THE COMPLETE GUIDE TO INVENTORY MANAGEMENT 1
Contents
Chapter 1: What is Inventory Management? 2
Chapter 2: Types of Inventory 11
Chapter 3: Inventory Forecasting 14
Chapter 4: Purchasing Inventory 20
Chapter 5: Inventory Storage 26
Chapter 6: Inventory Analysis 33
Chapter 7: Inventory Management Techniques 41
Chapter 8: Multichannel Inventory Tracking 49
Chapter 9: Inventory Accounting 58
Chapter 10: Choosing An Inventory Management System 64
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THE COMPLETE GUIDE TO INVENTORY MANAGEMENT 2
Chapter 1: What is Inventory Management?
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Inventory management is the process of ordering, handling, storing, and using a company’s
non-capitalized assets - AKA its inventory. For some businesses, this involves raw materials
and components, while others may only deal with finished stock items ready for sale.
Either way, inventory management all comes down to balance - having the right amount of
stock, in the right place, at the right time. And this guide will help you achieve just that.
Retail inventory management
Retail is the general term used to describe businesses that sell physical products to
consumers. While not exclusive to retail, inventory management tends to play more of a role
in this industry than any other.
We’ll therefore be focusing mainly on inventory management from a retail perspective within
this guide.
Retail can be split into several areas:
● Offline. Where a company sells via a brick-and-mortar store or physical location.
● Online. Where a company sells over the internet via an ecommerce website or
marketplace.
● Multichannel. Where a company sells in multiple different places, usually a
combination of online websites and marketplaces.
● Omnichannel. Where a company provides a unified, integrated experience for
customers across all the different online and offline channels it sells on.
Businesses may also choose to trade via wholesale channels. This involves selling inventory
(usually in bulk) directly business-to-business (B2B) or taking part in B2B ecommerce.
A company’s inventory will therefore need to be managed in accordance with which of these
retail models it operates within.
Inventory management in action
We’ve covered the broad definition of inventory management. But what’s actually
involved
when it comes to making good inventory management happen?
Bottom line:
You want to keep inventory levels balanced at all times without ever having too much or too
little of each product in stock.
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And there are a few key aspects in achieving this:
● Types of inventory. So you know what type of inventory is where and can have full
visibility over it.
● Forecasting. So you know how much stock is needed to satisfy demand over an
upcoming time period.
● Purchasing. So you know when
and how
to create purchase orders to re-order new
stock.
● Storage. So you know how much of each inventory item can be suitably housed, and
where to send it.
● Analysis. So you can use metrics to make more informed decisions about your
inventory as time goes on.
● Techniques. So you can quickly and efficiently book-in, put away, pick, pack and ship
inventory as and when needed at your various locations.
● Tracking. So you have visibility on where exactly your inventory is as well as additions
(purchases) and subtractions (sales), to give as close to a live stock figure as possible.
● Accounting. So you can properly record your inventory on financial documents.
● Systems & tools. So you know which software is right for your business, and when the
right time is to implement it.
These are the basic ingredients of quality inventory management. And you’ll need to take a
systematic approach to them in order to best equip your business for long term growth.
The importance of inventory management
A retail business is useless without its inventory. And so while it may not be the most exciting
subject, inventory management is vitally
important to your business’s longevity.
Good inventory management helps with:
1. Customer experience. Not having enough stock to fufill orders you’ve already taken
payment for can be a real negative.
2. Improving cash flow. Putting cash into too much inventory at once means it’s not
available for other things - like payroll or marketing.
3. Avoiding shrinkage. Purchasing too much of the wrong inventory and/or not storing it
correctly can lead to it becoming ‘dead’, spoiled, or stolen.
4. Optimizing fufillment. Inventory that’s put away and stored correctly can be picked,
packed and shipped off to customers more quickly and easily.
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Key inventory management terms
Inventory management is a complex subject. And there’s a lot of systems, processes and
general pieces that go into the puzzle.
Here’s a glossary of key terms you’re likely to come across:
● Barcode scanner. A device used to digitally identify items via a unique barcode, then
perform inventory and fufillment tasks like booking-in, picking, counts, etc.
● Bundles. A group of individual products in an inventory that are brought together to
sell as one under a single SKU.
● Cost of goods sold (COGS). Direct costs of purchasing and/or producing any goods
sold, including everything that went into it – materials, labor, tools used, etc. Does
NOT include indirect costs – like distribution, advertising, sales force costs, etc.
● Beginning Inventory (BI). The value of any unsold, on-hand inventory at the start of an
accounting period.
● Ending Inventory (EI). The value of any unsold, on-hand inventory at the end of an
accounting period.
● Inventory valuation. The process of giving unsold inventory a monetary value in order
to show as a company asset in financial records.
● First-in-first-out (FIFO). An inventory valuation method that assumes stock that was
purchased first
, is also the first to be sold.
● Last-in-first-out (LIFO). An inventory valuation method that assumes the most recent
products added to your inventory are the ones to be sold first.
● Average inventory cost. An inventory valuation method that bases its figure on the
average cost of items throughout an accounting period.
● Average inventory. The average inventory on-hand over a given time period,
calculated by adding Ending Inventory (EI) to Beginning Inventory (BI) and dividing by
two.
● Back order (BO). An order for a product that is currently out of stock, and so cannot
yet be fulfilled for the customer.
● Sales order (SO). A document created when a customer makes a purchase, detailing
which products are to be received and how much has been paid or is owed.
● Purchase order (PO). A commercial document created by a business to its supplier,
detailing quantities, items and agreed prices for new products to add to on-hand
inventory.
● Stock keeping unit (SKU). A unique alphanumeric code applied to each variant in a
company’s inventory, helping to easily identify and organize a product catalogue.
● Third-party logistics (3PL). Refers to the use of an external third party to handle
warehousing, inventory, fufillment and/or customer service on behalf of a retail
company.
● Order fufillment. The process of getting a customer’s sales order from your
warehouse or distribution center to it being in their possession.
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● Order management. The systematic process behind organizing, managing and
fulfilling all the sales orders coming into a business. From receiving orders and
processing payment, right through to picking, packing, shipping, handling returns and
communicating with customers.
● Inventory variant. The variations of a single product that a company may hold in its
inventory. For example, stocking a t-shirt in various colors and sizes.
● Inventory visibility. The ability of a person or business to see exactly where its
inventory is and how it is being used.
● Pipeline inventory. Any inventory that has not yet reached its final destination of a
company’s warehouse shelves, but is currently ‘en route’ somewhere within their
supply chain - e.g. currently being manufactured, or being shipped by the supplier.
● Lead time. The time it takes for a supplier to deliver new stock to the desired location
once a purchase order has been issued.
● Carrying costs. The total costs associated with holding and storing inventory in a
warehouse or facility until it is sold on to the customer.
● Inventory count. Also known as a stock take, this is the systematic process of taking a
physical count of inventory in order to verify accuracy.
● Dead stock. Inventory that remains unsold for a long enough period of time for it to be
deemed outdated and virtually unsellable.
● Inventory shrinkage. An accounting term to indicate inventory items that have been
stolen, damaged beyond saleable repair or otherwise lost between the point of
purchase and point of sale.
● Supply chain. The complete flow a product or commodity takes from origin to
consumer - including raw materials, to finished goods, wholesalers, warehouses and
final destination. A retailer might only be directly responsible for certain chunks of this
supply chain, but should still be aware of it in its entirety for the products they sell.
● Multichannel. A retail model that sells in multiple different places, usually online via a
combination of websites and marketplaces.
● Omnichannel. A retail model that goes beyond multichannel to integrate all of a
company’s online and offline sales channels into one, unified customer experience.
● Overselling. Taking online orders for a product that turns out to be out of stock
(usually through poor inventory management). Preventing overselling is key to
providing a high-quality experience for online customers.
Key inventory management formulas
It’s not just common terminology you need to know when it comes to inventory management.
There are some specific formulas to take note of too.
We’ll be going into greater depth with how and when to use these formulas later on in this
guide. But here’s a quick run through to use as a reference point:
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1) Inventory turnover
Inventory turnover measures the number of times a company has sold and replaced inventory
over a given time period:
This gives an insight into the overall efficiency of a company and its inventory management
processes. The higher the inventory turnover rate, the more efficient a business is at getting
through its inventory.
2) Sell through rate
Sell through rate takes the amount of inventory a retailer receives, and compares it against
what is actually sold over a given period. It’s usually expressed as a percentage:
This helps analyze if your investment in a particular product is working out well. Low sell
through rates indicate you either overbought or priced too high, while high sell through rates
indicate you may have under bought or priced too low.
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It’s a great way to make decisions on future purchase quantities for a product or from a
particular supplier.
3) Days of inventory outstanding (DIO)
Days of inventory outstanding (DIO) measures the typical number of days it takes for inventory
to turn into sales.
It’s hard to draw insights from just one calculation. But you should look into typical industry
standards, and also keep track of whether you are trending up or down as time goes on.
4) Safety stock
Safety stock is the backup stock needed to meet unexpected supply problems and/or sudden
changes in demand.
Bear in mind that you want to have enough safety stock to meet demand. But not so much
that increased carrying costs puts a strain on cash flow.
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5) Reorder point
The reorder point helps determine when
to order new inventory. It is a specific point in time
that acts as a trigger to re-order as soon as stock has diminished to that certain level.
It’s important to consider the lead time for new stock to be delivered when setting reorder
points. Enough stock should be leftover to keep up with demand before the newly purchased
inventory becomes available for sale.
