product catalogue altogether.

Some small businesses also find it cost-effective to donate unwanted products to nonprofits, taking a tax deduction to mitigate any losses. You might also negotiate better payment terms with vendors and reduce shipping costs by arranging for drop-shipping, which means manufacturers and vendors ship directly to your customers to save your business money on processing costs.

10. Apps to help organise and manage inventory

If you have an online retail business or sell products through a website such as eBay, Etsy or Amazon, you need tools to help track and manage your inventory. The good news is that several apps already exist just for this purpose. In many cases, you can sync these apps with your QuickBooks Online account or other versions of QuickBooks so you can keep close tabs on your sales.

11. Update your orders

Once you update your inventory list through a manual count of products, you’re in a good position to update your orders. Keeping inventory in stock proves important because you can lose customers — sometimes forever — if you don’t fulfil their orders. Use your cloud-based inventory software to replenish the stock needed as inventory becomes low, ensuring you don’t run out of your best-selling products.

12. Keep your website updated

If you run out of a certain product, it’s important to update your website immediately. When customers place orders and pay for products but fail to receive them in a timely manner, they may turn to other sellers. Ideally, your cloud-based inventory management software updates your website automatically, but you may want to put fail-safes in place to make sure this happens reliably.

Consider whether to add information on your site stating when you expect the product to be back in stock. You may also want to take back orders with promises to fulfil them by a certain date.

13. Adjust safety stock levels

Inventory management typically ends up feeling like you’re walking a tightrope between having too much stock on hand and not having enough. When you have too much stock, it decreases in value as it sits there and takes the place of products that might sell more readily. Plan to have a 30-day supply of inventory, especially for your key products. Keep an eye on your safety stock, and replenish it every time you start to dip into it. As you plan for orders of new stock, pay attention to how long it takes your vendors to deliver the items you need.

14. Focus on quality control

If your products look (or are) damaged in any way, you may want to pull them from inventory. Ask employees who fulfil your orders to keep their eyes open for damaged goods, and use a checklist to note them during your regular inventory audits. Watching out for the maintenance of your warehouse and shipping equipment is also key to keeping your order fulfilment processes smooth. Broken machinery can halt the whole process, so take care to monitor your equipment and catch breakdowns immediately.

15. Adjust inventory for seasonal events

Many online retailers make a significant portion of their income at the end of each year as consumers spend money on gifts for Christmas and other holidays. But those aren’t the only holidays to watch when stocking your shelves. If you sell stationery and office supplies, the end of summer may be your busy season as students get ready to go back to school. Likewise, winter typically heightens demand for coats, boots and ski equipment, among other products, and summer may boost demand for sunglasses and swimwear. Use your inventory management season to track the rise and fall of product demand so you can plan accordingly and avoid losing money due to lack of stock.

When you have a handle on your online inventory, you can react quickly to changing market conditions and maximise your profit. 5.6 million customers use QuickBooks. Join them today to help your business thrive for free.

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