Tracking inventory can seem like a never-ending chore. Just when you think you’ve attained balance, your inventory levels keep shifting. Studies show that 43% of small business owners are still using manual inventory management tactics such as Excel spreadsheets or just don’t track inventory at all.
However, inventory management can make or break your bottomline. CNBC reports that common inventory challenges such as returns, overstocks, as well as out-of-stock products cost retailers a whopping $1.75 trillion every year.
To ensure that your eCommerce business doesn’t fall into this category, optimal inventory management is crucial. This helps you optimize the cost of logistics and also meet customer expectations.
So, what exactly do you need to ensure you have optimal inventory levels?
This article will provide you with a brief overview of what optimal inventory levels mean and why it’s important, then we’ll get into how you can determine whether your inventory levels are optimal and wrap up with a handful of actionable best practices you can use to achieve an effective inventory management system for your online business.
Table of Contents
What are Optimal Inventory Levels?
Optimal inventory levels are the exact amount of stock that you need to have in a fulfillment center at any given time in order to fulfill regular demand for the products.
When you optimize your inventory levels, you’ll be able to reduce common inventory challenges such as:
- Selling out-of-stock items
- Overstocking
- High storage costs
- Dealing with dead inventory
Why Optimal Inventory Levels Matter
When you have a strategic plan in place that ensures effective inventory management, your business stands to reap the following rewards:
Accurate order fulfillment
Optimal inventory levels ensure you have knowledge of accurate stock and where it’s located. This way, you’ll be able to avoid high return volumes, loss of customers, and ensure all orders are accurately met.
Better inventory planning
You’ll also be able to gauge the products that have high demand and those that are slow moving. This will help you to mitigate issues such as over and under stocking.
Cost reduction
Excess inventory can be stolen, damaged or even become obsolete. Spending more money storing obsolete products is an unnecessary expense. Shortages and expedited deliveries often lead to increased shipping costs. Maintaining optimal inventory levels eliminates these extra expenses saving your business both time and money.
Increased customer satisfaction
Good inventory management leads to orders being fulfilled efficiently and faster. This enhanced process helps you avoid increased backorders, stockouts, and on-time delivery. This has the ripple effect of offering a great shopping experience for your customers which leads to repeat purchases and customer retention.
How to Determine Optimal Inventory Levels
Below are the main factors to consider when determining your inventory levels.
Lead times
Lead times is the amount of time it takes for your supplier to deliver an order you placed from manufacturing to completion. Here, you should consider any holidays your manufacturer takes and how long it will take to receive the inventory.
Your goal is to reduce the lead times for faster delivery to your customers. To do this you can
- Use a domestic supplier
- Use sales data to inform suppliers of expected reorders
- Consider kitting services
Safety stock
Safety stock refers to the extra stock you keep in hand to avoid stockouts in case of unexpected mishaps or demand spikes. In order to calculate safety stock, you’ll need to take each SKU and determine:
- Average daily usage
- Average lead time
- Maximum daily usage
- Maximum lead time
To calculate optimal inventory level, use the economic order quantity (EOQ). This helps to keep warehousing costs down and still meet customer demand.
Demand forecasting
Demand forecasting lets you make more accurate predictions on the demand for your products so that you’ll be able to determine the right amount of inventory needed for a given period.
This way, you’ll be able to optimize your inventory through predictions of future demand based on past sales. You’ll be able to know when to run flash sales and when to stock up.
Best Practices to Follow
Let’s get into 6 key best practices that every business can leverage to achieve optimal inventory.
Prioritize inventory
Fact is, some products will have more demand than others and need more attention. The ABC technique helps you organize your inventory into a hierarchy starting with the most important items to the least important ones.
The hierarchy includes:
- A- best-selling products that need frequent quality review and regular reordering
- B- moderate-value products that often require monthly reordering
- C- low-value products that are need minimal reordering
Set up reorder points
A reorder point is the minimum number of products you need to have on hand based on its frequency of sales and how long it takes to restock. When you set reorder points, it ensures you’re never understocked.
To do this, assess customer demand and lead times. Inventory management software comes in handy as it sets alerts for your team to start the refilling process.
Use an inventory management software
An inventory management software allows you to sync SKUs, orders, and view inventory in real-time. It also helps you to centralize your inventory, fulfillment centers as well as sales channels.
Having an inventory management software lets you automate inventory-related tasks that are not only time-consuming but also prone to human behaviour. You’ll be able to set automatic reorder levels to prevent running out of stock when customer demand surges.
Schedule inventory audits
Even when you have an effective inventory management system in place, you still have to perform inventory audits for maximum accuracy. The good news is that you can also automate this process by syncing your store with the fulfillment technology of a 3PL. This technology is able to perform spot checks, cycle counting, and a full annual check
Kit and bundle products
Kitting involves grouping separate products and selling them as a single unit to increase average order value. Doing this also helps to keep shipping costs low and prevent deadstock.
The process involves defining a pack size, selecting products for the bundle, and bundle tracking to ensure that you have enough items at hand for each variant.
How NextSmartShip can Help You Optimize Your Inventory Levels
Working with a third-party fulfillment center like NextSmartShi ensures that you don’t have to do any of this alone.
By outsourcing fulfilment to NextSmartShip, you’ll be able to overcome the inventory challenges we covered earlier and access to the following:
- Real-time inventory tracking
- Multiple courier options to ensure discount shipping rates
- Custom packaging to amplify your brand awareness efforts
- Picking and packing to prioritize inventory for you
- 90 days free storage to reduce your fulfillment budget in China Fulfillment Center and 30 days free storage in other centers
- One-click sync orders between your store and NextSmartShip’s fulfillment centers
- One-on-one customer service
- Global warehousing to ensure worldwide reach
Over to You
Effective inventory management involves striking a balance between your input and output. A third-party fulfillment center like NextSmartShip can help you streamline your inventory and logistics operations. Reach out to us today to get custom solutions for your business.
