What is inventory management?
Inventory management is the process of organizing and controlling the flow of goods within a business. It involves tracking the movement of goods and materials, monitoring inventory turnover, and optimizing replenishment. Inventory management aims to minimize the cost of holding all your inventory inventory while maintaining consistent stock levels. Effective inventory management helps businesses maintain consistent stock levels and get products into customers’ hands faster.
Setting Up inventory management in Shopify
Before diving into inventory management strategies, ensure your products and inventory are properly set up within Shopify. Here's a quick guide:
Step 1: Activate Inventory Tracking
- Log in to your Shopify admin.
- Navigate to "Products" and select a specific product.
- Scroll down to the "Inventory" section.
- Enable the "Track quantity" option. This allows Shopify to monitor the available quantity for each product or variant.
- You can even view the history of inventory adjustments by clicking on "Adjustment History"
Step 2: Choose Your Inventory Policy
- Select "Continue selling when out of stock" (Its Ideal for products with reliable restocking or for pre-orders.)
Step 3: Define Product Variants (if applicable)
- Products with multiple variations (size, color, etc.) require variant creation.
- Access the "Variants" section within your product listing.
- Create individual variants for each option, enabling separate stock tracking.
Step 4: Initial Inventory Entry
- Set initial stock levels for each product or variant.
- Locate the "Inventory" section of your product listing.
- Enter the starting quantity for each product or variant.
Pro Tip: Enhance your inventory management by categorizing your products using a hierarchical structure. Organize products into categories and types on the product page. This detailed classification improves product search, inventory tracking, and analysis, ultimately streamlining your operations.
Common challenges in Shopify inventory management
As illustrated in the previous section, effective inventory management hinges on two critical factors: visibility and control. Without a clear understanding of where your products are and how much you have, businesses risk the twin perils of overstocking and understocking. While an excellent platform for launching a DTC brand, Shopify encounters limitations when scaling inventory management.
At its core, Shopify struggles to handle the complexities of large-scale inventory, encompassing a multitude of SKUs and diverse sales channels. Relying solely on Shopify or manual oversight becomes increasingly challenging as your business grows. These foundational issues trigger a cascade of problems:
Overstock and dead stock
Shopify’s inability to create product bundles hampers efforts to move slow-moving inventory. Identifying and addressing dead stock becomes a time-consuming challenge without granular data on product performance. This can lead to tied-up capital and wasted storage space.
Managing returns and exchanges
Efficiently processing returns and exchanges requires real-time data and quick adjustments. Shopify’s inventory management features often fall short. They have a simplistic approach, leading to delays, errors, and increased operational costs.
Addressing Stock outs
Accurately predicting demand is crucial for preventing stock outs, but Shopify’s limited data analytics capabilities make this difficult. Consequently, businesses may struggle to determine optimal safety stock quantities, leading to lost sales and customer dissatisfaction. While diversifying suppliers can mitigate risks, it doesn't address the root cause of inaccurate forecasting of demand.
Backorder Management
Effectively managing backorders requires precise reorder points and timely communication with customers. Shopify's limitations in data analysis and automation hinder the ability to set accurate reorder points and efficiently process backorders.
Inventory Shrinkage
Manual cycle counting is time-consuming and prone to errors. Shopify lacks advanced inventory tracking features like barcode scanning, making it difficult to accurately measure and reduce inventory shrinkage.
Best practices for Shopify inventory management
Inventory management for Shopify goes beyond recording available inventory and detailing variants for a product. Effective inventory management can have a wide range of impact from improved efficiency, profitability and better business planning. All of these are achievable with the right inventory management practices. Here are some of the most popular ones:
1. Regular stock audits and stock takes
Maintaining accurate inventory records is fundamental to effective management. Regular stock audits and physical stock takes help identify discrepancies between recorded and actual stock levels. By pinpointing these inconsistencies, businesses can take corrective actions, reduce losses due to shrinkage, and ensure that customer demand is met in time.
2. Managing routing and reorder points
Establishing clear routing and reorder points is crucial for preventing stock outs and overstocks. By defining when and how much to reorder, businesses can optimize inventory levels, reduce carrying costs, and improve cash flow. Leveraging data analytics to inform these decisions can enhance accuracy and efficiency.
