Understanding inventory management

Inventory management involves the monitoring of your business's inventory, such as any raw materials, components, and finished products. This guide offers strategies and practices to help you manage inventory effectively.

You can manage and monitor your inventory from the Inventory page of your Shopify admin.

Understanding your inventory sales cycle

To manage your inventory successfully, you need to understand your sales cycle. You can analyze your past sales data to help you identify patterns and forecast future sales.

An inventory sales cycle refers to the entire process from when a unit of inventory is received by a business to the point when it's sold to the final customer. This cycle includes the stages of receiving, storing, managing, and selling the inventory. Cycles repeat for each new inventory item.

You can view metrics about your product inventory that help with inventory management, restocking, and planning, on the Products page with the product inventory analytics bar. Learn more about how to use inventory analytics.

A typical inventory sales cycle for an item might include the following stages:

  1. Procurement: Identify the need for a particular product in your store and place an order with your supplier to procure the goods.
  2. Receiving and inspection: Inspect the inventory quality and quantity to make sure that it matches what you ordered. Report any discrepancies or damage back to the supplier.
  3. Storage: Store items based on their type and requirements. Proper storage practices are important for preventing damage or loss of inventory.
  4. Inventory management: Manage your stock levels on the Inventory page of your Shopify admin to track the quantity of each item in your store. Categorize items, set up SKUs, and update your inventory records regularly.
  5. Sales: When customers place orders, your inventory is sold to customers and your inventory levels are automatically updated in your Shopify admin.
  6. Delivery: Pack and ship the product to your customer. To maintain customer satisfaction, ship products quickly and use trusted delivery services.
  7. Reorder: Based on the sales data and current inventory levels, you decide when to reorder the product. You can use your store's inventory analytics in Shopify to help you understand sell-through rate and forecast sales.
  8. Customer feedback and return management: Collect customer feedback, and handle any returns or exchanges. Customer feedback can be useful for future inventory planning.

Inventory management methods

There are different methods for making sure that your business has the right products available at the right time, at the same time minimizing costs and satisfying customer demand.

Choosing the right method for inventory management depends on various factors such as the business model, type of products, demand variability, and supplier reliability. Businesses often use a combination of methods to optimize their inventory management.

Review the following table for an overview of some common methods used for inventory management:

Inventory management methods
Economic Order Quantity (EOQ)EOQ is a method that calculates the most cost-effective amount of an item your business should order. The aim is to minimize the costs associated with ordering and holding inventory. This method balances the cost of inventory storage with the cost of ordering.
Just-In-Time (JIT)The JIT method aims to increase efficiency and decrease waste by receiving goods only as they're needed in the production process, thereby reducing inventory costs. It requires accurate forecasting and reliable suppliers.
ABC AnalysisThis method involves categorizing inventory into three classes based on their importance: 'A' items are high-value products with low sales frequency, 'B' items are moderate-value products with moderate sales frequency, and 'C' items are low-value products with high sales frequency. This allows businesses to focus on managing their most valuable products. Learn more.
Safety StockSafety stock is a small surplus of inventory kept on hand to guard against variability in market demand or supply delays. This method helps prevent stockouts, maintaining customer satisfaction.
Perpetual Inventory ManagementThis method involves maintaining real-time updates to inventory records as sales and purchases happen. It provides accurate inventory counts and can be automated with inventory management software.
First-In, First-Out (FIFO)FIFO is a method of inventory valuation where the assets produced or acquired first are the ones sold, used, or disposed of first. It's especially crucial for perishable goods, but is generally good practice for all types of products to prevent items from becoming obsolete or suffering deterioration.
DropshippingDropshipping is a fulfillment method where a store doesn't keep the products it sells in stock. Instead, when a store sells a product, it purchases the item from a third party and has it shipped directly to the customer. This method eliminates the need for inventory stock management.
ConsignmentIn the consignment method, goods are sent to the consignee, but the consignor (supplier) remains the owner of the goods until they're sold. This method reduces risk for retailers as they only pay for the stock that they sell.

Complete inventory checks

To make sure your records match your stock on hand, you can physically check your inventory on a regular basis. Inventory checking, also known as stocktaking, is an essential practice for any business dealing with physical goods. Accurate inventory management is important for business success to help you make sure that you have enough stock to meet customer demand, identify and prevent issues, such as theft or loss, and learn valuable information for planning.

The following are the basic steps to guide you through the stocktaking process:

  1. Plan: Decide when the stocktake will occur, who will do it, and which areas or items will be counted. It's often best to conduct stocktakes during quiet periods or when the business is closed to avoid discrepancies due to sales happening during the count.
  2. Organize: Ensure your inventory is well-organized. Label all items and arrange them in a manner that is easy to count. Arrange items by type, location, or any other method that makes sense for your business.
  3. Set up your tools: Use inventory management tools or software to streamline the process. You can use pen and paper, a spreadsheet, or specialized inventory management software. Barcode scanners can also speed up the process and reduce errors.
  4. Count: Make note of each item carefully and record the quantity. It's often a good idea to have two people involved - one to count and the other to record. Be sure to check all areas where stock might be held, including storage areas, shop floors, and any off-site locations.
  5. Count again: Conduct a second count for verification. This is especially important for items with discrepancies between the counted quantity and the recorded quantity in your system.
  6. Update your records: After the count is completed and verified, update your inventory records with the new quantities.
  7. Analyze: Compare the results of the stocktake with your inventory records. If there are significant discrepancies, then you might want to investigate the possible causes. This could highlight issues with theft, damage, misplacement, or errors in purchasing or sales records.
  8. Regularly repeat: Check your inventory regularly. The frequency of inventory checks depend on your business type and size. Some businesses conduct full stocktakes annually, with smaller checks on high-value items more frequently.
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