6) Economic order quantity (EOQ)
EOQ is a formula that helps calculate exactly how much inventory to order. It takes into
account a company’s typical demand, ordering costs and carrying costs to provide the most
economical figure possible:
This is obviously quite a complicated formula to use. But we cover this in greater depth in
Chapter 4: Purchasing Inventory.
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Inventory management software
An inventory management software or system does all the heavy lifting for a retail business
when it comes to its inventory. It tracks inventory additions and subtractions automatically,
without
relying on manual, paper or spreadsheet processes.
Systems like this are becoming more and more popular among growing businesses as they
tackle the challenges of modern multichannel and omnichannel retail.
Choosing an inventory management system that’s right for your business can be a tricky
process. But here are a few pillar features of good software:
● Real-time tracking. Syncs a live inventory figure across all sales channels and
warehouses.
● Forecasting. Uses past sales data to project estimated inventory requirements into the
future.
● Purchasing. Helps manage all suppliers and purchase orders for quick and easy stock
replenishment.
● Rules & automations. Allows creation of inventory rules, e.g. to dictate how much
stock shows on each sales channel.
● Cloud-based. Accessed from anywhere with data never being overwritten by team
members making changes.
Many systems (like Veeqo) will also help manage and automate a plethora of other
operational tasks - like sales & wholesale orders, picking & packing, shipping, and returns.
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This initial guide covers all the basics of inventory management you need to know. But there’s
much more that goes into it that we’ll explore in the coming additional chapters, starting next
with the different types of inventory you need to be aware of.
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Chapter 2: Types of Inventory
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There are several different types of inventory a company might come across. All are critical to
understand in the pursuit of effective inventory management.
This chapter covers all these different types, so your business is best equipped to manage,
plan and budget for stock going forward.
Basic types of inventory
There are five fundamental types of inventory when it comes to the products a business might
sell.
1) Raw materials
Raw materials are any items used to manufacture finished products, or the individual
components that go into them. These can be produced or sourced by a business itself or
purchased from a supplier.
For example:
A business that makes its own bespoke furniture may purchase materials from a supplier.
While a small business supplying specialty herbs may actually grow these itself.
Either way, raw materials are still considered a type of inventory. And so must be managed,
stored and accounted for accordingly.
2) Work-in-progress (WIP) inventory
Work-in-progress (WIP) inventory again refers to retailers that manufacture their own products.
These are unfinished items or components currently in-production, but not yet ready for sale.
For our furniture business, this may be products that have been put together without yet
being painted or packaged.
3) Finished goods
Finished goods are products that are complete and ready for sale. These may have been
manufactured by the business itself, or purchased as a whole, finished product from a
supplier.
Most retailers will either purchase whole, finished products from a supplier, or have custom
products manufactured for them by a third-party. Finished goods are therefore often (but not
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always) one of the only types of inventory needing to be handled within retail inventory
management.
4) Maintenance, repair & operations (MRO) goods
MRO goods are items used within the manufacture of products, but without directly making up
any part of a finished product.
This can include items such as:
● Production & repair tools.
● Uniforms & safety equipment.
● Cleaning supplies.
● Machinery.
● Batteries.
● Computer systems.
And all items that are consumed or discarded during the production process.
Small types of inventory like this may seem menial. But MRO is inventory that still needs to be
purchased from a supplier, stored somewhere and accounted for in financial records.
5) Packing materials
Packing materials are anything you use for packing and protecting goods - either while in
storage, or during shipping to customers.
This is therefore particularly important for online retailers. And may include things like:
● Bubble wrap.
● Padding.
● Packing chips.
● A variety of boxes.
Many retailers don't think about packing materials when managing their inventory. But stocks
of these items need to be used and maintained regularly - and it's therefore important to
include them in overall inventory reporting and accounting.
Finished good types of inventory
Within a retail context, it’s also useful to further subdivide finished goods into a few other
types of inventory. This gives a business much greater inventory visibility, allowing for
improved allocation and management.
1. Ready for sale. Also known as ‘available inventory,’ this is stock that has been
manufactured/purchased and put away in the warehouse ready for sale. It could be
picked, packed and shipped without complication at any desired moment.
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2. Allocated. This is inventory that has been bought by a customer and allocated to a
sales order. It is therefore not eligible for sale again, and must be removed from the
available inventory figure.
3. In-transit. This is unsold inventory that is currently on the move - e.g. a purchase order
delivery in transit, or stock being moved to another warehouse.
4. Seasonal. Also known as ‘anticipation stock,’ this is inventory that has been
manufactured or purchased to specifically cover a forecasted upturn in demand.For
example, to cover Black Friday sales, or your peak season.
5. Safety. This acts as a buffer cushion of stock to cover you in the event of any
unforeseen upturns in demand, or problems with supply.
Knowing (and using) these different types of inventory is critical to good inventory
management. In the next chapter, we’ll go into the art and science of inventory forecasting.
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Chapter 3: Inventory Forecasting
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Inventory forecasting is crucial to the financial success of any retail business. It helps strike a
balance between sinking too much cash into inventory at once, while ensuring demand can
always be satisfied without going out of stock.
However, this is also one of the most difficult aspects of inventory management to get right.
So in this chapter, we outline all the techniques and best practices retailers can use to
forecast inventory requirements.
What is inventory forecasting?
Inventory forecasting is essentially making an informed projection on how much stock will be
needed to satisfy demand over a given time period. It starts with a simple demand forecast,
then uses what’s already in stock to plan how much inventory is required going forward.
It’s important to note that forecasting will always be educated guesswork. No forecast is set in
stone, and there are several factors that can affect accuracy - such as seasonality and sales
history.
Good demand and inventory forecasting will therefore take these factors into account, and be
agile enough to allow for adjustments when circumstances change.
Setting forecast boundaries
The first step in predicting your inventory requirements is to create a simple forecast of your
expected sales. For this, you’ll need to set some forecast boundaries.
1) Forecast period
A forecast period is the specific amount of time into the future that a forecast will be
attempting to predict.
We recommend at least the following three periods:
1. Annual.
2. 90 day.
3. 30 day.
These should then be reviewed each month. If market trends or actual sales performance is
different than expected, then upcoming sales forecasts can be adjusted accordingly.
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2) Base demand
Base demand is simply the exact current demand for a product at the specific point a forecast
is due to begin from.
For example, a company may be doing a 30 day forecast for white Nike sneakers. If they sold
37 units over the previous 30 days, then base demand would be 37.
This just gives a starting point to work from in our forecast. To increase accuracy, we’ll need
to consider any trends and variables that may impact demand.
Incorporating trends and variables
It’s not enough to forecast inventory based purely on current demand. There’s a whole host of
factors that could impact the data going forward.
Most businesses will therefore need to take a variety of trends and variables into account in
order to achieve the most accurate inventory forecasting possible.
1) Sales velocity
Stock-outs shouldn’t
happen, but in reality they sometimes still do. And sales velocity takes
this into account when it comes to looking over your past sales performance for inventory
forecasting.
For example:
Maybe you only sold 20 units of a product in the past 90 days. But it doesn’t tell the whole
story if you actually had it listed as ‘out of stock’ for 89 of those days.
Forecast better for the upcoming period and you could sell much more.
We can therefore use the following calculation to omit out of stock days:
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Note: The time periods are obviously not fixed here. You could work out 10 day sales velocity
from 180 days of sales, but larger data sets tend to yield more reliable results.
All things being equal, sales velocity gives an indication of how much a product should sell if
continuously in stock over a 30 day period. Something that can be very useful for forecasting
inventory requirements into the future.
However, there are several other factors that can impact this too...
2) Marketing activity
It’s also essential that you consider marketing and advertising activity when it comes to
inventory forecasting. This should be taken into account in two ways:
1. Past marketing activity when looking at sales history.
2. Planned marketing activity when planning for future sales.
The main thing to watch out for is whether planned
marketing activity is conceivably different
or scaled up/down compared to past
marketing activity.
For example:
It could be realistic to expect a 25% sales uplift if Facebook Ads worked well last Q3, and you
decide to increase budget by 25% in this Q3. So you’ll need to account for this when
inventory forecasting.
3) Seasonality
Seasonality is absolutely critical for forecasting your stock requirements.
Winter coats tend to not sell well in summer months. Good gifts will tend to pique around the
Holidays. Items you discount will possibly go through the roof during Black Friday.
But there may also be more subtle, not so obvious variations in demand for certain products.
This is where 12 month sales data is powerful.
You’ll need to look back over the previous year (several years if possible) to see which
specific months and periods in time certain items:
● Start to trend up.
● Plateau.
● Start to trend down.
This allows you to make data-backed decisions on seasonality, and how much inventory you
might require during these periods.
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4) Unexpected publicity
Unexpected media attention or publicity may be unlikely. But it’s still something you’d need to
forecast for if it happens.
For example:
You’ll probably need to forecast an uptrend in sales if Kim Kardashian is pictured wearing
some of your jewelry. Or be prepared for a possible downtrend if you get some bad press in a
national newspaper.
Either way, unexpected publicity is definitely something you should be aware of and reacting
to with your forecasts.
5) Industry-specific effects
Events and goings on within your industry and marketplace in general can also impact
demand for products.
This could be a whole range of things, such as:
● A major competitor going out of business.
● A large company diversifying into your niche.
● Major changes to pillar marketing channels (if Facebook banned your Ad account, for
example).
● Law changes in states/countries you operate/sell in.