3. Using barcodes and scanners for accuracy
Implementing barcode scanning technology can significantly improve inventory accuracy and efficiency. By assigning unique barcodes to each product, businesses can streamline the receiving, putaway, picking, and shipping processes. Real-time data capture minimizes human error and provides up-to-date inventory visibility.
4. Demand planning
Accurate forecasts are essential for aligning inventory levels with customer needs. By analyzing historical sales data, market trends, and external factors, businesses can make informed decisions about product quantities and timing. Advanced forecasting techniques, such as machine learning, can further enhance prediction accuracy.
Also read: Inventory Forecasting Software & Apps for Shopify in 2024
5. Multichannel inventory management software
For businesses operating across multiple sales channels, managing inventory efficiently is crucial. Integrating inventory data across multiple channels prevents stock discrepancies and ensures consistent availability. Utilizing specialized tools and software can streamline this process and improve overall inventory visibility.
Strategies for optimizing Shopify inventory
Effectively managing inventory requires selecting the right strategy to optimize stock levels, reduce costs, and enhance customer satisfaction. Here's a breakdown of some key inventory management techniques commonly utilized in eCommerce:
1. Just-in-Time (JIT) Inventory:
Concept: The core principle of JIT is to minimize inventory holding costs by receiving products only when they are needed for production or sale. This approach ensures fresh inventory while maximizing storage space and reducing carrying costs.
Ideal for: Industries with high product turnover, short lead times, and predictable demand. For example, fast-fashion retailers can benefit from JIT to avoid holding onto outdated styles.
Example: A clothing company utilizes JIT to ensure they have the latest seasonal trends in stock, minimizing the risk of holding onto unsold items from previous seasons.
2. First-In, First-Out (FIFO):
Concept: This inventory management technique assumes that the first products received are the first ones sold. FIFO ensures older inventory is sold first, minimizing the risk of obsolescence or product deterioration.
Ideal for: Industries with perishable goods or products with expiration dates, such as food and beverage companies or pharmaceutical suppliers.
Example: A grocery store utilizes FIFO to ensure older produce is sold before fresh deliveries arrive, minimizing spoilage and waste.
3. Last-In, First-Out (LIFO):
Concept: LIFO assumes the most recently received products are sold first. This method can be advantageous in times of inflation, as the cost of recently purchased goods reflects current market prices. However, it can also lead to discrepancies when reporting the value of inventory for tax purposes.
Ideal for: Industries experiencing price fluctuations, such as construction materials or commodities with volatile markets.
Example: A lumberyard utilizes LIFO to sell newer stock purchased at higher prices first, potentially lowering their overall tax burden.
4. Safety Stock:
Concept: Maintaining a buffer of additional inventory beyond the expected demand helps mitigate risks associated with stockouts due to unexpected surges in demand or unforeseen supply chain disruptions. While this may need additional storage space and increased costs, it does safeguard against unpredictable problems when it comes to suppliers.
Ideal for: Industries with unpredictable demand or products with long lead times. This can be particularly relevant for seasonal businesses or those reliant on overseas suppliers.
Example: An online toy store maintains a safety stock of popular items during the holiday season to fulfill unexpected demand spikes and avoid stockouts.
5. Drop shipping:
Concept: The seller doesn't hold any physical inventory in this model. Orders are forwarded directly to a third-party supplier responsible for storage, packaging, and shipping the product to the customer. while dropshipping comes with its own benefits, it leads to reduced quality control.
Ideal for: Businesses with limited capital or those testing new product lines without upfront investment in inventory. Dropshipping offers a low-risk entry point but may yield lower profit margins due to supplier markups.
Example: A startup clothing brand utilizes dropshipping to launch its initial product line without committing to large inventory purchases.
6. Economic Order Quantity (EOQ):
Concept: EOQ is a mathematical formula that helps determine the optimal order quantity to minimize total inventory costs. It considers factors like holding costs, ordering costs, and demand to calculate the most cost-effective amount to order at a time. This is one of the most profitable methods as it is customized to the business model and accounts for various factors. However, a business needs software infrastructure that provides accurate data to implement this method.
