Do you find yourself constantly stuck between overstocking or understocking? Or maybe you are finding it difficult to track stock levels. If so, you need to assess your inventory health.
Inventory health is one of the most critical factors for eCommerce success. With the rise of online shopping, customers expect to find the products they want in stock and be able to receive their orders quickly. However, maintaining sufficient inventory while minimizing excess stock is a delicate balancing act. Inventory-related costs are estimated to account for 30% of the total retail supply chain costs.
Optimizing inventory health involves having enough stock to meet customer demand while keeping inventory costs low. It requires balancing procurement, forecasting, and warehouse operations. With omnichannel retailing, inventory needs to be visible and optimized across all sales channels. Getting inventory health right leads to improved customer satisfaction, greater sales and margins, and lower operational costs.
What is Inventory Health?
Inventory health refers to how optimized and efficient a business’s inventory system and management processes are. At its core, inventory health comes down to having the right amount of each product available to meet customer demand and prevent overstocking or shortages.
For eCommerce businesses, inventory health is critical for success. With customers unable to see and touch products in person, having accurate inventory visibility and tracking is essential for providing good customer service, avoiding lost sales, and running operations smoothly.
Some key aspects of inventory health include:
- Inventory Accuracy: Having precise counts of what products are in stock and where they are located. This prevents fulfilling orders with the wrong items or overselling inventory that is not available.
- Turnover Rate: How quickly inventory sells through. Higher turnover means less cash tied up in inventory and reduced storage needs. Slow turnover can indicate excess stock or low-demand products.
- Stockout Percentage: The percentage of time a product is out of stock when a customer tries to order it. High stockouts lead to lost sales and poor customer experiences.
- Excess Stock: Having too much extra stock wastes money and resources. Effective inventory management matches supply closely to demand.
- Seasonality: Accounting for seasonal and time-of-year fluctuations in demand for certain products.
3 Key Indicators of Measuring Inventory Health
An eCommerce business needs to monitor some key metrics to measure the health of its inventory. Keeping track of these metrics helps identify problems and opportunities to optimize inventory.
Below are some of the most important indicators of inventory health.
1. Stockout Percentage
The stockout percentage is the percentage of time a product is out of stock and unavailable to customers. Too high of a stockout percentage means you are frequently running out of products. This frustrates customers and leads to lost sales. Ideally, you want stockout percentages under 2-3%. If the stockout percentage rises higher, it’s a sign to adjust inventory levels.
2. Dead Stock Percentage
Deadstock refers to products that haven’t sold for an extended period, perhaps 6 months or more. A high dead stock percentage indicates stagnant inventory taking up space in the warehouse. It ties up cash flow and incurs storage costs. Calculating the percentage of stock that is stagnant reveals how effectively inventory is managed. Striving for under 5% deadstock is a reasonable goal.
3. Inventory Turnover Ratio
The inventory turnover ratio shows how many times a year the average inventory sells out and is replaced. A low turnover ratio means inventory sits for a long time. A high turnover indicates brisk sales and restocking. However, an extremely high turnover over 10.0 starts increasing stockout risk. A healthy target for most eCommerce sellers is an inventory turnover ratio between 5-8. This shows inventory is moving at a productive rate.
Monitoring stockout percentage, dead stock percentage, and inventory turnover provides quantifiable visibility into inventory health. Action can be taken once targets are missed for these key indicators. With real-time tracking, problems can be caught early before they escalate.
Common Threats to Inventory Health
Managing inventory is a balancing act. When goods aren’t moving as expected, inventory can quickly become unhealthy.
Common threats to inventory health include:
- Excess Inventory: Having too much-unsold stock ties up working capital and leads to carrying costs for storage and maintenance. The excess stock also increases the risk of markdowns, spoilage and obsolescence.
- Stockouts: Running out of key items results in missed sales opportunities and poor customer satisfaction. Customers may turn to competitors when faced with stockouts.
- Dead Stock: Keeping slow-moving or obsolete products for too long leads to working capital being trapped in unproductive inventory. Deadstock should be discounted, returned, or discarded.
- Shrinkage: Inventory loss from theft, damage, spoilage or accounting errors depletes available stock and impacts profitability. Shrinkage should be minimized through security, worker training, and audits.
