Inventory management

Online business: Warehouse and inventory management

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Inventory management is a fundamental element of any commercial activity, whether traditional or online. Those with experience in the commercial sector certainly know how complicated inventory management can be: establishing a link between the accounting situation and the physical inventory of a store can prove to be complicated, especially with chaotic and approximate management.

Efficient inventory management is therefore essential for balancing the accounts and maximising profits. In fact, inventories represent fixed capital which, by way of sales, is expected to translate into revenue.
Only by carefully monitoring stocks can you:

Avoid running out of products, with the loss of potential sales.
Implement commercial strategies aimed at optimising earnings.

In this article, we'll look at what inventory management is and how Amazon can provide you with effective support in this fundamental task.

What is inventory management?

Inventory management means tracking your products in the warehouse, identifying their weight, size, quantity and location. The aim of this service is to minimise the costs associated with inventory management, allowing you to know when to replenish your inventory by purchasing or manufacturing new items.
Having direct inventory control means monitoring available stocks by way of effective processes.

Importance of inventory management

Proper warehouse inventory management guarantees a level of stock that meets customer demand, protecting you from potential economic losses. If your stocks are insufficient, you risk not being able to keep up with demand and losing sales. By contrast, if your stocks are excessive, you risk wasting money buying goods that then remain unsold and take up useful space. There are several other reasons why warehouse inventory management is essential:

Avoiding deterioration of goods
If you sell products with an expiration date, such as food, make-up or personal care products in general, you may run the risk of deterioration if stocks are not disposed of by the expiration date. For this reason, effective inventory management helps you avoid unnecessary waste.
Preventing warehouse stock
Stock that remains unsold, but not necessarily because it has expired, may be unsuitable for the season, unfashionable or unattractive to the public. By adopting a smart strategy, you can avoid this costly inventory mistake.
Saving on warehouse costs
Warehouse costs are often variable, depending on the quantity of goods in stock. If you have excessive supplies or if a product proves difficult to sell, storage costs will rise. Avoiding these situations will save you money.
Improve cash flow
Proper inventory management rationalises costs and, at the same time, helps to increase cash flow. The inventory consists of products that have often already been paid for, but as long as these goods remain unsold, they are not equivalent to cash. This has a direct impact on your sales and expenses, affecting how much you can sell and how much you can buy.

Every company with a proprietary warehouse should set this as its primary objective: to eliminate the possibility of human error from inventory management processes. This goal can be achieved using computerised software or by relying on a company like Amazon, which, with its logistics support, aims to meet the needs of sellers.

However, regardless of the system you wish to use, the following techniques can improve your inventory management, increasing cash flow:

Guarantee of standard stock levels
Simplify warehouse inventory management by setting a standard stock level for each product. By "standard level", we mean the minimum quantity of a product that you should always have available. When the inventory in your warehouse falls below the pre-set levels, you'll know it's time to stock up.
Ideally, you should never order more than necessary, but only the minimum quantity of product that will allow you to return to above the “standard level”. Standard levels vary depending on the speed of sale and product replenishment times. To determine these times, you will need to start an initial search and make some decisions, but on the other hand you can automate the ordering process. This has two advantages: you'll make faster decisions, and your staff will also be able to determine when to restock the products.
Remember that conditions change over time.
Evaluate the standard levels a couple of times a year to check that they are still appropriate. If changes occur, don't hesitate to increase or reduce standard stock levels.
FIFO method (First In, First Out)
From a logistics perspective, FIFO (“First In, First Out”) represents a method of storing goods in which the first element introduced is the first to leave. In other words, the FIFO logic assumes that the first goods purchased (first in) are also the first to be sold (first out), making sure that only the items that arrived last remain in stock.
The FIFO method is, in general, the most frequently used in warehouse management as it allows quick replacement of goods, preventing them from becoming unsellable due to too much time passing. This method is therefore particularly suitable for perishable goods subject to an expiration date.
To implement the FIFO method, you need to have a well-organised warehouse. Generally, new products are added at the bottom and the older packages are placed in front of them.
LIFO method (Last In, First Out)
LIFO (“Last In, First Out”) is the opposite method to FIFO. The most recently purchased goods (last in) are sold first (first out).
This method is preferable when prices are constantly rising; in this case, the stocks purchased last have a higher cost, which translates into a lower profit and a lower taxable capital. This is the main reason and situation in which to use LIFO.
However, LIFO is one of the least used management methods, because keeping stocks of older items in the background can make them obsolete and unsellable at the time of sale. It is also a method that cannot be used for products with an expiration date. The main advantage of this method is that the value of the older products that are already in stock allows the company to keep capital in stock that it can use when it deems most appropriate, making the products almost speculative stocks.
JIT (Just-In-Time) method
JIT (acronym for “Just in Time”) is a method created in the 1950s in Toyota's automotive factories. Designed for industrial production, it is now also used in warehouse management. The underlying concept is to send only the product sold into production. In this way, the warehouse has a stock of products that will definitely be sold. This method has a certain inherent risk component even if effective inventory management greatly mitigates this factor. With the JIT method, you keep the minimum amount of stock necessary to meet demand and have the opportunity to stock up before the products run out.
This method requires careful planning and accurate forecasting. It works well for rapidly growing companies, such as for the launch of a new product or a new line of products.
Ensuring good relationships with suppliers
Inventory management isn't always linear. Therefore, the individual seller must be able to deal with problems that may occur unexpectedly. For example, you may have to return an item that does not sell to the supplier to make room for a new product, or you may find that you need to quickly restock an item that has sold better than expected. Having a good relationship with the supplier can help to resolve these inconvenient situations.
Also consider that minimum order quantities are often negotiable, so it is possible to negotiate this quantity with the supplier to avoid finding yourself with excess stock.
From a business perspective, in order to forge good relationships with your supplier, you need to adopt clear and proactive communication. If sales increase, or if you’re planning to place multiple orders, notify the supplier in advance so that they can adjust their production. Ask to be notified when a product is out of stock, so that you can suspend promotions or temporarily search for another supplier.
Emergency actions
As mentioned in the previous point, warehouse inventory management can sometimes run into various problems that may bring your operations to a halt if they catch you unprepared. There are an endless number of emergency situations. The most common are summarised below:

Sales increase unexpectedly, and you find yourself accepting a quantity of orders that exceeds the available stocks.
You lack funds, and you can't pay for a product you need.
During the peak sales season, there is not enough space available in the warehouse for you.
Due to a miscalculation, you end up with a lower quantity of product than expected.
A product remains unsold and takes up all the space for storing goods.
The manufacturer is out of stock of an item, but you still have orders to fulfil.
The manufacturer stops manufacturing an item without notifying you.

You don't have to ask yourself “if” problems will arise, but “when”; try to have a contingency plan that is always up to date.

Regular checks
Regular inventory management is critical. Generally, software and reports are used to determine the quantity of stock available in the warehouse. However, you should make sure that the data accurately reflects reality. There are several methods to do this.

Physical inventory
To make a physical inventory, you will need to count all the goods available in the warehouse. Many companies carry out this operation at the end of the year, because it is linked to accounting and the payment of turnover taxes. Although this task is normally performed only once a year, it can be burdensome and tedious for traders. In fact, in the case of a discrepancy, it is not always easy to identify the problem when you have to look back over the entire year.
Sample checks
Do you count your entire physical inventory at the end of the year and often run into problems, or do you find yourself struggling because you have a lot of products? You may need to start doing sample checks throughout the year. It is simply a matter of choosing a product, counting the quantity actually in stock and comparing it with the theoretical quantity. This is not a task that needs to be done at regular intervals and serves to complement the physical inventory. In particular, you may wish to carry out sample checks on problematic products or products that you sell in high volumes.
Cycle counting
To verify the inventory, instead of carrying out a complete physical count, some companies use cycle counting. This involves checking a different product every day, week or month. There are different methods for determining which items to count and when, but in general the check should be carried out more often on higher-value items.

ABC analysis
Some products generate more revenue than others. You can classify stocks based on the percentage of revenue they produce, according to three classes defined as ABC:

Class A items: these correspond to the top 20% most valuable items in your inventory, are high-turnover items and are the most important strategically. They generate a lot of revenue and are essential for the operation of the company. Since they are usually subject to high movement, it is recommended to place them in easily accessible areas of the warehouse or near loading areas.
Class B items: these have a lower rotation and a lower value than those in class A, but they should still be monitored carefully, because their class may change. Supply management for this type of product may be based on the minimum stock. In the warehouse, they should be located in areas with average accessibility.
Class C items: these are lowest in value, but highest in volume (usually at least 50% of the warehouse). Supply management for this type of product may be based on the safety stock. These are the least strategic goods, which can be distributed in higher and less accessible areas of the warehouse.