Ideal for: Businesses with predictable demand patterns and stable supplier relationships. EOQ can help optimize ordering frequency and minimize storage costs.
Example: An office supply store utilizes EOQ to calculate the most cost-effective quantity of printer cartridges to order based on historical demand and supplier discounts for bulk purchases.
Advanced inventory management for Shopify: Boost your bottom line!
1. Inventory turnover
Understanding and optimizing inventory turnover is pivotal for business success. By calculating the inventory turnover ratio, businesses can gauge the efficiency of their inventory management. A high turnover ratio generally indicates strong sales and efficient inventory utilization, while a low ratio might signal excess stock or slow-moving items.
To enhance inventory turnover, strategies such as implementing targeted promotions, offering discounts on slow-moving items, and effectively managing product lifecycles can be employed. By closely monitoring product performance and adjusting inventory levels accordingly, businesses can free up capital tied up in inventory and improve overall profitability.
2. Inventory Optimization Techniques
Several advanced techniques can help optimize inventory levels and reduce costs. Economic Order Quantity (EOQ) analysis determines the most cost-effective order quantity by considering factors like ordering costs and holding costs. Safety stock optimization, often employing statistical models, helps balance the risk of stockouts against excess inventory.
ABC analysis categorizes inventory items based on their value and usage, enabling businesses to focus on managing high-value items more closely. By applying these techniques, businesses can achieve significant cost savings and improve inventory efficiency.
3. Supply Chain Collaboration
Building strong relationships with suppliers and fostering collaborative partnerships can yield substantial benefits. Vendor Managed Inventory (VMI) empowers suppliers to manage inventory levels based on point-of-sale data, reducing the burden on the retailer. Collaborative Planning, Forecasting, and Replenishment (CPFR) involves sharing sales forecasts and crucial data with suppliers to improve visibility and responsiveness. Effective supplier relationship management is crucial for ensuring timely deliveries, maintaining product quality, and imrrove supply chain management.
4. Inventory Visibility and Control
Achieving real-time visibility into inventory counts is essential for efficient operations. RFID technology offers a robust solution for tracking product movement throughout the supply chain. Warehouse management software (WMS) provide comprehensive control over inventory storage, picking, packing, and shipping processes. By implementing key performance indicators (KPIs) to measure inventory performance, businesses can identify areas for improvement and make data-driven decisions.
5. Risk Management and Mitigation
The supply chain is subject to various disruptions, including natural disasters, economic fluctuations, and geopolitical events. Developing comprehensive contingency plans, such as alternative sourcing options and disaster recovery procedures, is crucial for mitigating risks. Additionally, investing in insurance coverage can protect against financial losses due to unforeseen circumstances. Implementing robust security measures is essential to safeguard inventory from theft and damage.
Top features for a Shopify inventory management Software
Data is the cornerstone of proper inventory management. While manual oversight can provide a basic understanding of stock qu, it falls short in delivering the precision and real-time insights required for optimal decision-making. Even with substantial manpower and resources dedicated to manual tracking, achieving the same level of accuracy and efficiency as the right inventory management software is virtually impossible.
To maximize the benefits of inventory management software, look for platforms that offer the following core features:
Real-time Inventory Updates
Accurate and up-to-date inventory data is paramount for effective management. Seek software that provides real-time visibility into stocks across all channels, ensuring consistency and preventing stockouts or overstocks.
Multi-location Inventory Management
For businesses with warehouses or fulfillment centers at multiple locations, a software capable of managing inventory across different locations is crucial. Real-time tracking of stocks and transfers between locations is essential for optimizing operations and reducing costs.
Read Our Complete Guide to Multi-Location Inventory in Shopify
Demand Forecasting
Predictive analytics is vital for aligning inventory with customer demand. Look for an inventory management system that offers robust forecasting capabilities, utilizing historical sales data, market trends, and other relevant factors to optimize stock levels and minimize lost sales.
Purchase Order Management
Efficient purchase order management is essential for maintaining optimal inventory levels. Choose an inventory management system that has automated purchase order creation, helps tracks order status, and integrates with suppliers for seamless collaboration.
