As an eCommerce professional, one of your trickiest problems is to determine optimal eFulfillment inventory levels. You never want your inventory to drop to zero. At the same time, you don’t want your money tied up in products that sit on fulfillment warehouse shelves, gathering dust and costing you money.
Finding the perfect balance between too little and too much inventory is a constant process of assessment and adjustment. Here are some tips for smarter eFulfillment inventory management.
How to Set E-Fulfillment Inventory Levels
Before you set eFulfillment inventory levels that will keep your third-party logistics provider’s shelves fully stocked, you should understand the flow of your production and fulfillment process. How long does it take for your manufacturer to fill an order? How quickly does your 3PL provider process new inventory and returns? How long are your customers willing to wait to receive an order?
Understand Your Production and eFulfillment Pipeline
To see how production affects your eFulfillment inventory, let’s look at an example. Emily designs garden sculptures and has them manufactured in a factory in Ohio. She sells statues of gnomes, birds, and other creatures through her online shopping site, Emily’s Garden. These pieces are shipped to homeowners from her fulfillment center in Tennessee.
When Emily reorders inventory, it takes her Ohio manufacturer six weeks to craft the statues and ship them to her fulfillment warehouse. If she runs out of her happy gnome statue, impatient gardeners will click over to her least favorite competitor, Gnarly Gnomes. She doesn’t want that to happen.
To keep from running out of stock, Emily looks ahead. To do that, she needs to understand her business patterns.
Use Research to Help You Plan Stock Levels
The first year Emily was in business, she made her best guesses about what would sell and when. She ended up with some items sitting around (the cement flamingos went over like, well, a cement flamingo) and ran out of others (her ravens practically flew off the shelves).
While Emily couldn’t predict the future of her new business, she didn’t go into it completely blind. She read articles on eCommerce shopping patterns. She pored through manufacturing statistics and other resources on the Small Business Administration website. She explored her competitors’ websites and used tools like Google Trends to see what designs were popular in the marketplace.
Look for Patterns in Your Ecommerce Sales
Emily did one very smart thing from day one: she kept meticulous records of her sales. As the years went on, she was able to create charts that showed her patterns that repeated from year to year. Spring was a busy time, as she had expected, but she also discovered that she sold a lot of statues in November and December. Her garden decorations made popular Christmas presents, especially in the Southwest. She saw that customers tended to buy larger statues in the spring and smaller ones in the fall.
Understanding these patterns allowed Emily to schedule exactly when she should reorder stock for each design. She might have a dozen grumpy gnomes in inventory in February, but she knew that she should still order five dozen more to be ready to beat Gnarly Gnomes to the buy button in April and May.
Can My E-Fulfillment Warehouse Help Me Find Inventory Nirvana?
Emily initially overlooked one of her best sources for eFulfillment inventory assistance: her 3PL provider. In fact, she had to switch fulfillment warehouses twice in her first year because of problems with inventory handling that cost her sales.
By the third time, Emily knew the right questions to ask, and she settled on a fulfillment warehouse that helps her keep her inventory at just the right levels.
Reduce Out-of-Inventory Time
Because Emily’s garden statues take some time to create, she can’t afford to have her products sitting on pallets on the loading dock at the fulfillment warehouse for days. She looked for a 3PL provider who guaranteed to take her products off the truck and put them into their inventory system in two days or less.
Returns are another big issue for Emily. She doesn’t get many of the statues back (she doesn’t like to brag, but her gnomes are ‘gnumber’ one). When she does have a return, she doesn’t want that piece to be out of inventory for any longer than is necessary. She chose a fulfillment center that processes returns quickly so that each gnome can find a new home.
Just Say No to Inventory Shrinkage
One of Emily’s worst eCommerce fulfillment upsets was the week she spent trying to figure out why her fulfillment warehouse couldn’t send a statue of a toad on a toadstool to one of her very best repeat customers. Her inventory said that she had the piece in stock, and the fulfillment center also showed it in inventory. On the shelf, however, there was no toad.
Emily was the victim of inventory shrinkage. To calm her irate customer, she had to give him a deep discount on his next order. And her stock was just gone—poof!
Emily looked for a fulfillment provider who guaranteed reimbursement for stock lost or damaged in its warehouse. At Red Stag Fulfillment, we think this is one of the policies that makes us stand out from the pack. We take your inventory just as seriously as you do. Missing toads upset us, too.
The E-Fulfillment Inventory Backup Plan
Emily’s statues are expensive, as is the large amount of space it takes to store them. She doesn’t want to have any more of her business capital tied up in inventory than is absolutely necessary. She needed one more tool to make sure that she never ran out of stock.
That’s why Emily figured out how much safety stock she should keep, and you should too.
What is Safety Stock?
Emily can’t anticipate everything. Blizzards may add unexpected days to delivery times. A power outage can bring production at her manufacturer to a standstill.
That’s why Emily’s inventory calculations include safety stock. Safety stock is the perfect amount of extra inventory she needs to protect her eCommerce business from product shortfalls.
How Do I Figure Out My Safety Stock Level?
There are several different safety stock formulas, including some pretty fancy math. Emily uses a simple formula to calculate her safety stock.
First, she multiplies the number of statues she sells on her busiest days by the longest number of days it might take to get product from her manufacturer—for example, if there were a blizzard and a power outage. Then she multiplies her average daily sales figure by the average number of days it takes to get her products from the factory.
On a spring weekend, Emily often moves eight salamander statues a day. That is her top sales number. On average, she sells three salamanders per day.
On average, her manufacturer can fill an order for salamander statues in 42 days. When things go wrong, it can take up to 60 days to get salamanders onto the fulfillment warehouse shelves.
Emily’s formula looks like this:
(maximum daily sales x maximum production time in days) – (average daily sales x average production time in days) = salamander safety stock.
For Emily’s salamander inventory, this translates to (8 x 60) – (3 x 42) = 354. Emily’s safety stock level is 354 salamander statues, which she keeps in addition to her regular inventory of this design. She will never have to miss a salamander sale.
What is your safety stock level? When you have a top-notch fulfillment warehouse, you can work with your customer service rep to help you figure out your perfect eFulfillment inventory levels.