Again, these are slightly ad-hoc and unpredictable. But anything that does
happen should be
reacted to with inventory requirements adjusted accordingly.
Forecasting for new products
As stated earlier, inventory forecasting is always going to be somewhat of a guess. And that
becomes even more so when it comes to new products with limited sales data available.
The key is to try to inform your guesswork as much as possible.
So consider things like:
● Trends of similar products you’ve launched.
● Trends of other products within that category you’ve launched.
● Trends of all previous products you’ve launched.
● Using a tool like Google Trends to see seasonality of when people search for specific
products most.
● Making use of market research, surveys and focus groups.
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You can also build up your data set slowly. So launching new products with small amounts of
inventory to judge initial reaction, then re-investing in greater stock numbers going forward.
Inventory planning and replenishment
Sales and demand forecasting is one thing. But true inventory
forecasting needs to go a step
further and actually plan out how you’ll replenish stock for the upcoming period.
This means considering:
1. Current stock levels. How much is currently on-hand? There’s no point purchasing 40
units to cover 40 forecasted sales if you already have 27 units on-hand.
2. Pipeline inventory. How many units have already been ordered and en route as
pipeline inventory? You don’t want to double buy stock.
3. Lead time. How long will it take for new stock to be delivered, received into inventory
and made ready for sale? We’ll cover lead time and reorder points with more detail in
Chapter 4: Purchasing Inventory of this guide.
Automated inventory forecasting
Forecasting demand, sales and, in particular, inventory can be an incredibly complex task.
Luckily, one option is to use automated inventory forecasting.
Tools like this won’t do all
the work for you - you’ll still need to analyze data and consider any
unexpected sales up or downturns. But they’ll be able to take previous sales performance and
run accurate reports on estimated inventory requirements.
Veeqo, for example, helps take the guesswork out of the process by using past sales history
to calculate inventory requirements for your chosen upcoming period:
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As you can see, there’s a lot of estimating that goes into forecasting inventory. But the more
you can base decision making on data, the more accurate you’re going to be.
Many guides on inventory planning simply look at reorder point and economic order quantity
(EOQ) calculations, without addressing how to actually forecast demand like done here.
However, we do look at reorder points and EOQ in the next chapter on purchasing inventory.
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Chapter 4: Purchasing Inventory
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Purchasing inventory is about more than just raising a purchase order. Serious businesses pay
close attention to how much
inventory they should order and exactly when
to do it in order to
minimize carrying costs and achieve steady growth.
This whole practice is therefore a critical aspect of effective inventory management. And
something we discuss how to optimize in this chapter.
Methods of purchasing inventory
There are several methods you can use for purchasing inventory. Each one has its own
benefits and drawbacks, and so what might work for one business may not for another.
1) Bulk buying
Also referred to as ‘just-in-case’ inventory purchasing, this is where a company would buy its
inventory in bulk batches. Stock will then be held at a warehouse, third-party logistics (3PL)
facility or location of some kind in order to supply a forecasted demand.
Bulk buying is perhaps the most well-known way of purchasing inventory. It could involve
purchasing finished products or raw materials in a vast array of quantities - depending on
what’s best for a business at that particular time.
Pros:
● Take advantage of bulk buying discounts.
● Potential for greater profit margins due to smaller cost-per-unit.
● Relatively simple purchasing system to set up.
Cons:
● Costs associated with a warehouse or 3PL partner for inventory storage.
● Risk of sinking cash into too much stock if forecasting is inaccurate.
Best for: Growing or established businesses that have a good handle on expected demand
and profit margins.
2) Dropshipping
Dropshipping is a method of purchasing inventory where the retailer doesn’t keep any of the
products it sells in stock. Instead, items are purchased from a third-party supplier as and when
each customer order comes in, with the supplier shipping products directly to the customer.
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As a result, the retailer usually doesn’t ever see, handle, stock or own any of the inventory
themselves. This method may sound appealing, but it does have several drawbacks too.
Pros:
● Effectively removes the need for any inventory management by the retailer.
● Removes risk of cash getting tied up in inventory that doesn’t sell.
● Lower overall costs of not needing a warehouse, 3PL or fufillment team.
● Easy to find, source and test new products.
Cons:
● Profit margins can be thin from lack of bulk buy savings.
● Little to no control over fufillment speed and product/package branding.
● Products are easily accessible to other dropshippers, meaning you’ll likely be facing
stiff competition.
Best for: Startup retail brands, or more established brands wanting to test the waters for a
new product without investing in lots of inventory.
3) Just-in-time (JIT)
Just-in-time (JIT) is usually better associated with retailers that manufacture their own
products. This would involve ordering raw materials and assembling each product as and
when an order comes in - hence, it’s produced ‘just-in-time’ for fufillment.
This method can result in holding much less ‘on-hand’ inventory, but requires seamless
management of the manufacturing process and a highly reliable supply chain.
Pros:
● Reduced warehouse costs from needing to store on-hand inventory and materials.
● Maintain control of your product quality and branding.
● Less waste of raw materials.
Cons:
● Any supply chain hiccup can have large effects on production.
● Supply chain lead times will need to be factored into overall order fufillment speed.
● Requires highly sophisticated management and processes to get right.
Best for: Larger businesses manufacturing their own products with sophisticated production
processes in place. These businesses will also tend to rely on fewer orders that contain many
quantity units in each one.
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When to order new inventory
Dropshipping and JIT speak for themselves when it comes to placing a new purchase order -
you do it as and when each sales order comes in.
But most growing retailers will most likely be going down the bulk buying route. And this begs
the question, when’s the right time to place a new bulk buy order?
There are three methods to use:
1. Order pattern method. This would involve simply making regular fixed purchases of
the same amount. It’s perfect for retailers who know they’re sales numbers will rarely
change, with a review taking place maybe 1-2 times a year.
2. Control rhythm method. This would involve checking inventory at fixed intervals and
purchasing inventory amounts that have been adjusted accordingly. It’s perfect for
retailers that have a good grasp of their demand and inventory forecasting.
3. Reorder point method. This involves reordering stock once it gets below a certain
level, usually set via a calculation. It tends to work better for retailers with fewer
products, and who aren’t reliant on bulk buying discounts from large purchase orders
of multiple products at a time.
Determining which method to use depends completely on how your business operates.
For example:
Order pattern method could be catastrophic if you have products that are highly seasonal or
fluctuate in sales. But the reorder point method might not make sense if smaller, more regular
purchase orders means you’d miss out on significant bulk buying discounts.
Calculating reorder point
Purchasing inventory based on reorder points is a very common method to use.
In essence, an item’s reorder point needs to be as soon as its safety stock levels are hit.
But we also need to make sure we don’t run out of stock in the time it takes for our new
inventory to be delivered. So the lead time between ordering and receiving the order needs
to be taken into account.
Here’s the formula to use:
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For example:
Imagine we typically sell 11 blue t-shirts each day. If we aim to always keep 50 in safety stock,
and it usually takes seven days to receive and put away new inventory - then reorder point
would look like this:
Reorder point = (7 x 11) + 50
Reorder point = 77 + 50
Reorder point = 127
So a new purchase order needs to be created for our blue t-shirts as soon as inventory levels
hit 127 units.
How much new inventory to order
We’ve covered when the best time is to place a new purchase order. Next comes the
question, how much stock is best to order at one time?
To answer this, there are several things to consider:
● Forecasted demand.
● Bulk buying discounts.
● Carrying/storage costs.
● Ordering costs.
One option is to manually take these into account with your thought process each time you
go about purchasing inventory.
But we can also use a more scientific method known as economic order quantity (EOQ).
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EOQ is a calculation that helps work out the most economical quantity of inventory to order
for a specific product. The three variables involved are:
1. Demand. The number of units sold over a given time period (usually a year).
2. Relevant ordering cost. Total ordering cost per purchase order. This includes all staff,
transportation and any other costs associated with making each purchase order - but
not
the actual cost of the order itself.
3. Relevant carrying cost. Assume the item is in stock for the entire time period in
question and decipher the carrying cost per unit.
You’ll then put this into the following equation:
This helps to determine the best amount of inventory to order each time. Helping to strike a
balance between minimal ordering and carrying costs, while still satisfying demand.
Automated inventory purchasing
Purchasing inventory is another task that can be brought into the digital world. This helps to
automate a lot of the repetitive, manual tasks, while also taking care of some of the
complicated forecasting and mathematics involved.
Veeqo, for example, allows you to:
● Manage all your suppliers in one CRM-like database.
● Manually add and remove products to digital purchase orders.
● Auto-populate purchase orders with items low on stock and/or below re-order point.
● Email the purchase order off to suppliers:
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You can then manage all active purchase orders in one place to see when delivery is
expected. And even send reminder emails to suppliers for any order that’s past due.
In the previous two chapters of this guide, we’ve talked about how to plan, forecast and
purchase new inventory.
The next chapter moves on to optimizing your inventory storage procedures. We’ll cover how
to book-in and look after your stock in order to have it ready for sale as soon as possible and
minimize spoilage and shrinkage.
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Chapter 5: Inventory Storage
Read this chapter online here
Inventory storage is critical to long term retail success. Fail to look after your stock properly,
and you run the risk of it getting lost, stolen or damaged - wasting cash that could be used on
other important business expenditures.
So this chapter is all about how to most efficiently store, organize, maintain and generally
preserve the life of your inventory.
Broad inventory storage options
The first thing to assess is exactly where you’ll be storing inventory. To do this, you typically
have a few options.