Accurate forecasting
Good inventory management is largely based on accurate demand forecasting. It is incredibly hard not to make mistakes. There are countless variables to consider. Even though you'll never know exactly what to expect, you can try to get a more accurate estimate.
Here are a few things to consider when you're projecting future sales:

Market trends.
Sales made in the same week the previous year.
Current year's growth rate.
Seasonality and general economy.
Planned promotions.
Planned advertising campaigns.

Safety stocks
Safety stocks are a reserve for emergencies, and it's a good idea to include them in your inventory management strategy. You can draw on it in cases of need, such as damage to the goods, a surge in demand, an interruption to the distribution chain or some other unforeseen circumstance.
The reasons for establishing safety stocks are:

to prevent delays in supply;
to respond reactively to increases in demand;
to prevent inefficiencies due to incorrect sales forecasts;
to prevent production failures due to machine breakage.

Safety stocks help resolve any imminent problems. The disadvantage is that you will find yourself with larger amounts of stock, and therefore fixed capital and a greater occupied area in your warehouse.

Reorder point
The reorder point lets you know when it's time to replenish stocks. In essence, to avoid affecting safety stocks, when reordering you will have to take into account supply times and possibly anticipate the order.
The calculation of the reorder point is essential for effective inventory management. This is a complex operation, especially if you sell many products. Everything is simpler if you make the decision to automate inventory management.
What is the best inventory management system?
Many stores start by managing inventory manually using simple tables, but this method quickly becomes inconvenient, especially if you set yourself growth objectives. A larger business also increases your exposure to the risk of human error, and results in lost time and money.

It is preferable to use software for inventory management, because it allows you to easily monitor stocks, guaranteeing additional advantages, such as warehouse alerts, automated purchase orders, inventory reports and the ability to create accounts and authorisations for various users. When combined, the functionality of the software gives you complete control over inventory, providing you with key information on the movement of goods from suppliers to customers, and all the steps in between.

As we have seen so far, warehouse management is particularly complex and requires specific skills and a significant investment, not only in terms of money, but also in terms of time that could be used to focus on sales and the subsequent development of your business. With its FBA programme, Amazon offers excellent support because all inventory activities are carried out by Amazon itself. Thanks to Amazon FBA, your products will be stored in Amazon fulfilment centres, which will handle the management of your warehouse, the selection, packaging and shipping of your products, and, if necessary, customer service.

The main advantage of Fulfilment by Amazon is not having to have a proprietary warehouse, because Amazon gives you the option of using its own.

In addition, the seller will no longer have to deal directly with stock-taking, with all the problems that this entails. As a result, the seller will have more time to devote to core business activities, such as marketing and sales. Obviously, the costs of the service must be taken into account; these consist of the fulfilment fee, which is a fixed rate based on the size and weight of the product, and a storage fee, based on the cubic metres of space actually used inside the warehouse. These rates, plus selling fees, have a significant impact on the profit margin. Consequently, if the volume of business is minimal, the system is often unsuitable. Furthermore, while allowing a third party to manage shipping and customer service is a good thing, the negative aspect is the loss of direct contact with the customer and all the associated loyalty techniques.
When it comes to inventory management by Amazon, one positive factor is that it is always managed in a precise and professional manner.

Amazon also generates a series of reports that provide a precise overview of your inventory in terms of sales, shipping status, fees and units in stock or excess stock to help you identify and take the necessary steps to deal with any adverse event.
The following reports can be generated with Amazon:

Amazon Inventory Management
As an Amazon selling partner, you'll need to become familiar with the features of the inventory that the company provides. Even if the inventory on Amazon is managed through an external system, this is based on the data contained within your account on Seller Central. You will therefore need to become familiar with the inventory data that Amazon provides and with the control options that you have in Seller Central.
The first step is the “Manage Your Inventory” page. You can use this page to quickly control many types of data relating to the products placed on Amazon and carry out all sorts of manual adjustments based on inventory, such as:

View active, inactive and removed products.
Add a product to the inventory.
Change the quantity of product available.
Change the price.
Check the selling partner's fees for each product.
See the stock levels managed by Amazon or the selling partner.
Track shipments fulfilled by Amazon at every step.

