Ever ordered your desired item on an e-commerce store, only to be disappointed with the dreaded words “Out of Stock”? I know how frustrating that can be for a customer. And definitely, a store owner wants to avoid this by any means.
So, why does it happen?
Let me introduce you to another interesting data published by IHL Services, Inc, a research organization based in Franklin, Tennessee. In their research, they found that the global cost of inventory distortion is over $1.7 trillion annually (including overstocking and out-of-stock).
This shows how crucial inventory management is, regardless of whether your business operates globally or serves a local customer base. This article is a comprehensive guideline on Shopify inventory management, including the proven best practices we follow for high-growth stores.
What Is E-commerce Inventory Management?
Inventory management involves monitoring stock, collecting raw materials and components, storing finished products, and maintaining the cycle for faster delivery.
Except for dropshipping, where the manufacturer or a third-party entrepreneur delivers the product directly to the customer, you must stock the products to operate an e-commerce business. Receive the products from the supplier, store them, and deliver them to the customers.
Or, if you manufacture the product yourself, collect the raw materials and other necessary components, and store the finished product in your inventory.
Sounds simple, and so it is when you get fewer orders for limited products. As your store grows and sells hundreds of products with multiple variants, managing inventory is sometimes a daunting task for Shopify store owners.
Don’t worry, there is more than one solution to the problem. But first, let’s point out why inventory management is important to operate a Shopify store.
What do you count in your inventory?
- Raw materials
- Work-in-progress items
- Finished goods
- Maintenance, repair & operations goods (MRO)
- Packaging materials
Why Shopify Inventory Management Matters
You need to keep the product in hand for quick delivery and optimum operations of an e-commerce business. At least that’s the standard procedure.
Unlike a physical store, an e-commerce store operates online with only the product cards and descriptions. But after getting an order, you won’t have enough time to collect the product from a supplier, package it, and deliver it to the customer’s address. Besides, the supplier may not have it in his stock!
So, if you don’t have the product in stock, you’ll miss the order, which will eventually create dissatisfied customers. To avoid this situation, if you overstock products, it’ll increase inventory cost.
The primary goal of inventory management is to minimize expenditure by avoiding overstocking and, at the same time, maintaining a consistent product flow so that customers get their products in their hands faster.
How Shopify Inventory Tracking Works
Shopify has its own basic inventory tracking system that you can enable in your store settings. For those who still maintain manual tracking, this can be a good solution to automate their inventory management.
Once you set up the Shopify inventory tracking, it will automatically track and update your inventory after every sale. You can also define whether a customer can make an order when the stock becomes zero.
Shopify’s automated tracking reduces the chance of errors and updates the stock in real time. It should work fine for small to medium-sized stores covering inventory tracking, stock adjustment, bulk editing, low stock alerts, etc.
However, if you also have a physical store and your business has more complex operations, selling through multiple channels, you’ll need third-party software or Shopify POS to track omnichannel sales and manage inventory.
Enabling inventory tracking on Shopify
Follow the steps below to enable Shopify inventory tracking in store settings:
- Log in to your Shopify admin
- Go to “Products” from the left-hand sidebar
- Select the product you want to track. In the product details page, scroll down to the “Inventory” section.
- Enable the inventory tracking by clicking the button on the top-right of the inventory section (for new products, tracking is enabled by default)
- Enter the quantity of the item you have available in stock (if not entered when adding the product)
- For more detailed tracking, click the expansion arrow for “More details” and enter the SKU and Barcode if you have them
- Mark the ‘Continue selling when out of stock’ checkbox if you want to allow customers place an order when you are temporarily out of stock
- Click “Save”
12 Shopify Inventory Management Best Practices
Now that you understand the basics of inventory management, the next question likely on your mind is, “What is the best strategy for Shopify inventory management?”
Well, there is no “Best” inventory management strategy to suggest. Every business follows its own techniques to effectively control the supply chain. However, to avoid common mistakes, follow the pro guidelines below.
I’ve compiled 12 inventory management best practices that will help you minimize inventory cost and save you from apologizing to your customers:
- Understanding your inventory sales cycle properly
- Forecasting demand with accurate data
- Ensuring economic order quantity (EOQ)
- Implementing an effective inventory tracking
- Adopting an inventory control system (FIFO, LIFO)
- Using product variants
- Creating a standard list of tags to use across your store
- Keeping SKUs accurate and consistent
- Using barcode and scanning tools
- Syncing inventory across all channels
- Running regular inventory audits
- Outsourcing inventory management
01: Understanding your inventory sales cycle properly
If you don’t understand your sales cycles properly, ensuring both low inventory cost and customer satisfaction is not possible. Analyze your past sales data to get a clear picture.
An inventory sales cycle involves the whole process from initial procurement and storage to the final delivery to the end users. All products will not move at the same speed. So, try to monitor each product’s inventory cycle precisely.
02: Forecasting demand with accurate data, not by gut feelings
An accurate forecast of demand and sales is the key to effective inventory management. Analyse your annual data to understand the ups and downs in your sales report, especially for products with fluctuating sales throughout the year.
Seasonal products get orders only in specific months. Take detailed data from that time of the year for analysis. The purpose of demand forecasting is to make sure you have enough items in stock for delivery, but not by overstocking them.
Don’t take measures based on gut feeling only, as you can get precise data from your inventory tracking software. A data-driven decision is more likely to minimize risks and optimize operational efficiency.
03: Ensuring economic order quantity (EOQ)
Maintain the economic order quantity for low-cost inventory management. It will help you understand how much and how inexpensively you can order from your suppliers. If you order too much, it will occupy your shelf space and increase the cost. Order too little and you’ll end up apologizing to your customer for late delivery, or spend extra for faster delivery.
