Inventory management has changed substantially in the last few years. Most fulfillment professionals spent years learning about lean inventory strategies, only to find those methods ineffective when the supply chain turned volatile during the COVID-19 pandemic. Now, as pandemic difficulties ease, many eCommerce and omnichannel professionals find themselves asking the question: How much inventory should I have?
The answer to that question can vary depending on the specifics of the inventory itself. For example, when supply chains were running smoothly, it was generally considered safe for eCommerce sellers to operate with 1 or 2 months of inventory on hand since they could confidently replace that inventory within 30 to 45 days from anywhere in the world. However, in the current environment, retailers may need to bring in 3 to 6 months of inventory to mitigate disruption risk.
Okay, So How Much Inventory Should I Have?
Inventory management gets tricky. Keeping the exact right amount of inventory on hand requires extremely accurate forecasting. In practice, however, forecast accuracy for eCommerce fulfillment is spotty. Making the wrong choice has bad consequences either way.
Carry too much inventory and you risk paying to store thousands of items you can’t sell. That inventory may also expire and require disposal, simultaneously driving both losses and costs.
Conversely, carrying too little inventory can result in stockouts. Then you have to decide whether or not to ship partial orders and pay duplicate freight costs when the back-ordered items finally arrive, or upset your customer by holding the entire order until all items become available.
To address the “how much inventory should I have” dilemma, consider these factors:
- Supplier location. How far away are your suppliers? How much risk lies between you and them? If you import most of your product from overseas, you will need to carry higher safety stock volumes to accommodate for longer shipping times. Between port backlogs, manufacturing delays, and shipping delays in the current market, orders that once took 45 days can now take 90 days or longer. But if you use domestic suppliers you trust, you can potentially afford to hold less inventory since replenishment is less risky.
- Inventory turn times. Retailers must know how fast products will sell before establishing ideal inventory levels. Underestimating your turn times can quickly turn your two months of inventory into a few days of inventory, leaving a significant gap between your stockout date and replenishment. Ideally, you should turn your inventory 3 or 4 times annually.
- Buffer times. At the height of the pandemic, some retailers faced buffer times up to 180 days. Though port congestion and supply disruptions still cause issues, those delays have eased noticeably. Generally speaking, current best practices would dictate that a retailer has 2 or 3 months of standard stock on hand, plus 2 or 3 additional months of safety stock.
- Perishability. When asking “how much inventory should I have,” consider expiration dates. If you can’t move the product before it expires, you end up paying months of storage fees for what ultimately becomes unsellable product. Worse, you may lose tens or hundreds of thousands of dollars in inventory.
- Temperature control. Many eCommerce businesses still choose to run tighter on inventory that requires temperature controlled storage. This leaner practice happens because temperature-controlled warehousing space comes at a premium, and carrying 8 or 10 months of a refrigerated or frozen product requires a fully dedicated facility.
- Ordering method. A decade ago, retailers preferred ordering in bulk so they could benefit from the lower cost per unit. However, as supply chains got leaner, batch ordering became much more popular. In the current environment, many eCommerce businesses have combined these two methods. Though bulk ordering is making a comeback, batch ordering remains the preferred method. Once you determine the amount of inventory you want on hand, you can then determine the batch size necessary to maintain it.
The volatile nature of today’s supply chain can make it difficult for online sellers to keep up with current best practices in inventory management, but a third party logistics provider can help. For example, at Amware Fulfillment, we help customers determine optimal reorder points for each product we fulfill on their behalf. In addition, we can send automated reminders to customers when inventory drops below a pre-determined threshold, helping to ensure the product gets ordered in plenty of time.
Amware’s team has experts from diverse backgrounds, enabling us to provide insights for retailers in virtually any industry. So, if you’re unsure what the answer is to the question “how much inventory should I have,” please reach out to start a discussion.