1) Dropshipping
Dropshipping is a way of purchasing inventory where the retailer doesn’t keep any of the
products it sells in stock. Instead, items are purchased from a third-party supplier as and when
each customer order comes in, with the supplier shipping products directly to the customer.
It therefore entirely negates the need for inventory storage or keeping stock on-hand.
Pros:
● Inventory storage is entirely taken care of by the supplier.
● Supplier is liable for any inventory shrinkage.
● Lower overall costs of not needing a warehouse, 3PL or fufillment team.
● Less risk when starting out.
Cons:
● Little to no control over product quality or branding.
● Puts someone else in control of how well products are stored.
● Shipping speeds can be incredibly slow.
● Highly competitive with razor thin margins.
Best for: Startup retail brands that want to test the waters before investing in bulk inventory.
2) Third-party logistics (3PL) service
A third-party logistics (3PL) service allows retailers to effectively rent space in another
warehouse. You can then send inventory units directly to the 3PL location for them to store
and ship on your brand’s behalf.
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This usually incurs housing and shipping fees, but again eliminates the need to worry about
having to store inventory.
Pros:
● Inventory management is entirely taken care of by the 3PL service.
● Can take advantage of bulk inventory discounts without the need for a self-fufillment
warehouse.
● Usually involves significantly faster shipping times and more control over product
quality compared to dropshipping.
Cons:
● Monthly storage fees can eat into profits for slow moving stock.
● Trusting someone else to ship products on your brand’s behalf.
● Usually requires investing in bulk stock quantities.
Best for: Growing retail brands that have proven, consistent sales and want to buy stock in
bulk without a dedicated warehouse.
3) Self-fufillment warehouse
A self-fufillment warehouse is a location set up by a retailer in order to specifically store its
own inventory and ship orders.
This usually comes with significant up-front investment of both capital and time - like signing a
lease and hiring a team. But if the sales are there and numbers make sense, then the result is
more control and lower operational costs in the long run.
Pros:
● Complete control of the fufillment experience delivered to customers.
● Initial investment can result in long term savings compared to a 3PL.
Cons:
● Usually involves signing a long term lease, which can be risky.
● Will need to hire and train a team, and possibly invest in WMS software.
● May require moving to new locations several times as the business grows.
Best for: Established retail brands planning for long term growth.
Setting up your warehouse
The main goals of setting up your warehouse for optimal inventory storage are:
1. Safety. Any inventory should be stored safely to prevent both injury to staff members
and damage to the inventory itself.
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2. Security. Warehouses with large amounts of valuable stock will be a target for thieves,
so this should be prevented as best as possible.
3. Accessibility. Inventory will need to be stored in a way that’s easy to receive and put
away when new, then pick, pack and ship out to customers later on.
In order to do this, there are several things to think about:
1) Warehouse layout
Your warehouse will need to balance having enough storage space for inventory, while
providing enough working space for staff to move around and complete tasks.
Exact requirements will depend on each individual business, but the following areas tend to
be needed in a warehouse layout:
● Delivery/receiving area.
● Unpacking and book-in area.
● Warehouse office.
● Main storage area.
● Area for excess, obsolete or dead stock.
● Packing table(s).
● Shipping station(s).
This can be tricky – especially when dealing with a limited space. So it’s best to sketch out
your warehouse layout to scale before setting it up or changing what you already have.
Space and manoeuvrability is a key thing to remember.
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Pickers need to be able to walk up and down aisles without getting in each other’s way. And
should also have enough room to actually pick items.
2) Warehouse labeling
Specific locations and clear labeling are essentials for effective inventory storage. Your team
should be able to look at your inventory system and see exactly
where any product is
located.
Practicality is king here.
Stick with simple alphanumeric combinations labeling specific rows, shelves and then exact
bin locations:
So you always know, for example, that all your blue t-shirts sized medium will be in Row A –
Shelf B – Bin 1. And the pattern can be continued like this.
Larger warehouses can extrapolate forward as much as needed with the same concept:
The bigger your facility, the more in-depth you’ll need to go with your location labeling to
achieve optimal inventory storage.
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3) Arranging inventory
Another key part of inventory storage is determining the exact location each product should
be stored within your warehouse.
Ideally, sales volume should be taken into account for this.
Veeqo research found that 60% of a company’s sales tend to come from just 20% of their
products. Meaning you can severely reduce picker walking time by:
● Identifying that 20% of products from past sales data in your business;
● and then storing these as close to the packing desk as possible.
ABC Analysis is an inventory management technique that can become very useful here. This
divides all on-hand inventory into three groups – A, B and C:
A Items: Are of high value with low sales frequency.
B Items: Are of moderate value with moderate sales frequency.
C Items: Are of low value with high sales frequency.
You can then decide that ‘C items’ will be placed closest to the packing desk, while ‘A items’
will be farthest away. Like this:
Some small and lightweight items may even be sold frequently enough to warrant being
stored on shelves above the packing desks themselves.
Finally:
You can take this concept another layer deep by also identifying which products are most
commonly sold together.
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So faster selling products are stored closer to the packing desk and products commonly
purchased together are stored close or next to each other. Meaning you’re doubling down on
reducing walking time for each picker.
Inventory storage equipment
Storing inventory in the safest and most practical way is almost impossible without investing in
some form of equipment.
This can differ heavily depending on the goods in question. Retailers selling refrigerators, for
example, may require large locations, forklifts and heavy-duty shelving racks. While selling
t-shirts or jewelry can usually be done with simple shelves in a smaller space.
With that being said, here’s a look at some of the general equipment to consider:
Shelving units. Some warehouses can work with simple block stacking of products on
top of each other, but most will need some kind of shelving to place products on. The
most common ones have metal frames with wooden shelves, are easy to build, yet
robust. Access to both sides can also be very useful - one side for putting in, one for
taking out.
Bins. Warehouse bins are where your individual product variants go into, particularly
for smaller items. Each bin will be labeled and assigned to a specific variant to make it
easy to locate in the warehouse.
CCTV. Inventory is a business asset, and should be protected as such. Make sure to
get a good Closed Circuit Television (CCTV) system set up with signage to indicate it’s
in use in order to deter thieves as much as possible.
Barcode scanner. A quality barcode scanner will help with booking-in, picking,
packing, conducting inventory counts and generally keeping your inventory accurate
and aligned with what’s recorded in your inventory management software.
Picking cart. Pickers will need a cart on which to carry all the items that are being
picked before returning to the packing station. This is particularly useful if you
commonly sell multiple items per order, or when using a batch picking system.
Totes. These will sit on the picking cart and carry items for individual orders during a
batch picking route. Totes are usually simple plastic containers and will only ever hold
items for one order at a time.
Packing desk. A professional packing desk is very solid, larger than a normal office
desk and has rolls so that you can get easy access to your packaging materials. It’s
worth having at least two, so someone else can jump in during busy periods.
Packaging materials. This will involve your different sized shipping boxes - we
recommend around 3-5 options to strike a balance between speed and shipping
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costs. Plus, tape and all the protective inner packaging - like bubble wrap, shredded
paper or air pillows (determined by how fragile your items are in transit).
Printers. You’ll need a good quality A4 laser printer for invoices, and a typical 6x4”
shipping label printer (Dymo is great for this). For your A4 printer, think about speed of
printing the first page, speed of printing multiple pages and cost per page.
Shipping computer. This is a dedicated computer solely
for shipping out orders -
printing out labels, marking orders as shipped, sending out tracking details and/or
using shipping software. It’s best to opt for a touchscreen to remove the need for
keyboard and mouse in this fast-paced environment.
Shipping scales. These weigh all packed shipments and send details to your shipping
computer via a direct connection. Dymo are, again, a great option for scales.
Of course, retailers need to consider this equipment from the point-of-view of their own
business. Selling certain foods may require a refrigerated unit or cold store, while very high
value jewelry may need extra security measures.
The key is to use this guide as a blueprint to build upon and mould to your own business.
We’ve now covered how to plan, replenish and store inventory as a retailer. Next, we’ll move
on to inventory analysis in order to use the best and most useful metrics for keeping on top of
your stock management going forward.
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Chapter 6: Inventory Analysis
Read this chapter online here
Inventory analysis is the regular auditing of inventory in the pursuit of continuous
improvements to how it is managed. This can be done through a variety of commonly used
inventory KPIs and ratios.
Regular monitoring of these metrics is a key part of inventory management, and so we
explore each one in-depth within this chapter.
The goals of inventory analysis
Before getting into any metrics, it’s important to understand what the specific goals are when
it comes to doing inventory analysis.
The general objective is to improve overall inventory efficiency. But breaking this down even
further would involve aiming to:
● Identify improvement areas. Metrics should be compared to past results and industry
benchmarks to identify where problem areas lie.
● Reduce stock-outs. Stock-outs should be seen as huge red flags for retailers, and
inventory analysis will help minimize them as much as possible.
● Improve cash flow. Analysing inventory now will prevent sinking too much cash into
stock at any one time going forward.
● Waste less inventory. Analysis and improvements will help minimize inventory
shrinkage, such as stock that gets lost, stolen or damaged beyond repair.
This all has the bottom line effect of making the business more profitable, while also
improving the experience for customers.
ABC analysis
ABC analysis is a commonly used inventory analysis method that helps to identify your most
valuable inventory.
It’s based on the Pareto principle - AKA the 80/20 rule. Applied to retail, this would suggest
that around 80% of sales would typically come from 20% of a company’s total inventory.
