Your inventory is one of the biggest assets of your eCommerce business, but the task of monitoring it and keeping inventory costs at a minimum is a difficult one. This can be achieved by utilising an inventory management strategy to reduce risks and decrease eCommerce inventory costs, but this can be a challenging job.
In this article, we examine the various costs associated with inventory, the factors that influence them, how to monitor them and what can be done to better manage your stock.
What are eCommerce inventory costs and why are they important?
eCommerce inventory costs are the expenses associated with stock management. This can include the cost of goods, warehousing and shipping costs, as well as the opportunity cost of not selling inventory.
Inventory costs are important because they can have a major impact on your business’s bottom line – inventory is often one of the largest expenses an eCommerce business has.
The three categories of eCommerce inventory costs
When it comes to the categories of eCommerce inventory costs, there are three primary categories.
Ordering costs are the expenses associated with placing an order for inventory. This can include the cost of goods, as well as shipping and handling charges which are often overlooked when replenishing inventory. So be aware of the costs for a new batch of inventory and other associated fees.
Carrying costs are the expenses associated with storing and holding inventory before they are sold. This can include warehousing costs, as well as the opportunity cost of not selling inventory.
You need to consider costs such as insurance, warehouse rent, taxes, and labour wages, as well as replacement costs for those that are perished or damaged.
Stockout costs are those related to the loss of income and other expenses that result from the shortages of inventory.
If products that are out of stock are not logged correctly, the order will still be processed and you’ll run the risk of having to carry the refund processing cost, as well as losing out on a sale.
The types of eCommerce inventory costs
There are several inventory-related costs to consider:
Storage costs are the fees charged for storing inventory and can include warehousing costs, as well as the opportunity cost of not selling inventory. This includes security, rent, and employee wages.
These costs are the funds required to purchase inventory in the first place. This includes the cost of goods, as well as shipping and handling charges.
Theft and fraud lead to higher eCommerce inventory costs
Theft and fraud can be significant costs when it comes to inventory. This also includes the somewhat uncomfortable topic of employee theft.
Tax and insurance
Be aware of the taxes and insurance costs associated with your inventory. If you don’t have sufficient insurance in place, you put a lot of risk on your business further down the line, so get professional guidance here.
Damage and obsolescence
Make sure that you have adequate measures in place to protect your inventory from damage. Also, keep an eye on unsold inventory that may be reaching the end of its lifecycle. Both of these strategies, however, have the potential to become costly – a particularly painful sting when the product is too obsolete to even sell anymore.
Poor investment budgeting
Inadequate investment budgeting can lead to overspending on inventory, which can cause cash flow problems for your business. You should ensure that you deploy inventory investment with a well-thought-out plan and a meticulous budget. Define a clear budget for your inventory investments – and stick to it.
Now that we have covered the basics and some of the concepts around inventory costs, let’s take a look at some of the most common inventory errors that can prove costly and some of the ways you can reduce your eCommerce inventory costs.
Common eCommerce inventory errors
Here are a few common (and costly) eCommerce inventory errors that you need to avoid.
Understocking causes higher eCommerce inventory costs
Make sure that you don’t find yourself in a position where you are understocked. Products that are out of stock will frustrate potential customers, and they will most likely choose to go to a competitor instead – one who does stock their required products.
This also includes managing inventory post-product launch. When it comes to product launches, make sure you anticipate the demand for the product to avoid running out of stock immediately after launch, otherwise, you’ll end up losing customers who are not willing to wait for the next order to come in.
Always buying in bulk
While buying products in bulk can save you money, be wary of buying too much as you may risk the items reaching their expiration date or sitting in your warehouse for extended periods if they don’t sell as quickly as they should.
As we’ve covered, there are costs associated with holding stock. The longer you have it sitting around not generating revenue, the more it costs, so buying in bulk isn’t always the best move for products you aren’t confident will move quickly.
Siloing inventory management processes
Software that manages your inventory correctly ensures better visibility, coordination between team members, improved tracking capabilities and stock movement. However, for a variety of reasons, many companies give stock management capabilities to just a small select group of employees.
Avoid being in a position where you have bottlenecks in your inventory management by ensuring that all employees who should be able to manage inventory ordering and tracking have the access and the training to do so.
Not including inventory management when forecasting
With the right inventory management software, you can accurately track SKU (Stocking Keeping Unit) performance and average lead times. You’ll also be able to closely monitor your inventory turnover rate and then restock optimally as a result of making more accurate predictions based on established metrics.
Three factors affecting your eCommerce inventory costs
There are a variety of other costs to consider that may affect your inventory costs, outside of inventory storage, insurance, shipping and tax costs.
Low warehouse vacancy rates
Make sure that you consider limited warehouse vacancies when it comes to seasonal periods. You’ll find yourself in a challenging position to offload goods and make room for additional stock over peak periods. Furthermore, having to rent new space or dispose of old stock will again impact your total inventory costs.
Sudden change in demand
Demand for eCommerce products will ebb and flow throughout the year, driven by various factors. Consider things such as an influencer promoting a certain product, a product that receives bad press, or even geopolitical issues. All of these factors can impact the demand for your product and therefore your inventory costs.
Consider factors such as inclement weather and unexpected events which could disrupt the transportation of inventory to your warehouses. The impact of the COVID-19 pandemic on supply chains is a macro-level example of such disruption.
Three tips to keep eCommerce inventory costs low
Reorder stock appropriately
You need to find the right balance while maintaining an optimal level of inventory on an ongoing basis. To improve how you restock your inventory, use a variety of inventory metrics that you can track and review regularly such as
- Inventory Turnover Rate
- Days (or Weeks) on Hand
- Stock-to-Sales Ratio
- Sell-through Rate
- Backorder Rate
- Rate of Return
- Time to Receive
- Inventory Shrinkage
If you can’t easily get these products to hand, it’s probably time to invest in new inventory management software.
Removing dead stock lowers eCommerce inventory costs
Carrying too much stock can significantly impact your profits, so make sure they don’t sit on the shelves for a long time. This is where proactive tracking comes in. You’ll be able to avoid the accumulation of dead stock while making space for your higher-selling products.
Minimise picking and packing errors
No warehouse is perfect and mistakes will happen. However, having a high level of returns due to mistakes made by your inventory management personnel will eat away at your profit margins.
Not only will you have a disgruntled customer who will certainly tell your friends about the problem, but you will also have to absorb the cost of the return including the shipping, packaging, reshipping and repacking as well as the staff time you will lose to dealing with the issue.
Be wary of deals when managing inventory
For resellers, be wary of deals when it comes to managing inventories. If you are presented with a deal, for example, a “buy one, get one free”, consider if this is a supplier looking to dispose of dead or unwanted stock.
If you get it wrong, you’ll sit with an increase in carrying costs. It’s always best to be guided by the strategy you have in place for inventory management, no matter how intriguing an offer such as this may appear.
Let ParcelPlanet keep your eCommerce inventory costs low while you get on with running your business
If you are looking for an efficient way to manage your stock and meet the demands of your customers, then you should be considering a third-party fulfilment solution like ParcelPlanet.
As a complete eCommerce fulfilment service provider, we help eCommerce businesses keep their inventory costs down while exceeding customer expectations through our full range of services such as next-day delivery and returns management.
So, if you’d like to reduce your inventory costs and continue growing your eCommerce business, get in touch to speak with an experienced member of our team today.