Clearly, if you manage a substantial inventory, it is possible to change and update the data by uploading a file containing all the products or links to third-party software. To learn more about inventory analysis, you can also rely on Amazon Tutor, a section of Seller Central that offers useful inventory management tools on Amazon.
With Amazon Tutor, you can check product sales trends and see the estimates suggested by Amazon for how many days the current stock level will last. This helps to accurately predict purchases related to the inventory, based on current sales data.
Amazon Tutor also sends notifications when stock levels are low, by email or on the Amazon Seller smartphone app. This lets you know when it's time to reorder within the time set for each product and helps to minimise the risk of running out of stock, to avoid lost sales and lower search rankings.

What's the difference between inventory management and stock management?

Inventory and stock management are two similar terms that can be easily confused. To better understand the difference, it's important to know that the term "inventory" involves not only the products you sell but also the materials and equipment needed to make them, while "stock" refers specifically to the final goods available for sale to customers.

While both inventory management and stock management involve overseeing the flow of goods, they differ in focus and scope. Inventory management involves the entire process of controlling and monitoring all aspects of a company's inventory, including procurement, storage, tracking and optimisation of inventory levels to meet demand and minimise costs.

Stock management, by contrast, typically refers to the more operational aspect of managing the physical stock on hand, such as organising, storing and replenishing products in warehouses or retail stores. While closely related, understanding these distinctions can help businesses implement more effective strategies for both inventory and stock management.

Conclusions

Inventory management depends on many factors; it is hard to find a formula that works for every type of seller.
How orders are fulfilled and how cash flow is managed are all elements that play a fundamental role in inventory management decisions.
Sellers who deal with few products have vastly different inventory needs from those of multi-channel sellers who store and reorder large volumes of product. Whatever the sales model, however, it is crucial to understand what problems may arise and how to deal with them.
Amazon, with all the free inventory management tools available on its website, allows you to reorder stock based on key data, ensuring professional and user-friendly inventory management.

FAQ

What is inventory management?

Why is inventory management important?

The main reasons are:

To avoid deterioration of goods.
To prevent warehouse stock.
To allow you to save on warehouse costs.
To improve cash flow.

Which methods are used to improve inventory management?

The main methods to improve inventory management are the following:

Ensure standard stock levels.
FIFO method (First In, First Out).
LIFO method (Last In, First Out).
JIT method (Just-In-Time).
Guarantee good relationships with suppliers.
Emergency actions.
Regular checks.
ABC analysis.
Accurate forecasts.
Safety stocks.
Reorder point.

Is one inventory system better than the others?

No one inventory system is better than the others; it all depends on your business, the product you sell, and the quantities. In general, in order to be valid, an inventory system must allow you to save time and money by avoiding possible errors.

Does Amazon manage inventory?

Yes, through Fulfilment by Amazon, commonly known as Amazon FBA, through which Amazon also deals with the warehouse, selection, packaging and shipping, and customer service for your products. The main advantage of Fulfilment by Amazon is not having to have a warehouse, because Amazon gives you the option of using its own.

What are the reports that I can generate on the Amazon site if I entrust them with managing my inventory?

Amazon allows you to generate multiple reports free of charge that allow you to always keep your inventory situation up to date, helping you to better deal with any adverse situation. The following reports can be generated with Amazon:

I would like to learn more about the inventory analyses offered by Amazon. Is there any support for this?

To learn more about inventory analysis, you can also rely on Amazon Tutor, a section of Seller Central that offers useful inventory management tools on Amazon.
With Amazon Tutor, you can check product sales trends and see the estimates suggested by Amazon for how many days the current stock level will last. This helps to accurately predict purchases related to the inventory, based on current sales data.
Amazon Tutor also sends notifications when stock levels are low, by email or on the Amazon Seller smartphone app. This lets you know when it’s time to reorder each product and helps to minimise the risk of running out of stock, to avoid lost sales and lower search rankings.

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