How you manage the inventory for your eCommerce business can have a significant impact on your profitability.
There are many types of inventory management and no one-size-fits-all approach that works for every company.
This is why it is so critical for eCommerce businesses to fully understand the different types of inventory and inventory management techniques to find the strategy that works best for your business.
In today’s post, we’re talking about the different types of inventory for your eCommerce business, how to manage it, and some best practices.
Let’s dig in.
What is Inventory?
Your inventory is likely your most important source of revenue.
Not all inventory is the same. Inventory is how we account for items a company sells or uses in its production. These may include items, component parts, or raw materials.
One of the challenges for eCommerce businesses is effective inventory management to ensure you always have enough stock on hand to meet your customer demands.
Before we go any further, it’s important to clarify exactly what we mean by the term ”inventory.”
Inventory used as a verb refers to the act of either listing or counting items in stock.
Inventory used as a noun means items, component parts, and raw materials a business sells or uses in the production of products for sale.
When your eCommerce business sells a product to a customer, this is referred to as “inventory turnover” and is classified as an asset on your balance sheet.
This becomes a liability if you have more inventory than your business needs. Inventory that is not sold and left sitting in your warehouse is considered a liability on your balance sheet.
What are Different Types of Inventory?
Your inventory is more than just your eCommerce business’s finished products for sale.
Major types of inventory include:
Finished goods are goods that are ready to be sold. An eCommerce business that manufactures and sells day planners might place the planners in a cellophane wrapping to create a finished product ready for sale.
Raw materials are the components your company uses to create its finished products. Generally speaking, the raw materials are typically unrecognizable in their original form when the product is finished and ready for sale. An example of this might be an emollient a company uses to produce its beard oil.
Components, like raw materials, are used by your business to create and finish your products. The difference between components and raw materials is that components are recognizable once the product is assembled. Some examples of components could include a screw, a computer chip, or a lightbulb.
Work in Progress (WIP)
Work in progress is raw materials in the process of being assembled into finished goods. Suppose your eCommerce business builds custom gaming laptops, for example. In that case, your work in progress might include computers your company has begun to build for customers that are not yet completed and ready for sale.
Maintenance, Repair, and Operating supplies, known as MROMaintenance, repair, and operating supplies are inventory that supports making a product or maintaining a business. Examples of MRO goods for your eCommerce business might include items necessary for everyday operations, such as paper and printer toner.
In addition to the major types of inventory, most businesses also carry some form of specialized inventory.
Specialized inventory includes:
Transit inventory is inventory in the process of being shipped to your warehouse. When your company orders a case of a new bestseller from the publisher, it is considered transit inventory from the time it is en route from the publisher’s warehouse until the time it arrives in yours.
Packing and packaging materials
Packing and packaging materials include:
- Primary packing, which protects your products for use
- Secondary packing, which means packaging of your finished product and can include SKU information or labels
- Tertiary packing, which means bulk packaging for the transport of your goods
Safety Stock and Anticipation StockSafety stock is the additional inventory your eCommerce business buys to cover unexpected events, such as a shortage. The disadvantage of the safety stock is that it can have high carrying costs. The advantage is that it supports your customer satisfaction when products your customers want are available for purchase from your company.
Decoupling inventory is used to prevent work stoppages at each production line station. The coupling inventory only applies to companies that manufacture goods. This type of inventory is particularly useful if different parts of the production line work at different speeds.
Cycle inventory, also called working inventory, is the amount of inventory available to meet typical demand for a given time period, based on forecasts and historical data.
Service inventory generally refers to service businesses, such as a spa or restaurant. For example, let’s say you own a day spa, and a massage takes one hour to perform. Your spa has six massage therapists and is open nine hours each day. Your service inventory would be 54 hours per day, meaning you have 54 massage slots available each day.
Your theoretical inventory is the difference between your budgeted costs and your actual spending. For example, if your spa business allocates 12% of its budget on massage oils and other spa supplies, but its actual spend is 14%, your theoretical inventory is the 2% difference that was either lost or wasted.
Excess inventory, also called obsolete inventory, is goods or raw materials your company does not expect to sell or use but still must pay to the warehouse. An example of this might be T-shirts your company manufactured in anticipation of a team’s Super Bowl win that did not sell.
Each type of inventory requires different techniques for effective management. This is why there is no single “best” solution for every business.
What is Manufacturing Inventory?
Manufacturing inventory is your company’s products and goods in multiple stages of production. This includes raw materials, work in progress, and finished goods.
What are the Main Benefits of Inventory Management?
Inventory control, also known as inventory management, helps your eCommerce business to buy the right amount of inventory at the right time.
Inventory management helps your business minimize its inventory levels, reduce your storage costs, and prevent stockouts.
The primary benefit of effective inventory management is that it ensures you can fulfill customer orders on time and positively impact your company’s bottom line.
1. It Saves Your eCommerce Business Money
Effectively managing your company’s inventory saves your business money because your cash flow is not tied up in inventory or components sitting in a warehouse unsold.
In addition, this decreases the amount of stock you are holding that goes unsold before it becomes obsolete.
2. It Satisfies Your Customers
Ensuring your customers’ desired items are in stock when they are ready to buy and receive them on time is important in building customer loyalty.
Inventory Management Best Practices
To utilize your inventory effectively, you may want to consider employing these inventory best practices.
Managing your inventory helps you calculate your company’s profits, the cost of goods sold, and other important financial metrics. It helps you keep tabs on how much inventory you have on hand, and prepare for fluctuations in your sales.
Carry Safety StockYour eCommerce business should carry safety stock, also known as buffer stock to meet your customers’ needs as they occur. Safety stock ensures your business never runs out of the materials you need for production or the high-demand items your customers want.
Your safety stock serves as a backup if the supply chain slows or your sales increase unexpectedly.
Invest in an Inventory Management System (IMS) like SkuVault
Inventory management systems like SkuVault allow your eCommerce business to know in real-time where every product, component, or material is located.
When choosing an Inventory Management System, it is important to identify the key features your eCommerce business will need.
When in evaluating potential inventory management systems, look for:
- Real-time demand planning
- Robust data analysis tools
- Real-time data reporting
This critical data helps your business be more responsive to stock trends, up to date with the latest information, and flexible in your decision-making.
Use Cycle Counting
The cycle counting best practice means counting specific SKUs regularly. One way to accomplish this is to integrate it into the daily duties of your warehouse staff members.
Your business may want to utilize different standards for different types of inventory, with more regular cycle counting for popular and high-value items.
Cycle counting keeps your stock reconciled and your customers satisfied, saving your eCommerce business both time and money.
Use Batch/Lot TrackingUsing batch or lot tracking means recording information associated with each batch or lot of a specific product. This type of tracking is commonly associated with products such as food or pharmaceuticals, including expiration dates and sell-by dates. This practice can also be extraordinarily useful for companies that do not have perishable goods to understand your products’ shelf lives or landing costs.
Effective inventory management is a key component in determining whether your eCommerce business is profitable and provides excellent customer service.
SkuVault inventory management software can help eCommerce businesses of all sizes to effectively manage their inventory.