Barcode Scanning and Serial Number Tracking
Barcode scanning and serial number tracking enhance inventory accuracy and traceability. A software that supports these features enables efficient stocktaking and reduces human error. Not only that it helps counter the effects of shrinkage and makes categorization easier as well.
Integration with Other Shopify Apps
One of the biggest benefits of using Shopify is the strong ecosystem of Shopify Apps. Whether you want advanced billing systems or AI powered product suggestions and bundling software, Shopify has it all. It's counter-productive to subscribe to a software that does not integrate with your stack. strong integrations are crucial for a streamlined workflow. Look for inventory management apps that integrate with your accounting, shipping, and order management systems. This will help optimize operations as your team won't have to tackle multiple tools and tabs at the same time.
Scalability and Customization
As your business grows, your inventory management needs will evolve. Pricing structures are often a good indicator of scalability. If the inventory management software offers pricing based on the number of seats it may not be suitable for growing teams. if the pricing is based on sales volume, the system might not be able to scale with your business. Choose software that can adapt to your changing requirements. Also look for customization options to fit your specific needs. If you have multiple vendors, warehouses, if own order fulfillment or not- your software features should support your needs.
How Prediko Supercharges Your Shopify Inventory?
By leveraging the power of AI and advanced data analytics, Prediko empowers DTC brands to take their Shopify inventory management to the next level. Here's how Prediko can revolutionize your inventory operations:
AI-powered Demand Forecasting
Manual forecasting methods are often unreliable, leading to stockouts or excess inventory.
Prediko's AI engine analyzes historical sales data, seasonality trends, and external factors like marketing campaigns and competitor activity. This comprehensive analysis allows for highly accurate demand predictions, minimizing the risk of stockouts that can frustrate customers and impact sales. By identifying potential overstocks, Prediko helps businesses avoid unnecessary storage costs and wasted resources.
For instance, Jolies, a fashion brand, experienced a significant 60% reduction in stockouts by implementing Prediko's AI-powered forecasting. This improvement allowed them to optimize inventory levels, enhance customer satisfaction, and boost overall sales.
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Smart Inventory Planning
Prediko goes beyond just forecasting demand. It translates those predictions into actionable insights for smarter inventory planning. The software suggests optimal reorder points based on predicted demand and lead times, ensuring you have the right amount of stock at the right time. Prediko also helps manage safety stock levels, providing a buffer against unexpected fluctuations without tying up capital in unnecessary inventory. Additionally, Prediko generates intelligent purchasing recommendations, streamlining the purchase order process and reducing the risk of human error.
Inventory Control and Optimization
Prediko doesn't just track inventory; it helps you analyze it strategically. By identifying slow-moving or stagnant inventory, Prediko empowers you to make informed decisions about promotions, discounts, or bundling strategies to move these items and free up valuable storage space and capital. This data-driven approach allows you to optimize your inventory mix, ensuring your resources are focused on high-demand products.
Improved Decision-Making
Prediko empowers informed decision-making with insightful reports and data visualization. You gain a clear view of key metrics like inventory turnover, stockouts, and carrying costs. These insights enable you to identify areas for improvement, tweak your strategies, and make data-driven decisions that support long-term growth and profitability.
Enhanced Efficiency and Productivity
Inventory management can be a time-consuming and tedious task. Prediko automates many of the manual processes associated with inventory control, freeing up your team to focus on more strategic initiatives. From automated forecasting and reorder suggestions to streamlined purchasing recommendations, Prediko empowers you to streamline your inventory operations and boost overall productivity. As a real-world example, Kimai, a leading health and wellness brand, leveraged Prediko to save an impressive 20 hours per week on inventory management tasks, allowing them to dedicate more time to product development and marketing efforts.
Mastering inventory management is pivotal for the success of any DTC brand. By optimizing your inventory strategies, you can significantly impact your bottom line, improve customer satisfaction, and free up valuable resources for growth. Relying on robust inventory management software like Prediko is essential for achieving these goals. With features ranging from AI-powered demand forecasting to creating purchase orders, Prediko empowers businesses to make data-driven decisions, streamline operations, and unlock their full potential.
Ready to revolutionize your inventory management? Book a demo to explore how Prediko can transform your business.
Still unsure? start your free 14-day trial and experience the difference firsthand.