ABC analysis uses this theory to sort inventory into three buckets:
A inventory. Is inventory with the highest value - typically your 20% that brings in 80%
of sales/profits. These are usually items with the best profit margins and/or most sales
revenue.
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B inventory. Is inventory that sells regularly, but doesn’t have quite as much value as
A - often due to having slimmer margins or higher carrying costs.
C inventory. Is the remainder of inventory that doesn’t sell as much as A or B,
generates the least revenue and is generally least valuable.
This kind of analysis helps identify the key players in a retail business’s inventory.
A inventory, for example should rarely (if ever) stock-out and be given the highest priority and
focus. While C inventory may not warrant quite so much attention.
Inventory analysis metrics
ABC analysis isn’t the only way to draw conclusions from your inventory. There are several
key metrics that can be used to measure performance and uncover ways to optimize
operations.
Average inventory
Average inventory measures the average volume of inventory kept on-hand throughout a
given period.
It comes from adding together the beginning inventory (BI)
value at the start of a period and
the ending inventory (EI)
value at the end of the period. Then simply dividing by two to find
the average:
This helps to even out seasonal fluctuations to see whether too much or too little inventory is
typically kept on-hand at any one time.
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Inventory turnover
Inventory turnover measures how many times your inventory is sold over a given time
period. It’s therefore a critical metric showing how effectively inventory is being managed
overall.
The formula takes cost of goods sold (COGS)
over a specific period, and divides it by average
inventory
over the same period:
This is affected by two key factors:
1. Purchasing. Getting forecasting and inventory buying correct to ensure the right
amount of stock is purchased in the first place.
2. Sales. Ensuring the marketing and conversion sides of the business are on point in
order to back up the projected sales with actual orders.
Poor inventory turnover performance could be stemming from failures in either one (or both)
of these elements.
Generally speaking, higher inventory turnover rates indicate better performance and
efficiency. This is because the company would be getting through its inventory stocks more
often - minimizing carrying costs per unit.
Inventory write-off
Inventory write-off is a measure of any unsold inventory that has become defunct or no longer
has any value for the business over a given period. Usually due to loss, theft, damage or
generally becoming obsolete and unsellable.
It involves identifying the inventory, disposing of it and officially writing off its value in
accounting records. So is more a procedure and final value, rather than a specific formula.
But it’s worth regularly reviewing and tracking how much inventory is being written-off.
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High or continually increasing amounts could indicate problems with forecasting for certain
products, or how inventory is being stored in the warehouse.
Gross margin return on investment (GMROI)
GMROI is a simple ratio to measure the profitability of your inventory over a certain period. It
gives the gross profit a retailer makes for every dollar of inventory that’s purchased.
Here’s the formula:
(Note: gross margin
is found by subtracting COGS
from net sales
.)
Any GMROI ratio below 1.0 means a business is not profitable, and is losing money for every
dollar invested in inventory. Anything above 1.0 means a business is selling goods for more
than what it costs the firm to acquire them.
It’s important to note that this is not a measure of bottom-line profitability - as only COGS is
taken into account as a cost, not total expenditure.
But this does give a clear indication as to how profitable your inventory is with current price
points and buying procedures.
Sell through rate
Sell through rate takes the amount of inventory a retailer receives, and compares it against
what is actually sold over a given period. It’s usually expressed as a percentage:
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This can be used on a ‘per product’ (or even ‘per variant’) basis to analyze how quickly the
investment in inventory is paying off.
It’s useful when comparing one product or variant against another. Or when comparing the
sell-through of a specific product from one month to another.
Low sell through rates indicate you either overbought or priced too high, while high sell
through rates indicate you may have under bought or priced too low.
Days inventory outstanding (DOI)
Days of inventory outstanding (DOI) is simply how many days it typically takes to create or buy
inventory and turn it into a sale. It’s even sometimes referred to simply as average days to
sell
.
The formula involves dividing average cost of inventory over a time period by COGS over the
same period, then multiplying by number of days in the time period (all usually a year):
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It’s hard to draw insights from just one calculation. But you should look into typical industry
standards, and also keep track of whether you are trending up or down as time goes on.
Increases and/or poor performance could indicate a problem with manufacturing/purchasing
and/or the sales process.
Back order rate
Back order rate shows the percentage of your total orders over a given period that ended up
being placed on back order.
This gives an indication of how well you forecast, replenish and track inventory. A high back
order rate could stem from:
● Not buying the right amount of inventory.
● Not re-ordering at the right time.
● Not syncing and tracking multichannel inventory efficiently enough.
As well as a host of other reasons.
However, it’s also important to note this doesn’t account for sales that may have been lost
from poor inventory management. You could still have a zero back order rate, but have lost
sales from having to mark online store products as ‘pre-sale’ or ‘out-of-stock’.
Conducting inventory analysis
Inventory analysis is not about simply looking at these equations once. It’s about setting aside
regular time to properly track, monitor and draw conclusions from them.
It’s worth creating a spreadsheet, then setting aside monthly time to compare trends and truly
analyze the data.
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Good inventory management software should come with extensive reporting features.
Allowing you to automatically track and easily pay attention to vital KPIs within the platform.
Veeqo, for example, lets you run all kinds of reports. From sales:
To products and inventory:
Right through to warehouses and team performance.
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This chapter should have provided you with some key insights on how to analyze and
understand your inventory better. The next chapter will focus on the crucial inventory
management techniques you need to know about to handle stock in the most optimal way
possible.
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Chapter 7: Inventory Management Techniques
Read this chapter online here
In essence, all the inventory management techniques a retailer needs are covered throughout
the different chapters of this guide. These span across a number of different areas and tasks
within the field of inventory management - forecasting, purchasing, storing, analysing, etc.
So in this chapter, we give a summary of key techniques and ideas you can use to control and
manage your inventory in the best way possible.
Inventory management techniques
For ease of consumption, here's a quick run-down of all the inventory management
techniques we mention in this article:
1. Choose an appropriate fufillment option.
2. Take forecasting seriously.
3. Set reorder points for each product.
4. Use EOQ for optimal order quantities.
5. Give each variant a dedicated warehouse bin.
6. Sell older inventory first.
7. Prioritize with ABC analysis.
8. Always track your metrics.
9. Verify accuracy with regular counts.
10. Automate as much as possible.
Let’s explore each one of these further below:
1) Choose an appropriate fufillment option
As a retailer, the whole point of having inventory is to sell it. And with ecommerce, this usually
means having to store and ship it somewhere too.
So deciding exactly how this fufillment process will be done is one of the most crucial
inventory management techniques to get right.
Your general options are:
● Dropshipping. This is where you never see or hold inventory yourself. Instead, it is
purchased as each sales order comes in, and shipped directly to the customer.
● Third-party logistics (3PL). This is where you would purchase inventory in bulk, but
have it sent to a 3PL service. They would then manage inventory and ship orders to
your customers for a monthly fee.
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● Self-fufillment. This involves setting up your own facility and team. You’d be totally
responsible for controlling, managing and shipping inventory.
Each of these options has its own benefits and drawbacks, with the best one depending
entirely on individual business requirements. We discuss this in greater depth in Chapter 5:
Inventory Storage of this guide.
2) Take forecasting seriously
It’s tempting to skimp out on forecasting inventory requirements. Instead, many retailers will
simply guess, or just buy inventory and hope they sell it.
The problem?
This leaves you extremely susceptible to ending up with way too much (or too little) stock
on-hand at any one time. And the extra carrying costs involved will be eating into profits every
single day.
Make sure to use your past sales data in two ways:
1. Short term. Look at sales over the past 30-90 days to indicate your short term sales
trends and demand for the inventory you hold.
2. Long term. Look at what sales were like at particular points in the year to indicate
where sales tend to spike and dip.
We discuss this in greater depth in Chapter 3: Inventory Forecasting of this guide.
3) Set reorder points for each product
Reordering your products needs to be done in a timely manner.
Leave it too long and you’ll run out of stock. Go too early and you’ll pile up way more
inventory than you need.
This is why each product (and ideally each product variant) should have its own reorder point,
taking into account:
● Safety stock. So you don’t eat into this emergency, backup stock unnecessarily.
● Lead time. So you can still cover sales demand while new products get shipped to
your warehouse.
Here’s the formula to work out exact reorder points:
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Apply this to each product in your inventory. As soon as a product hits this level, it’s time to
place a new purchase order with suppliers.
4) Use EOQ for optimal order quantities
It’s not enough to know when
to place a new purchase order. You need to work out exactly
how much stock to order at once to keep carrying costs to a minimum.
And economic order quantity (EOQ) is one of the best inventory management techniques to
help here.
This is a calculation that helps determine the best amount of inventory to order each time.
Helping strike a balance between minimal ordering and carrying costs, while still satisfying
demand.
The three variables involved are:
1. Demand. The number of units sold over a given time period (usually a year).
2. Relevant ordering cost. Total ordering cost per purchase order. This includes all staff,
transportation and any other costs associated with making each purchase order - but
not
the actual cost of the order itself.
3. Relevant carrying cost. Assume the item is in stock for the entire time period in
question and decipher the carrying cost per unit.
You’ll then put this into the following equation:
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We cover reorder points and EOQ further in Chapter 4: Purchasing Inventory of this guide.
5) Give each variant a dedicated warehouse bin
Organizing and arranging items in the warehouse is a key part of good inventory
management. Your team should be able to look at your system and easily see where any
product is located.
This means creating bin locations with clear labels for each product variant.
It’s best to avoid fancy names – simplicity and ease of understanding is king here. Numbers
and letters are therefore the best route to go.
