Tips for determining how much inventory to keep and what to do if you have too much.
eCommerce business owners often have a hard time parting with inventory. That sounds counterintuitive to running a thriving business. Let me clarify, some eCommerce business owners have a hard time parting with inventory that’s not moving. Whether it's a misguided strategy or an emotional attachment to having spent money on it in the first place, you may be holding onto your slow turning inventory too long.
Inventory is meant to turn over, making a profit as it turns. It’s vital to manage your inventory levels well because it’s cash that you can’t access. If you allow your stock to accumulate, you’re tying up your cash. That could become a big problem in a hurry. When discussing my inventory philosophy with my clients, I often ask them to visualize the products sitting on their shelves as piles of money.
Whether or not you break even or make a profit on those slow moving items, that inventory can become cash in your hand. So, don’t be afraid to cut your losses and reinvest in something better.
WHY YOU MAY BE HOLDING TOO MUCH INVENTORY.
There are many reasons you end up with too much of a particular product. Regardless of how it happened, you can generally group the reasons into two categories: internal (your fault) and external (not your fault).
Your forecast was wrong - you thought that market demand would be stronger than it turned out to be.
Your supplier has high minimums - in order to buy any, you needed to buy a lot.
You have an emotional attachment - maybe you believe that it’s a strategic product that you need to sell in order to sell other products. Or it could be a newer item that you were sure would be a hit. Or maybe you don’t want to settle for break even or lower profit on a particular product, so you let it sit there not moving, hoping that one day someone will buy the items at their regular prices.
You're not paying close attention - and you’re not actively monitoring your inventory levels down to the product level.
You have mechanical issues - like the product page is experiencing errors, the page details (description, images, title, specs, etc.) are not optimized, or maybe your marketing campaigns are not working properly.
Competition changed - your competitor(s) have a lower price point, better marketing, more sales channels or combinations of all of these.
Consumer behavior - your customers are not as interested based on any number of factors like newer/better/cheaper versions, changes in attitude, trends, etc.
HOW MUCH INVENTORY IS TOO MUCH?
This really depends. For most smaller eCommerce businesses, simply looking at the average monthly units sold over the past several months divided by the quantity in stock will show you how many months you currently have to sell. In general, this is a decent metric to follow.
For example, if you have been selling an average of 100 units of a particular product per month for the past year and you currently have 600 in stock, you have roughly 6 months worth of stock on the shelf.
HOW MUCH INVENTORY SHOULD A SMALL ECOMMERCE COMPANY KEEP?
Around 2-4 months worth of stock is a very general rule of thumb for how much inventory to keep in stock. However, it does vary widely and there are some things to take into consideration.
INVENTORY LEVEL CONSIDERATIONS
When you may want to hold high inventory levels for a product:
Toilet Paper Products - products you never want to run out of (like TP). Reliable and consistent products that your customers depend on you for. Since you have a long track record with these, you can more confidently buy higher quantities. The reason you’d buy more is to ensure you never run out of stock and lose sale opportunities and customer goodwill. You can also get lower prices from your suppliers with volume discounts.
Unreliable Suppliers - which you don’t want, but nonetheless will have from time to time for a product you need to sell. If your suppliers constantly run out of stock, have shipping/invoicing errors, change prices often etc., it may be better to order more at a time and carry higher quantities so you won't have to deal with that supplier and their issues as often.
Opportunity based - this may include a supplier close out where you get a low price for buying a lot. Or it could be a product that if you buy a lot, you get a lower cost and then can put it on sale in the hopes of running through a lot of units in a short window.
Seasonal - of course you want to scale up your operations when it comes to your biggest selling season and be sure you have the right amount of inventory to meet customer demand.
When it may be okay to hold just enough inventory for a product:
Reliable suppliers - you can keep less on your shelf because you know a replenishment order will happen quickly if your suppliers always have stock, are geographically close to you, and are easy to do business with.
Unproven products - new products in particular should be bought in lower quantities until they’re proven in the market.
TIPS FOR WHEN YOU HAVE TOO MUCH INVENTORY.
IMMEDIATE ACTIONS YOU CAN TAKE TO REDUCE SURPLUS INVENTORY OF A PARTICULAR ITEM
Sell it - drop the regular price or put it on sale and promote it through all of your marketing channels. If the product is discontinued and you’re never going to buy it again, make the sale price very aggressive at or below cost. Remember it’s all about turning the inventory into cash.
Return it to the supplier - see if your supplier is open to taking back some of it. You’ll have to pay for return shipping and maybe a restocking fee. Or they may have another item you can exchange it for. Note, depending on your supplier, they may not be happy about this move. But, it is an approach you can try in a pinch.
Donate it - only if you have no other way to move through it at all. Donate it and talk to your accountant about taking the tax write-off.
LONG TERM APPROACH TO CONTROLLING INVENTORY LEVELS
Forecasting - get better at inventory forecasting, your eCommerce will live or die by it. If you don’t have anyone who is great with data analytics, try to find someone who can help you.
Suppliers - work toward partnering with reliable and consistent suppliers.
Analysis - make it a habit to consistently monitor your inventory levels down to the SKU level.
As you scale your small or micro eCommerce business, strive to continually build sophistication, discipline, and processes around how you manage inventory. And if you find yourself holding onto extra stock for emotional reasons, it is probably time to break up with your inventory.
Bill Ross is a business coach and consultant offering small business owners, micro business owners, and eCommerce business entrepreneurs advice and support to help them achieve their goals. Learn More