Using the proper inventory management techniques will help you to minimize carrying costs and maximize profit. Hopefully you can arrange to have most of your products dropshipped. But there will be products where the suppliers you can find insist that you hold stock. This isn’t as bad as it sounds. Sometimes, these are also the products with the largest margins. You find that you make so much money on each sale that you are happy to keep a few on hand.
You’ll find that Quickbooks and other accounting programs can act as small business inventory management software, but in my experience they are quirky and use a set quantity requirement as a re-ordering point – not what you want when your sales flunctuate.
Sometimes the minimum quantity they want you to stock is enough to last for a couple of months. Other times, you may sell a couple dozen of an SKU (Stock Keeping Unit – a number assigned to each product) per day and your needs fluctuate. Most sellers stock up to get ready for Christmas, for instance.
If you don’t hold enough inventory, you’ll have customers waiting for product. This is a bad thing, the more so if they don’t pay until after they receive their items. Remember, you want maximize the flow of cash through your company. They may even cancel their order and go elsewhere.
The first time you order a product for inventory, it is a bit of a guessing game. But once you are shipping your widgets for a few months, you get a good feel for your needs. You can even set up a System to control your stock. Here’s a peek into ours:
Sales Jan-March for SKU G123:
- Jan : 35 units
- Feb : 46 units
- March : 18 units
Okay, so an average of 33 units per month. Now let’s say it take 2 weeks to get stock from your supplier.
So, to cover your highest sales numbers, you need to always have 23 units in stock when you place a new order. This is because your highest month is 46 units / 2 = 23 units every 2 weeks. By placing your order with 2 weeks stock remaining, you can be sure that you won’t run out.
Most accounting systems can track your inventory, and you can set up an alert set at your re-order stock number. I take this one step further. I like to add an additional 10% as safety stock. So in the case above, I would most likely buy these when my stock dropped to 25 or so units.
Of course the example above is simple. Normally you want at least 6 months of data to work with, but you have to start somewhere. Your stocking order should also take into account how the product is packaged. If they ship 12 to a carton, don’t be the dork that orders 17.
Here’s an easy inventory calculator for your business:
The cells in grey are your data entry cells. Here’s what to enter in the other cells:
B2 =B1 *.1
When you’re done, try it out to make sure it works, then Lock (or Protect, depending on your spreadsheet program) all except the grey cells to keep from breaking the calculator accidentally.
Taking the time to manage your inventory effectively can be difficult, when you’re juggling all the other responsibilities of running an ecommerce business, but it’s well worth it. Follow the steps above and reap the rewards of happier customers and vendors, along with fewer headaches! To learn more about managing your e-commerce business sign up for our newsletter at right, and maybe even snap up The Grabapple Guide.