Start by labeling each row, shelf, then bin location:
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So you always know, for example, that all your blue t-shirts sized medium will be in Row A –
Shelf B – Bin 1. And the pattern can be continued like this.
We discuss this in greater depth in Chapter 5: Inventory Storage of this guide.
6) Sell older inventory first
For most retailers, the last thing you want is to be always using the newest stock to fufill
orders. This leaves older inventory sitting in the warehouse and susceptible to damage, decay
or passing best before dates.
So it’s worth making a rule to store new inventory from the back of shelves and then take
from the front - automatically enforcing a first-in-first-out (FIFO) system:
However:
It’s always worth discussing this with your accountant too as they may use a different
inventory valuation method for your end-of-year accounts.
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7) Prioritize with ABC analysis
ABC analysis is a very common inventory management technique that helps to identify your
most valuable inventory.
This means retailers can prioritize inventory better. Allowing them to place greater focus on
the particular items and products that bring in the most revenue.
The whole process is about sorting inventory into three buckets:
● A inventory. Inventory with the highest value – typically your 20% that brings in 80%
of sales/profits. These are usually items with the best profit margins and/or most sales
revenue.
● B inventory. Inventory that sells regularly, but doesn’t have quite as much value as A –
often due to having slimmer margins or higher carrying costs.
● C inventory. The remainder of inventory that doesn’t sell as much as A or B, generates
the least revenue and is generally least valuable.
It might not make sense to prioritize like this at first. Surely all inventory is important -
otherwise you wouldn’t have it, right?
But in reality, some products will sell much better than others. And these are the ones to focus
on most to ensure they are readily available and never
stock-out.
8) Always track your metrics
Tracking simple metrics and KPIs is one of the inventory management techniques that often
gets lost amongst other fancy ideas. But it can still be one of the most powerful.
It’s essential to regularly track at least the following metrics:
● Inventory turnover. Measures how many times your inventory is sold over a given
time period, giving a critical insight into overall inventory management performance.
● Inventory write-off. A measure of any unsold inventory that has become defunct or no
longer has any value for the business over a given period.
● Gross margin return on investment (GMROI). Measures the profitability of your
inventory over a certain period, giving the gross profit made for every dollar of
inventory that’s purchased.
● Sell through rate. Takes the amount of inventory a retailer receives, and compares it
against what is actually sold over a given period.
● Days of inventory outstanding (DOI). Measures how many days it typically takes to
create or buy inventory and turn it into a sale.
● Back order rate. Shows the percentage of your total orders over a given period that
ended up being placed on back order.
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We discuss ABC analysis and these metrics (including the actual calculations needed) in
greater detail in Chapter 6: Inventory Analysis.
9) Verify accuracy with regular counts
Unfortunately, errors are inevitable when it comes to your stock. Even with all the inventory
management techniques and automations mentioned in this chapter.
So taking a physical count of inventory with regular stock takes is critical.
The traditional way of doing this is to shut the warehouse down for a night (or longer) and
complete a big count once or twice a year. But this can be an extremely time-consuming and
complex task, especially for large inventories or facilities.
Instead, try spreading it out through the year:
● Cycle counting. This is where team members would be given ‘counting tasks’ of a
small number of items to do each week. Over the year, each product has then usually
been counted and verified several times.
● Spot checking. This isn’t done with any specific regularity. It can simply be done if a
product is proving particularly problematic or if a team member finds they have some
spare time and needs something to do.
Good inventory systems will manage this for you. Assigning regular counting tasks to your
team and allowing for easy corrections via digital barcode scanners.
10) Automate as much as possible
Inventory management is a complex job. And it becomes even more complex the more you
grow and the more products that get added into your catalogue.
So taking advantage of automation can be possibly the most important inventory
management technique out there.
This means utilizing quality inventory management software to do most of the heavy lifting for
you. Helping take care of tasks like:
● Tracking. So you can sync inventory in real-time across multiple channels without
overselling and back orders.
● Forecasting. To remove the guesswork and never have too much or too little
inventory on-hand.
● Purchasing. So you can handle all suppliers and create and manage POs in one place.
● Counts. To keep inventory numbers accurate by automatically assigning weekly cycle
counting tasks to your team.
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● Organization. Recording exact bin locations for variants so you can find and pick
inventory quickly and accurately.
Quality systems like Veeqo will also let you create automation rules, handle orders and
shipping, run reports and push data to accounting software - all in one platform.
Hopefully, this article has provided you with a solid summary of inventory management
techniques to utilize in your retail operation. The next chapter will go into detail on efficient
multichannel inventory tracking, and how to perpetually keep an accurate live inventory
figure.
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THE COMPLETE GUIDE TO INVENTORY MANAGEMENT 49
Chapter 8: Multichannel Inventory Tracking
Read this chapter online here
Inventory tracking is the art and science of monitoring stock levels and exactly where
inventory is at any one time. It is therefore one of the most fundamentally critical aspects of
overall inventory management.
So this chapter of our guide covers the best practices in tracking inventory. We run through
detailed instructions on how to do this via manual spreadsheets (and provide a free template),
as well as when to start looking at an automated system.
What is inventory tracking?
Inventory tracking is the recording of stock levels for each individual SKU across every
location items are stored and sold in. This can be done in several different ways - from pen
and paper, to computerized spreadsheets, and even automated systems.
Tracking inventory was once a relatively
simple task. But it becomes more and more complex
as further sales channels and/or warehouses get added to a retail operation.
Failing to track inventory properly can lead to:
● Selling inventory you don’t actually have in stock.
● Purchasing inventory you don’t actually need.
● Filing inaccurate financial records and accounts.
Putting a system in place to track inventory (whether manual or automated) is therefore
imperative for ecommerce brands wanting to scale successfully.
Inventory tracking via spreadsheet
A commonly used inventory tracking option is to record everything via spreadsheet.
This is a form of periodic inventory system. So someone would be responsible for periodically
(usually at the end of each business day) updating the spreadsheet with the latest inventory
goings in and out (i.e. new sales and purchases).
We put together a sample inventory tracking spreadsheet, which you can see here on Google
Sheets. Just go to File >> Make a copy
to save a version of your own to edit and use:
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Setting up your inventory tracking spreadsheet
A basic inventory tracker will cover three pillars:
1. Product data. Including details like names, variants, SKUs, cost price, selling price and
beginning inventory.
2. Purchase data. To track all purchase orders being made, each causing an addition to
inventory levels.
3. Sales data. To track all sales orders being made, each causing a reduction to
inventory levels.
We’ve created three separate tabs in our spreadsheet, one for each of these data pillars:
You’ll need to periodically enter and adjust information in all the tabs for optimal inventory
tracking. But the formulas will pull data between tabs, helping to automate the actual tracking
process as much as possible.
The ‘Products’ tab
The ‘Products’ tab is where the most up-front work is done. You’ll need to input details about
every single product and variant that you have on-hand.
Enter your product details for all the blue columns, and the dark columns will be calculated
automatically:
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Key tips:
● Be consistent with how you format product names, sizes and colors.
● Make sure the SKUs match across everywhere this data is used.
● Calculate your reorder point for each product scientifically.
● Do not edit the black columns, these are calculated automatically from inputted data.
The ‘Purchases’ tab
The ‘Purchases’ tab is simply a running list of purchase orders in order to record and calculate
incoming inventory for each product variant.
Enter each variant within a PO as a separate line. Again, just focus on adding data to the blue
columns and the dark ones automatically generate:
To keep data consistent, there’s a drop down menu provided that pulls variant information in
from the ‘Products’ tab:
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The Delivery Date should also only be added when the product has actually been received
and put away ready for sale.
As soon as any
delivery date is entered, the ordered amount will add to On-hand stock
in the
‘Products’ tab. Leaving delivery date blank will keep it in the Stock to be received
column:
Key tips:
● Enter each variant within a PO on a separate line.
● Leave Delivery Date
blank until delivery is confirmed.
● Use the product drop down menu to ensure tabs can interchange accurate data.
The ‘Sales’ tab
The ‘Sales’ tab is a running list of sales orders in order to record and calculate outgoing
inventory for each product variant.
Just like the ‘Purchases’ tab, enter each variant within an order as a separate line. Once again,
enter data to only the blue columns and let the dark ones automatically generate:
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You’ll again be able to choose products from a drop down menu. But this time, only enter a
Shipped Date
once the order has actually shipped.
As soon as any
shipping date is entered, the quantities will subtract from On-hand stock
in
the ‘Products’ tab. Leaving shipping date blank will keep the order recorded in the Orders
awaiting shipment
column:
Key tips:
● Enter each variant within a sales order on a separate line.
● Leave Shipped Date
blank until shipment is confirmed.
● Use the product drop down menu to ensure tabs can interchange accurate data.
Using the inventory tracking spreadsheet
Entering each sales order manually should be avoided if possible. Most ecommerce platforms
will allow you to filter orders over a specific timeframe, then export all data to a CSV file.
With Shopify, for example, you simply head to the ‘Orders’ screen and then select the Export
button at the top:
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You’ll then be able to export all orders from different time ranges directly into a CSV file or
Excel spreadsheet:
Simply tweak the exported data to fit your inventory tracking spreadsheet, then copy and
paste it in. You can repeat this with every sales channel to import sales data as quickly as
possible.
Once done, you should have correct inventory data reflected for each variant in your
‘Products’ tab.
