The Keys to Lower Inventory Costs

Managing inventory is among the most critical tasks of an ecommerce company. Poorly managed, inventory costs can escalate, and profits erode. In this post, I’ll review five tactics of high-performing, multichannel sellers that greatly lower inventory costs while streamlining operations.

The Keys to Lower Inventory Costs

Build an accurate sales forecast. Do not buy inventory until you know what you’ll need, when you need it, and how much. Developing a good sales forecast requires knowing:

  • Sales history by item and by week.
  • Sales volatility for your category.
  • Upcoming promotions.
  • Competitive activity.
  • External factors that affect your market.

Importantly, understand the 80/20 rule. For most retailers, 80 percent of sales come from about 20 percent of products.

Shorten your supply chain. Try purchasing from manufacturers and suppliers that are close to your warehouse. The turnaround time for replenishment is faster, which makes it easier to react to changes in your sales forecast.

Purchasing from overseas manufacturers may not be optimal. The savings in production could be offset by long-term inventory finance charges, shipping fees, tariffs, and warehousing. And you may have to carry way too much stock, which ends up tying up cash.

Try purchasing from manufacturers and suppliers that are close to your warehouse.

Here’s an example. I once owned a company that sold razors to consumers. We considered purchasing the razors from an overseas manufacturer at roughly a 25-percent cost savings. On the surface it looked like a great deal. But once we crunched the numbers, the savings was not that attractive. We had a four-week production cycle from the time of the order. Then, to keep the costs low, we shipped over water to arrive on the West Coast of the U.S. This added another 28 days. Then we had another six days for the cargo to be released and for the products to be trucked from the West Coast to the East.

When all of those costs and time were factored in, the savings was closer to 5 percent. But the extended turnaround time from order to receiving the product didn’t give us the flexibility we needed. In short, we chose to pay a higher product price for the flexibility of weekly deliveries.

Audit the warehouse regularly. No matter how accurate you think your inventory systems are, there are always discrepancies, in my experience. Human intervention creates errors, such as the delivery count, picking errors, inventory in the wrong warehouse slots, wrong inventory in the picking slots, shrinkage from damages, and shrinkage from theft. So, physically audit the inventory in your warehouse, including packaging and marketing materials. If you’re using a third-party logistics company, audit its item counts, too.

Here’s another example. A Fortune 100 client, a retailer, uses very sophisticated inventory management systems. The company sells its products in many channels with multiple warehouses in North America.

During the 2018 holiday season, the company shipped inventory from a warehouse to a fulfillment center. But the system said the inventory never arrived, forcing the company to scramble to get more product. The shortage over two weeks created out-of-stocks that cost the company about $42,000 in lost sales. No one knew where the missing inventory was.

Finally, at the end of January, the warehouse manager was auditing inventory and discovered the product was there, but it was placed in the wrong slot. The error went undiscovered for about 45 days. The error caused a chain reaction because warehouse personnel counted the misplaced inventory for the product that was supposed to be in that slot, which then caused shortages for that item.

The shortage over two weeks created out-of-stocks that cost the company about $42,000 in lost sales.

Centralize inventory reporting. Multichannel inventory management is the process of accounting for inventory stored in multiple locations or used for multiple sales channels, such as marketplaces, branded websites, and wholesale outlets. But it’s essential that inventory reporting for these channels or locations is centralized. Avoid, say, an inventory report for Amazon, a separate one for eBay, and another one for your website. That type of setup is prone to errors. The result is warehouses with the wrong product and ongoing out-of-stocks.

Automate. My long experience in selling in multiple channels has taught me that automation is essential, especially for more than 20 products. It’s nearly impossible to manage a business on spreadsheets. Enterprise resource planning tools can bring all your business processes together — inventory, order management, accounting, human resources, customer relationships. ERP software integrates all these functions into one system to streamline processes and information across the entire organization. Everybody can see it — employees and supply chain partners.

With proper automation, you’ll never have to worry about a customer placing an order and not being able to fill it. Sales data is automatically shared with suppliers for restocking. Similarly, product information is syndicated from your ERP to all your channels.

The good news is that the price of automation tools is falling. It’s one of the easiest things to implement, even for smaller companies. It enables you to run your business with fewer people.

Phil Masiello
Phil Masiello
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