Any online retailer will tell you that maintaining optimal inventory levels is a never-ending challenge — a complex juggling act.
Which SKUs are selling more quickly than you expected?
Which products aren’t selling at all?
By the time you’ve figured out a good cadence, inventory levels have shifted once more. Inventory tracking is a continuous process if you want to reduce logistics costs while meeting customer demand.
What are the best levels of inventory?
The ideal quantities of products to have in a fulfillment center(s) at any given time are defined as optimal inventory levels. By optimizing inventory levels, you lower the risk of common inventory issues such as high storage costs and out-of-stock items.
Too much inventory can cost too much money, take up too much space on the shelves, and eventually become unsellable. However, having insufficient stock can result in stockouts and backorders, which can reduce customer satisfaction.
Here are a few things to think about when it comes to optimizing inventory levels:
- It will differ depending on the brand.
- Based on demand, each SKU may necessitate a different optimal inventory level.
- Inventory levels that are optimal can shift rapidly (monthly, seasonally, and annually as you grow).
Ultimately, inventory optimization becomes more complicated as:
- Your order volume grows.
- You are introducing more products.
- You broaden your physical reach.
Why is it critical to keep inventory at a healthy level?
Healthy inventory levels indicate efficiency and profitability throughout the e-commerce supply chain. By avoiding stockpiling too many or too few units, you improve cash flow, optimize warehousing capacity, and consistently meet customer demand, thereby fostering brand loyalty and trust.
Too much inventory can cost you money in the form of overspending on holding costs or, worse, sitting on a lot of inventory that has lost value or is no longer sellable.
Aside from ensuring optimal inventory levels, a better understanding of your stock levels can aid supply chain planning by determining the best time to reorder more inventory, as well as improve inventory accuracy.
How to Calculate the Best Inventory Levels
Determining the optimal inventory level requires some calculation and the ability to work backwards with past orders and inventory data. You also need to consider when to reorder your inventory. This ensures that after the order is placed, inventory arrives from the supplier in time for the order.
Here are three factors to consider, along with some best practices, when determining optimal inventory levels for your company.
- Lead times for inventory production
Understanding production lead times will allow you to make an informed decision about when inventory needs to be reordered in order to maintain desired levels of stock.
The time it takes your supplier or manufacturer to convert raw materials into finished goods after you place an order influences how much inventory you will have and when you will have it.
- Availability of emergency supplies
Extra e-commerce inventory set aside for unanticipated circumstances such as a sudden surge in orders or delays in manufacturing or transit is referred to as safety stock. You’ll need the following information to calculate safety stock:
- Maximum daily usage
- Maximum lead time
- Average daily usage
- Average lead time
Try this simple safety stock calculator to easily determine how much safety stock to keep on hand.
The economic order quantity (EOQ) formula is another excellent method for calculating the optimal amount of inventory on hand, including safety stock.
EOQ is an excellent method for determining the optimal amount of inventory to meet customer demand while minimizing e-commerce warehousing costs.
- Forecasting demand
Proper demand forecasting will allow you to make more accurate predictions on future sales demand in order to determine how much inventory you will require over a given time period.
Taking the time to forecast demand allows you to make better inventory decisions, which can affect logistics operations and financials, ranging from warehousing costs to staffing. Demand forecasting is rarely perfect, but it can provide you with better insights into your entire supply chain.
Best Practices for Keeping Inventory Levels at Their Optimal Levels
As previously stated, as your supply chain expands, maintaining optimal inventory levels becomes more difficult. One of the most important aspects of running an online store is maintaining healthy inventory levels because customers expect immediate order fulfillment.
To track inventory efficiently, each online store requires a different inventory management strategy, but here are some best practices for maintaining optimal inventory levels.
- Set up an inventory tracking system.
You can improve stock control throughout your distribution network by knowing how much of each SKU is located in each geographic location. Inventory management systems provide real-time access to stock levels across logistics centers and sales channels.
Implementing an inventory tracking system as your supply chain grows is a surefire way to efficiently allocate inventory by having complete access to real-time data.
- Determine the reordering points.
Manual inventory tracking is the last thing any business owner wants to do because there will be no time for anything else. Once you’ve determined your optimal inventory level, you can set reorder points to help automate the reorder process.
The minimum level of inventory that determines when it is time to reorder inventory is referred to as a reorder point. The reorder quantity you choose should take into account both customer demand and lead times. Most inventory apps also include a feature that alerts you when inventory levels reach a reorder point.
- Make use of an inventory management system.
Your distribution network can operate at peak efficiency with the right technology that complements the supply chain at every stage.
Implementing an inventory management system allows you to sync SKUs and orders in order to see all inventory, fulfillment centers, sales channels, and customers in one place. Many rapidly expanding online brands use inventory management systems to track inventory in real time and automate inventory tasks to save time and improve accuracy.
- Maintain open lines of communication with your supplier.
A clear communication with suppliers about your expectations and the new goods schedule is essential for effective inventory management. You should also be aware of any holidays or closures observed by your manufacturer, such as factory shutdowns.
Access to insights into your suppliers’ operations should be capitalized on and incorporated into your inventory tracking strategy. Your suppliers play an important role in your supply chain, so keep an eye on their performance over time.
- Conduct inventory audits.
Inventory audits and warehouse audits are undeniably time-consuming tasks, especially if you’re dealing with a large amount of inventory and manually tracking it all using spreadsheets.
Fortunately, conducting inventory audits on a consistent basis can be automated and digitized by syncing your online store with an inventory storage system or the fulfillment technology of a 3PL.