As soon as the pre-set Reorder Point
is hit for any variant, the On-hand stock
figure will turn
red:
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Meaning you can easily see as soon as new inventory needs ordering. And helping to keep
the cycle of inventory tracking and management as seamless as possible.
The key thing is to keep the information up-to-date.
This means committing to (at least) daily updates and housekeeping if you choose to utilize
this method of inventory tracking. Do this, and you should be able to manage and track
multichannel inventory a lot better than with siloed data.
Having said this, sustainable and manageable ecommerce growth will likely need a more
automated solution.
Inventory tracking via automated system
An automated inventory tracker effectively does the work of a spreadsheet, but without the
manual input needed.
It would connect to all sales channels together, and sync one live inventory figure between
them all. Meaning as soon as a sale is made anywhere
, inventory levels are updated
everywhere
else in real-time:
Exact functionality will depend on the specific system being used.
But quality ones, such as Veeqo, will also be able to do things like:
● Manage purchase orders to stay on top of incoming inventory.
● Sync across multiple warehouses, locations and channels.
● Sync data in real-time - not hourly or daily.
● Handle orders, shipping and returns in the same platform.
● Control exactly how much inventory shows for each sales channel.
● Combine products together to sell in kits and bundles.
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Choosing an inventory management system can be a big job. And one that either positively or
negatively affects your business for years to come.
We talk more about this in the final chapter of this guide.
Automated vs manual inventory tracking
There are pros and cons to both spreadsheet and automated inventory tracking methods.
Let’s have a look through a few of the highlights:
Spreadsheet pros
● Most of us know how to use and edit a spreadsheet.
● Many templates available to help you create your own.
● Cheap and cost-effective option for start-ups.
● Can be updated fairly quickly.
Spreadsheet cons
● Inputting data and checking accuracy is hugely
time-consuming.
● Spreadsheets (and your sales channels) won’t be updated automatically as stock
levels change, meaning you can easily oversell without realizing.
● Different employees may edit and update spreadsheets without making others aware
of changes, causing confusion and disrupting the order process.
Automated system pros
● Saves time by near-eliminating manual data entry.
● Frees up resources that can be re-directed towards company growth.
● Brings a consistent, scalable experience for customers across every sales channel.
● New sales channels can be easily opened up without adding to workload.
● Many systems offer an extensive portfolio of features beyond simple inventory
tracking – such as order management, picking and packing, etc.
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Automated system cons
● Pricing must be factored into your current financial plan.
● Staff may require training (though minimal, depending on the system used).
Overall, spreadsheets may be a viable short term solution for startups dealing with low order
numbers and a small product catalogue. In today’s digital age, however, it’s generally
accepted to not be a scalable option for most ecommerce businesses.
An automated system typically requires some level of monetary investment. But it’s one that
will prove its worth several times over when it comes to savings in both time and resources.
This chapter should hopefully have given you some clear insights into how to keep track of
inventory across your retail operation. Next, we’ll move on to some best practices for
inventory accounting.
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Chapter 9: Inventory Accounting
Read this chapter online here
On-hand inventory isn’t simply stock that hasn’t sold yet - it’s a business asset, and must
legally be treated as such. Inventory accounting is the practice of correctly valuing this
business asset, so it can be properly documented in end-of-year financial records.
This chapter covers the basics of inventory accounting for greater understanding of inventory
management as a whole. But it is highly recommended to seek the services of a professional
accountant and/or bookkeeper when it comes to submitting any financial documents.
What is inventory accounting?
Inventory accounting is all about how a business would show the stock it holds in its financial
records - balance sheets, profit & loss (P&L) reports, etc. This is typically more complex than it
sounds as inventory is often a 'live figure' that's constantly changing as sales are made and
more stock purchased.
In retail, this can cover three types of inventory or production phases:
1. Raw materials.
2. In-progress items.
3. Finished products ready for sale.
Your on-hand, unsold inventory needs to be included as an asset in end-of-year financial
records. Meaning the crux of the matter in all this is to correctly track both the cost of any
inventory sold and
place an accurate value on the unsold inventory being held at the end of
each accounting period.
Any increase or decrease in the value of goods affects your inventory value figure. This then,
in turn, affects the value of your overall business.
Inventory accounting key terms
There are two key terms retailers need to be aware of when it comes to inventory accounting:
1. Cost of goods sold (COGS). The direct costs of producing any goods sold by a
company.
2. Ending inventory (EI). The value of any unsold
, on-hand inventory at the end of an
accounting period.
Let's take a deeper look at each of these...
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1) Cost of goods sold (COGS)
Cost of goods sold (COGS)
is a core element of measuring a retail business’s profitability and
inventory value.
As the name suggests, COGS refers to the amount it cost a business to produce the products
it sold, including everything that went into it - materials, labor, tools used, etc. But (crucially)
without factoring in costs not directly tied to the production process - like shipping,
advertising and sales force costs, etc.
As a result, COGS helps you determine the amount of gross profit made in one or more sales.
For example:
If you sell an item valued at $50 and the COGS is $30, your company has achieved a gross
profit of $20. It’s a simple formula, though it can become more complex if manufacturing your
own products.
All inventory sold will be listed under the COGS account in your income statement at the end
of each business year.
Calculating COGS
To calculate cost of goods sold (COGS)
for an accounting period, you'll need to:
1. Determine what costs can be associated with the production process of your specific
products - like labor, raw materials, tools, etc.
2. Take the cost of beginning inventory (BI).
3. Add the cost of newly purchased inventory during the period in question.
4. Subtract leftover, unsold inventory at the end of the accounting period.
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2) Ending inventory (EI)
It's highly likely that a business will not sell the entirety of its inventory at the end of each
accounting period. Meaning any on-hand, unsold stock becomes an asset that must be
valued
and included in financial statements.
This is referred to as ending inventory (EI)
, and is actually quite simple at first glance.
1. Take the beginning inventory (the units carried over from the end of the previous
financial period).
2. Add any newly purchased inventory throughout the accounting period.
3. Subtract any units sold.
4. And this leaves the final inventory figure to be included as a company asset.
However:
We need to assign an actual value to the unsold inventory figure (i.e. how much this company
asset is worth in monetary terms). And this is where it can become a lot more complicated.
This is because:
● Numerous purchases of new stock and raw materials are usually made during a typical
12-month accounting period.
● Each purchase may have come at a different cost per unit.
● Sales are also being made at the same time, turning inventory into cash.
So which cost per unit figure do you use to value unsold inventory when there are so many
moving parts in a typical accounting period?
This is where inventory valuation methods come into play.
Inventory valuation methods
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Sticking to a specific method for inventory valuation is critical
for consistent, accurate and
(most importantly) legally acceptable financial statements.
There are three main valuation methods retail companies use for inventory accounting:
1. First In, First Out (FIFO).
2. Last In, First Out (LIFO).
3. Average Cost Method.
You'll just need to stipulate which one is being used when submitting financial records and
accounts.
1) FIFO
FIFO is a useful inventory management technique to actually use in the handling of stock in
your warehouse. But it's also a method of valuing unsold inventory.
It assumes inventory that was purchased first
, is also the first to be sold. So the oldest
on-hand inventory available is what will be used to fufill an order.
There are a number of benefits to the FIFO method. Primarily, companies selling perishable
goods (food and drinks) face less risk of their products spoiling or crossing best-before sale
date. They can establish a smooth supply chain and ensure their clients receive the freshest
items in their inventory.
All products received and sold must be recorded individually when using the FIFO accounting
method. It’s possible that the FIFO system can lead businesses to under or overestimate the
value of inventory in the future, due to market changes down the line.
2) LIFO
The LIFO approach works on the assumption that the most recent products added to your
inventory are the first ones to be sold first.
This system works well for retail businesses specializing in non-perishable goods or those
with a low risk of obsolescence. It can also increase COGS and lessen net profit (therefore
reducing annual tax liability) if more recently purchased goods are more expensive.
Note: LIFO is an acceptable inventory accounting method in the US only
.
3) Average Cost
Average Cost (or weighted-average) inventory accounting method is totally different to the
previous two.
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This applies to businesses that choose not
to track cost per inventory unit for each separate
purchase delivery. Instead, inventory value is based on the average cost of items throughout
the relevant period.
You can work out the average cost by simply dividing the overall cost of products for sale by
the total number in the inventory.
Using inventory accounting software
Inventory accounting can be a time-intensive, frustrating process for retail businesses -
especially small or independent teams.
But it doesn't have to be a rush of spreadsheets and paper receipts the week before every
tax deadline. There's reliable accounting software available to help automate and digitize as
much as possible, the main two being:
1. Xero
2. QuickBooks
These programs won't 'do your accounts for you'. But they will make it much simpler to
organize and present come the end of tax year.
Both Xero and QuickBooks do also have tools available to help with the inventory side of
accounting.
However:
They are accounting softwares
at heart. Meaning the inventory management functionality
within them is relatively basic and underdeveloped.
So for growing retail and ecommerce businesses, it's recommended to:
1. Utilize a high-quality inventory management software as master of stock.
2. Ensure this software has a direct Xero integration or QuickBooks integration to push
relevant data across.
This leaves you with the best of both worlds - two high-quality softwares automating as much
of your inventory and accounting processes as possible.
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Hopefully, this chapter has given you a good insight into the best inventory accounting
practices.
That being said, this can still be a hugely complicated task for retailers. So we highly
recommend employing the services of a professional bookkeeper and/or chartered
accountant when it comes to compiling financial records and submitting tax returns.
In our next and final chapter, we'll take a look at inventory management systems - including
how to determine when it's time to start using an automated system, and choosing the best
one for your company.
