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So you finally kicked off your new e-commerce business, and now you’re planning to take it to the next level. As the retail market competition continues to grow, you want to take advantage of enormous inventory to deliver customer’s orders without delays.
The thing is, you don’t know precisely when to do it.
Scaling your business means being able to adjust according to market demands, and to do this, you’ll need to know when to purchase inventory – everything from the materials you need to build your products, to the items used to deliver your product to customers scratch-free.
There are strategies for identifying the best time to purchase inventory and manage it properly so you, as the owner, won’t have to pay for long-term storage costs and disrupting service level agreements.
What is an inventory?
A company’s inventory is the largest current asset it has, as it’s essentially the compilation of available product the company expects to sell within any given period.
An inventory is comprised of finished goods, products in-progress of being made, and the raw materials needed to produce said goods.
Many businesses still count their inventory by hand at the end of each accounting period to make sure that their existing records accurately reflect what they have on-hand.
What is inventory management?
Assuming that you’re operating your business all on your own, it can be overwhelming to manage your inventory. Maintaining a healthy inventory allows you to deliver what your customers ordered from your stores or partners, but mismanaging it could be detrimental in terms of costs.
Intuit QuickBooks defines inventory management as a systematic approach to sourcing, storing, and selling inventory – from raw materials to the finished product. It entails getting the right stocks in the right place and at the right time, at the right price.
Effective inventory management includes overseeing purchases from suppliers, maintaining the storage of stocks, controlling products that are up for sale, and fulfilling customer’s orders.
A surplus of inventory carries with it storage costs, as well as potential spoilage costs and obsolescence. Alternatively, inventory shortages can negatively affect sales. If the amount of product the company has fails to meet its current demand, it will result in a loss of revenue.
Why inventory management for e-commerce shops is crucial
E-commerce has been on the rise for years, but now in the wake of the COVID-19 pandemic, consumers have grown increasingly reliant upon online retailers for non-essential and essential goods alike. A 1,500-person survey conducted by RBC Capital Markets in April of 2020 found that 42% of respondents were purchasing their groceries online at least once a week, up from just 22% in 2018.
A 2018 Salesforce study of 6,000 respondents highlighted speed as something online shoppers value, deducing that, “shoppers prefer retailers that can move at their speed.” Of the 6,000 participating consumers, 69% said it was important for them to “see new merchandise every time they visit a store or shopping site.” Furthermore, 75% of those consumers’ site search queries were said to be brand new every month.
Whether you own an e-commerce business or you’ve had to transition to online operations due to the pandemic, proper inventory management is critical to your growth. It’s not only important that you have more than enough inventory for top-selling goods, but also that you’re consistently introducing new ones.
So, when do you purchase inventory?
You may assume that emptying your shelves and delivering your products to consumers as soon as possible is always a solid blanket strategy. After all, the more orders you send out, the more revenue you earn, and more revenue means success. This can be true, but it’s important to keep in mind the amount of time it takes you to manufacture your products.
You never know when a specific product or line will sell out, and if it takes a month to make those products, you’ll need to be sure you have orders in place to replenish the stocks you just sold. If you don’t, you’ll likely fail to meet the demand which could lead to gaps in cash flow and disappointed customers who may not return to your business.
When it comes to purchasing inventory, it’s best to know what your options are so you, the owner, can decide which will allow you to best meet the demands of your customer. After all, in today’s highly competitive business landscape, you can guarantee that if you aren’t meeting those needs, a competitor will. Here are three methods to consider:
1. Bulk buying
If you have more than enough funds to pay for non-perishable goods in bulk – and assuming you have space to store and manage those goods – buying your materials as a wholesale item will definitely save you a lot of money in the future. You’ll also get to increase your profit margin and meet your inventory requirements.
Buying in bulk means getting a large quantity of the products you use most frequently in your operations.
Think about household items like toilet paper and dish soap. You typically buy these products in bulk because you use them every day. If you were to buy them one at a time, it would be inconvenient and costly to keep running back and forth to the store every day to get more.
From the business perspective, purchasing raw materials in bulk that are used regularly to manufacture, package or deliver you products – things like bubble wraps or corrugated boxes – will cost you a fraction of the individual sale price for those items.
Buying in bulk doesn’t mean buying as much materials as humanly possible. You certainly don’t want to end up with a surplus. The idea here is to do this as needed as a means to minimize your cost per unit.
Now, you might ask, so when is it needed? How do you know when it’s time to place a bulk order?
Assuming that you have the budget to buy your most crucial raw materials, you should also have an accurate estimate of how many products (finished goods) you are selling on a weekly or monthly basis. This information will give you a good idea of how many bulk orders you’ll need to place to receive the maximum discounts, and the timeframe in which those orders will last you.
Assuming that your supplier does a massive sale on the materials you always get, take advantage of the discount and buy in bulk while it’s there. Just make sure that the items you’re going to buy in wholesale are the ones you will really use and not something you think you can benefit from in the future.
2. Dropshipping
If you don’t have the luxury of access to a huge warehouse to store in-demand products, dropshipping may be best for you.
Dropshipping is an inventory approach that lets you sell your goods without carrying the load of your inventory. This method is perfect for small businesses that carry perishable inventory. Usually a wholesaler or a manufacturer will provide a suitable space with the proper environment for your products (right temperature, space, etc.) which you don’t yet have room for in your budget.
Using the dropshipping approach will help you reduce your odds of waste due to unsold perishables. Dropshipping companies often carry out the delivery of your goods to customers, depending on your agreement.
It’s a smart business move if you constantly worry about storage, fulfilling customer orders on time, and resources.
3. Just-In-Time
If your primary goal is to reduce the existing inventory that’s been sitting in storage for a long time, you’ll likely find the Just-In-Time inventory method most effective. Through this method, you only order the materials you need when your customer needs it.
The Just-In-Time inventory approach is ideal for small online businesses that can easily get their supplies from partners anytime they need them. Doing so means you’ll avoid having a surplus of inventory waiting to be sold.
In order for this method to work successfully, you have to have an accurate idea of how many products you will be able to sell within any given period – be it a week or a month.
Look at the data you already have available to you. How many products are you selling in a week, on average? If you plan to re-order raw materials every month to save on delivery costs, get the average number of products you send out to customers monthly.
Take note that customer preferences may change at any point, and you will run the risk of having too much inventory if you don’t sell existing products fast. Work on attracting new customers or redesigning your offers to make sure that your inventory is sold at the most optimal time.
Can you play by ear?
When it comes to purchasing inventory, you can do more than play it by ear. You can make intelligent estimates on how much developed products will be sold using the data you already have.
Taking advantage of your financial and consumer data, combined with the current industry trends, will help you determine if you need to get more raw materials now or sometime in the future.
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This content is brought to you by Dane Panes.
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