The Dangers of Poor Inventory Management — And How to Avoid Them
Consumers want what they want, when they want it. For the most part, ecommerce delivers on that near-instant gratification. Companies rely on ecommerce inventory management to ensure those consumer expectations are met wherever people shop. In recent years, making sure inventory is well-stocked has become a greater challenge for businesses of all sizes due to supply chain issues. But supply chain snags are only a symptom of a bigger problem — poor inventory management. Use this primer to see the full picture of how understocking and overstocking can do lasting harm to your brand and importantly, how to avoid both.
What Is Inventory Management?
Inventory management is the process of ordering, storing and selling your products. DTC companies use inventory management software to track product levels, orders, sales and deliveries throughout the supply chain. When managed well, companies maintain a consistent level of stock to meet consumer demand quickly without going out of stock. What could go wrong? A whole host of problems can plague companies at any point in the supply chain. Knowing what to look out for can help improve your ecommerce inventory management, keep costs down and drive sales.
Inventory management refers to the process of ordering, storing and selling your products throughout the supply chain.
The Downsides of Understocking on Ecommerce Sites
Out-of-stock messages rose 250% to 2 billion in the holiday season, compared to pre-pandemic levels a year prior. Understocking has more downsides than meets the eye.
Lost Sales From No Inventory: Every day you’re out of stock is a lost sale while you wait to replenish inventory. If you have a long manufacturing cycle, lost revenue quickly adds up.
Drop-in Loyalty and Share of Market: Those lost sales translate to lost customers, both new and existing. Consumers won’t necessarily wait for your brand if they can find something else faster. You may be able to win them back later but your competitive share of the market will suffer in the meantime.
Higher Manufacturing and Shipping Costs: Consider too that fulfilling those pending orders may result in higher costs for your business. If consumers are willing to wait, it’s in your best interest to rush producing and shipping items. Those higher costs will eat into your margins, but may be worth it to satisfy customers.
Falling Rankings on Ecommerce Platforms and Search Engines: As if understocking wasn’t bad enough, ecommerce marketplaces may punish you for understocking, especially if it’s a consistent issue. On Amazon, for example, the listing for an unavailable product is less likely to appear in search results, so potential customers may never discover it. The negative impact can last even after your product comes back in stock.
Bye Bye Bye Amazon Buy Box: If you know, you know the Amazon Buy Box is a must-win. Nearly 85% of sales on Amazon are closed thanks to the Buy Box. If you’re out of stock in Fulfilled by Amazon (FBA), you’re ineligible for this feature. Brands boxed out of the Buy Box have a less than 20% chance of closing the sale. In a highly competitive market, those are losing odds.
Lose the Amazon Buy Box due to understocking and you’ve got a 20% chance of closing the sale.
The Downsides of Overstocking
Similar to understocking, overstocking has an enormous impact on your bottom line. The longer the product sits, the more it costs you — and the harder it becomes to move.
Tied-up Capital: You’ve already paid for your inventory. That’s cash you’re not recouping if products sit on shelves or in warehouses. Your liquidity will suffer in this situation, meaning other parts of your business may be underfunded or without funding until you sell product.
Lost Margin: To move those products, you may need to discount heavily. Although a sale is a sale, be mindful of how much your margin suffers as a result.
Unusable Product: Inventory may be sitting in warehouses for any number of reasons. For one, consumers can be fickle and your product may be out of season or style. Or, your products may have spoiled or expired from sitting so long. Amazon fulfillment, for example, doesn’t share expiration dates with brands so it’s truly a black box.
Storage Costs: The longer your inventory sits in a warehouse, the more storage fees you’ll need to account for, which again can erode margin. Amazon fees vary based on the size of product and time of year. If your inventory hasn’t moved in a year in an Amazon fulfillment center, you’ll incur a monthly FBA aged inventory surcharge* (f.k.a., long-term storage fee), on top of the monthly inventory storage fee.
Amazon Monthly Storage Fees Example
Non-dangerous goods products
January – September
$0.83 per cubic foot
$0.53 per cubic foot
October – December
$2.40 per cubic foot
$1.20 per cubic foot
Fee Per Product = Average Daily Units x Volume Per Unit x Applicable Rate
Size tier: Standard-size
Current month: July
Volume per unit: 0.41 cubic feet
Average daily units in storage: 2000
2000 average units per month x 0.41 cubic feet per unit x $0.83 per cubic foot (standard-size rate in July) = $680.60 total monthly storage fees
Inventory Management Best Practices
Now that you know the dangers of poor ecommerce inventory management, here are four ways to improve your process, drive sales and support margin.
Pool Inventory: Understocking is an ecommerce business nightmare. Equally scary is being unable to access existing inventory. Pooling inventory solves this problem for omnichannel ecommerce fulfillment. Whitebox, for example, enables the same inventory to be used across all the channels you sell to so demand is met when and where it originates.
Test Bundling, Kitting or Multi-Packs: If you’re overstocked on a certain product, try bundling it with a proven seller. This not only helps move products but it enables consumers to discover and experience more of your catalog. Incentivize consumers with a multi-pack discount to increase cart size. A holistic solution like Whitebox can test a variety of bundles through advertising without costing you a penny in packaging, until the product actually sells.
Re-use Returns: Ecommerce marketplaces may or may not handle customer service around returns. If they do, chances are your returns are not recycled back into circulation. With Whitebox, we can replenish your inventory supply with that returned product so you can capture the sale.
Forecast and Plan with Fulfillment Data: Ecommerce offers brands a wealth of data but it requires expertise to use to your advantage. For example, most companies rely on historical data to prepare demand forecasts. This approach can be myopic, however. Understanding recency and identifying trends creates more durable demand forecasts that help you stay in stock and avoid overstocking.
Reduce Costs and Win More Sales With Whitebox
Inventory management is the beating heart of every ecommerce business. Doing it well can improve cash flow, increase sales, drive customer loyalty and keep costs low. Whitebox helps ecommerce businesses of all sizes achieve all this and more. Pooling inventory enables us to meet your customer demand across any channel. That centralization provides our customers real-time transparency into inventory levels to prevent out-of-stock situations. Plus, our complete approach marries marketplace advertising and fulfillment in a single, powerful solution. Using real-time data-driven insights from advertising fuels fulfillment and vice versa. With dynamic bundling, kitting and multi-packs, we can test and advertise any number of product combinations to help move product. Always be selling with Whitebox. Contact us to learn more about optimizing your inventory management.