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Chapter 10: Choosing An Inventory Management
System
Read this chapter online here
As we've seen throughout this guide, inventory management is a phenomenally complex
aspect of running a retail business. An inventory management system can simplify this entire
process by automating many of the manual tasks and calculations involved.
In this final chapter, we discuss what exactly an inventory management system is, some of the
features to look out for, and also how to choose the right one for your business.
What is an inventory management system?
An inventory management system is a piece of software used to track inventory items in a
business, and oversee all the processes involved in stock optimization. Any system’s bottom
line goal is to ensure the right inventory
is available, in the right amounts
, at the right time
-
with as few manual tasks involved as possible.
Benefits of using an inventory system
Any business selling and storing physical goods must
track inventory in one way or another.
Otherwise, items would be in complete chaos with stock consistency and fulfillment made
almost impossible.
Tracking can be done via pen & paper or spreadsheets. But using an automated,
computerized system has many benefits:
● Less time wasted on manual tasks.
● More consistent customer experience.
● Stock levels updated in real-time.
● Reduced labor costs.
● More insightful analytics and reports.
● Faster fulfillment from being better organized.
● Less cash wasted on unnecessary inventory and storage.
● Company becomes more easily scalable.
Overall, automated inventory management systems are powerful tools for retail businesses.
In the short term, they help overcome the operational challenges associated with modern day
multichannel and omnichannel ecommerce. While in the long term, they make growth easier
by reducing the reliance on manual processes and individual people.
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Key inventory management system features
It’s important to note that systems can be very different from one another. So when choosing
an inventory management system, retailers should ensure that all the necessary features are
included.
Here’s an overview of what to look out for:
● Live syncing. A live, central stock figure is kept in one system, and accurately
reflected across all sales channels and warehouses in real-time.
● Forecasting. Past sales data can be used to forecast demand and plan for upcoming
inventory requirements.
● Re-ordering. Purchase orders can be created and managed so stock can be
replenished quickly and easily.
● Suppliers. All suppliers and vendors can be organized in one system, and easily
contacted if purchase orders need creating, changing or chasing up.
● Barcode scanning. System is compatible with barcode scanning to enable easier
tracking and identification of products.
● Stock notifications. Can set up notifications and alerts to signify when a product has
hit its pre-defined reorder point and needs replenishing.
● Reports. Provides insightful data and analysis on sales, products and warehouses in
order to make better inventory decisions going forward.
● Returns processing. Return orders can be handled with returned inventory easily
written-off or added back into stock.
● Multiple warehouses. Manage stock across several warehouses, stores and locations
in one system.
● Integrations. Connect the system to all necessary sales channels, POS systems,
shipping carriers, accounting softwares, etc. - and/or can build desired integrations via
an open API.
● Cycle counts. Assigns weekly inventory counting tasks to your warehouse team so
stock is perpetually kept up-to-date with minimal discrepancies.
● Automations & rules. Stock rules can be created to show different available amounts
for individual sales channels and locations.
● Bundles. Products can be grouped together to sell in kits and bundles while still
maintaining an accurate central inventory figure.
Additional features for retailers
Managing a retail business isn't all
about inventory. There are many other aspects that
companies might need to handle in order to run a smooth operation.
So when choosing an inventory management system, it's important to also consider what
additional features it has beyond just stock control.
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It's not unreasonable to expect a system to be able to handle:
● Order management. Automatically importing orders from all your sales channels to
easily view and edit in one centralized place.
● Shipping & fulfillment. Directly integrating with shipping carriers to view quotes, print
labels and ship orders.
● Picking & packing. Creating and organizing picking lists and packing tasks via either
paper printouts or digital scanner.
● Warehouse management. Organizing warehouse inventory, creating automations and
handling tasks like new stock put away, pick & pack, physical counts, etc.
● Returns management. Giving all your teams one place to handle return tasks from
start to finish - like creating returns, booking back into stock and processing refunds.
● Wholesale orders. Creating and issuing invoices, taking phone orders, processing
payments, and then actually fulfilling and shipping B2B orders.
● Accounting. Either in the system itself, or by integrating directly with specific
accounting tools to push sales and inventory data across.
These are all key operational tasks when it comes to running a retail and/or ecommerce
company. And they will all likely need some kind of software to handle them in a scalable way
and to an acceptable standard for customers.
It’s important to note that having as few systems in place to manage all these operational
tasks can be a huge benefit.
Choosing an inventory management system
Here are the key points to take into consideration when choosing an inventory management
system:
● Timing. There are several signs you've outgrown a standard inventory tracker and
require a more automated system. These include things like constant overselling,
inventory errors and spending more time on manual operational tasks than on growth.
● Integrations. Create a list of must-have integrations, e.g. ecommerce platform,
marketplace, shipping, POS, 3PL, etc. It's important that any new inventory system
integrates with these directly
(and doesn't require an additional app or piece of
software managed by another company). Failing this, is there an open API to create
new integrations?
● Features. Create a list of must-have features from the ones we've discussed above.
Do you need/want your new inventory system to be able to also ship orders or enable
digital picking? Do you do a lot of wholesale orders and need this managed well? Do
you manufacture your own products and need a system to handle raw material types
of inventory?
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THE COMPLETE GUIDE TO INVENTORY MANAGEMENT 67
● Ease-of-use. It's possible that you'll need some less technically-minded staff members
to use your inventory system. So is it relatively easy for these people to learn and
understand the software's UI?
● Support. You'll likely need support getting set up and to receive help quickly if
something goes wrong. Does the system you're looking at offer support during your
typical working hours? Does this include phone, chat or just email support? And what's
the quality rated like online?
● Development. Any software used is going to be powering a critical part of your
business, so finding one driven by innovation and built on the latest technology is
critical. Is the software you're looking at being actively developed and improved on a
regular basis? How often are new features being released and bugs being fixed?
Every business is slightly different. So take these things into consideration when choosing an
inventory management system, but also do it within the context of what's necessary for your
individual business needs.
Inventory system options
In this section, we'll look at some of the popular inventory management system options for
online retailers.
Veeqo
Veeqo is an all-in-one system to help retailers manage multichannel orders, inventory and
shipping from a single platform. It also has a barcode scanner to improve speed and order
accuracy in the warehouse when it comes to tasks like picking, receiving new stock and
inventory counts.
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THE COMPLETE GUIDE TO INVENTORY MANAGEMENT 68
Built-in features: Orders, inventory, purchase orders, shipping, digital pick & pack, warehouse
management, wholesale, returns.
Direct integrations: Strong, direct integrations with a range of major sales channels, shipping
carriers, 3PLs, POS systems, accounting softwares.
Pricing: From $156 per month
Capterra score: 4.5/5
Trustpilot score: 4.7/5
Brightpearl
Brightpearl's system handles orders and inventory for multichannel retailers and wholesalers.
It also has a built-in accountancy module, but needs third-party software to manage shipping
and warehousing.
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THE COMPLETE GUIDE TO INVENTORY MANAGEMENT 69
Built-in features: Orders, inventory, purchase orders, wholesale, returns, accounting.
Direct integrations: A range of sales channels, 3PLs, POS systems, accounting softwares. Will
need to connect to third-party shipping software and WMS systems in order to handle these
tasks.
Pricing: Unspecified monthly cost + implementation fee
Capterra score: 4.3/5
Trustpilot score: 4.8/5 (Excellent)
Tradegecko
Tradegecko is an inventory and order management platform for multichannel retailers. It can
also handle manufacturing and wholesale orders, but requires third-party integrations for
functions like shipping and warehousing.
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THE COMPLETE GUIDE TO INVENTORY MANAGEMENT 70
Built-in features: Orders, inventory, purchase orders, wholesale, manufacturing.
Integrations: A range of sales channels, 3PLs, POS systems, accounting softwares. Will need
to connect to third-party shipping software and WMS systems in order to handle these tasks.
Pricing: From $39 per month
Capterra score: 4.4/5
Trustpilot score: Unrated
Linnworks
Linnworks is a system to manage inventory, orders and shipping in one place. It used to be a
desktop software, but has recently started being transitioned into a cloud-based system like
the others mentioned in this guide.
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THE COMPLETE GUIDE TO INVENTORY MANAGEMENT 71
Built-in features: Orders, inventory, shipping, product listing.
Integrations: A variety of sales channels and shipping carriers. Will need third-party software
and apps for WMS and accounting software connections.
Pricing: From $150 per month
Capterra score: 4.0/5
Trustpilot score: 3.9/5
Stitch Labs
Stitch Labs provide order and inventory management for multichannel retailers that have
grown to a size to be able to justify the relatively high starting price. There's also a wholesale
element, but you'll need third-party software to manage shipping and warehouses.
Veeqo helps retail brands provide the best experience to their customers everywhere
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THE COMPLETE GUIDE TO INVENTORY MANAGEMENT 72
Built-in features: Orders, inventory, purchases orders, wholesale.
Integrations: A range of sales channels, 3PLs, POS systems, accounting softwares. Will need
to connect to third-party shipping software and WMS systems in order to handle these tasks.
Pricing: From $799 per month
Capterra score: 4.5/5
Trustpilot score: 3.6/5
This chapter concludes our guide on the subject of inventory management. These 10 chapters
should give you all the information necessary to manage your inventory with reduced costs
and minimal manual practices.
Veeqo helps retail brands provide the best experience to their customers everywhere
Click here to start your 14-day free trial today, or get in touch at [email protected]