How to Optimise Inventory Health?
Inventory health optimization starts with understanding customer demand and aligning inventory levels accordingly.
Here are some best practices for optimizing inventory health:
1. Demand Forecasting
- Leverage historical sales data and seasonality trends to create demand forecasts. Account for spikes around holidays, promotions, and new product launches.
- Use predictive analytics to increase forecast accuracy based on changing market conditions and external factors. Continuously refine the forecast model.
- Create separate demand forecasts by product, category, location, channel etc. Granular forecasts enable better inventory planning.
- Collaborate with stakeholders in sales, marketing, procurement etc. to gather qualitative insights that augment the quantitative forecasts.
- Build in buffers for uncertainty but avoid inflating forecasts unnecessarily as it ties up working capital.
2. Inventory Optimization
- Set target inventory levels aligned to the demand forecasts for each product/location while balancing service levels and costs. The stock is just enough to fulfill demand.
- Employ inventory optimization tools to recommend ideal stock levels and reorder points based on forecasts, lead times, variability, etc. Continuously adjust parameters.
- Classify inventory by sales velocity – high, medium, low – for differentiated management. Focus on aligning high-velocity inventory closely to demand.
- Maintain lower extra stock of slow-moving inventory subject to obsolescence risks. Keep buffer stock at central locations rather than each store.
- Reduce surplus inventory buildup by monitoring inventory performance KPIs like days-of-supply, excess stock, stockout %, etc. Take corrective actions promptly.
3. Warehouse Management
- Use a warehouse management system to enable real-time visibility and tracking of inventory by location. Ensure high pick and putaway accuracy.
- Replenish pick-face locations dynamically based on demand. Use wave planning to sequence order picking efficiently.
- Employ barcoding, and RFID for inventory tracking. Conduct cycle counts for proactive correction of errors.
- Streamline storage by clustering fast-moving items, and keeping aisles clear. Follow FEFO for perishables and obsolescence-prone products.
- Continually optimize warehouse layout, storage allocation, material flows etc. as the inventory profile evolves.
Read Also: Strategies to Handle Inventory Glut
How ShipTop Improves Inventory Health?
ShipTop helps eCommerce businesses optimize their inventory health using our proprietary order fulfillment software and nationwide fulfillment center network. Our technology and services address the key elements needed for robust inventory management:
1. Real-time visibility into inventory levels
Our fulfillment software integrates with your sales channels and inventory management system, providing 24/7 visibility into stock levels across all your warehouse locations. You can access real-time reporting to spot low stocks or dead inventory before it becomes a problem.
2. Optimised inventory planning
Our algorithms leverage your sales history and forecasting data to recommend ideal inventory levels and reorder points for each product. This takes the guesswork out of planning and reduces the risk of tying up too much capital in excess inventory.
3. Automated reordering and replenishment
Once configured, our system can automatically generate purchase orders to your suppliers when stock for a product reaches its reorder point. This ensures you never miss a re-order and minimizes the risk of stock-outs.
4. Warehouse management
Our strategically located fulfillment centers are equipped with warehouse management technology for efficiently receiving, storing, picking, packing, and shipping inventory. This provides scalable fulfillment capacity and excellent inventory accuracy.
5. Unified order management
We centralize your inventory from all warehouses and sales channels into one unified order management system. This gives you a single source of truth for inventory data and prevents over-selling of stock.
Conclusion
Maintaining strong inventory health is essential for the success and growth of any eCommerce business. By actively monitoring and optimizing your inventory health, you enable your business to operate efficiently, avoid costly problems, and provide customers with a positive shopping experience.
Optimized inventory reduces carrying costs, storage fees, and waste. This improves your cash flow and profit margins.
By partnering with an eCommerce fulfillment provider like ShipTop that leverages technology and supply chain expertise, eCommerce businesses can gain the infrastructure and support needed to optimize inventory health. The right solutions enable you to scale your inventory efficiently, avoid costly missteps, and focus on sales growth. Investing in inventory health delivers a significant competitive advantage in the fast-paced eCommerce landscape.
Discover how our strategic approach to inventory process management delivers results. Get in touch with us to discuss how ShipTop can help take your eCommerce business to the next level with the right eCommerce fulfillment strategy.