Advanced inventory software can calculate EOQ automatically; however, you need to have clear knowledge of it to make strategic decisions.
04: Implementing an effective inventory tracking
An automated inventory tracking system will not only count the stock level for you, but also give you detailed information about the product location, how long you are keeping it in the inventory, and what is the condition of the item.
Set up Shopify’s built-in tracking system properly, or get a reliable third-party software to reduce manual effort and human error.
05: Adopting an inventory control system
There are different inventory control methods to make sure you have the right product at the right time to satisfy customer demands.
Choose a suitable method based on your business model, product type, demand variability, and supplier reliability. You can also consider a combination of multiple inventory methods for your business if it suits you.
- First in, first out (FIFO)
Clear out the older items before the new ones. This method is good for optimal inventory turnover and product freshness. You’ll not have out-of-date products in the inventory, but this method also increases your tax bill.
- Last in, first out (LIFO)
In contrast to FIFO, newer items are sold before the older items here. This method is suitable for businesses with a large inventory. Following this method, you can record a lower net income and pay less tax.
- Just in time (JIT)
As the name suggests, this method ensures you get the product at the last moment before delivery or use. It ensures easier inventory management and lower costs.
- ABC analysis
The ABC analysis is a simple concept where the “A” category products or materials get the highest priority and are usually expensive. The “B” category comes in the second stage and costs less. Similarly, the “C” category includes the lowest-cost items that need minimal management.
- Safety stock
Keep a small surplus of inventory in hand to cover variable market demand or supply delay. This method saves you from going out-of-stock and makes customers happy.
06: Using product variants
Rather than listing separately, use product variants for colors and sizes under the same product in Shopify. It’s easier to keep track of your products this way.
This practice helps with accuracy and publishing to Google Shopping without problems. If you list product variants separately, Google may consider them as duplicate content and lower search ranking.
07: Creating a standard list of tags to use across your store
Tagging your product is a good idea to manage inventory. Most stores maintain a standardized tagging system so that all team members understand it and use the same tag.
After a certain period of time, if you want to change the tag or include something new, inform the whole team about it.
08: Keeping SKUs accurate and consistent
SKUs (Stock Keeping Units) are unique numbers that are used to keep inventory records exact. Especially, mid-sized to large e-commerce stores on every platform now maintain SKUs for inventory management.
Make sure you’re using a well-structured SKU system and all your products follow the same structure to track inventory accurately across all platforms and sales channels.
09: Using barcode and scanning tools
Barcode and scanning tools will keep you one step ahead, whether you maintain a brick-and-mortar or fully digital store. A barcode contains all the information related to a product that reduces the chance of errors to almost zero.
Facilitate your teams with reliable scanning tools. This will accelerate each step of your business operation and save valuable time for your staff. Shopify POS supports a wide variety of barcode scanning tools. Just check compatibility before you make the purchase decision.
10: Syncing inventory across all channels
Suppose you have a physical shop that you have connected to your Shopify store, and you maintain the same inventory for both stores. What if you have another e-commerce store on another platform that also sells the same product from the same inventory? How do you track your sales and manage the inventory?
In a situation like this, sync all the sales channels to your inventory. Use an advanced software that will track each sale across multiple channels and update your inventory automatically.
11: Running regular inventory audits
Regular audits are recommended for overcoming any mismatch, as large e-commerce stores have several employees working regularly. Anyone can make a mistake, and this will end up as a mismatch in the final counts.
So, do not rely on only the year-end counts and audits. I recommend a cycle count every month if possible. Even a quick audit can identify and fix issues sometimes, saving you from bigger problems.
12: Outsourcing inventory management
For larger e-commerce stores, inventory management can be complex, especially if you don’t use the right tools and techniques.
Rather than doing it in-house by hiring high-paid accountants and managers, they often outsource inventory management services. Several agencies in south asian countries provide reliable Shopify inventory management services at a relatively lower cost.
Wrapping Up
Let’s recap in simple words. If you have set up a small Shopify store and you are confident that you can manage the inventory yourself, follow the Shopify inventory best practices I’ve listed above. It should be fine.
If you are too busy maintaining your inventory or have a larger store that requires professional assistance, get help before it’s really messed up!
FAQs
01: What is the best inventory management app for Shopify?
Answer: Shopify has its own built-in inventory tracking system to help you manage your inventory. To manage larger inventories with more complex operations and multiple sales channels, there are many third-party software solutions.
It is difficult to identify one specific tool as the best, because you need to choose your inventory management tool based on your business model, scale, operations, and inventory control method. Alongside its built-in inventory management features, Shopify recommends these third-party software:
- Oracle NetSuite
- Sumtracker
- Lightspeed Retail
- Cin7 Orderhive
02: Does Shopify have built-in inventory management?
Answer: Yes, Shopify has its own inventory management features built in. Once you set up your Shopify store and add new products, the feature will automatically be enabled and start tracking sales. You just have to put how many items you have in your stock. Also, enter the SKUs and barcodes for detailed tracking of your inventory.
03: How do I track inventory for variants in Shopify?
Answer: To track inventory for variants in Shopify, enable tracking while listing the product. Enter the stock amount for each variant (color, size, etc.) in the “Variants” section at the bottom of the product details page. Shopify’s tracking system will automatically track the variants with every sale you make and update the inventory.
To check the inventory later, go to “Inventory” under the product tab from the left-hand sidebar. Click on the product to see detailed inventory records.
04: Can Shopify track inventory across locations?
Answer: Yes, Shopify can track inventory location-wise, using its built-in “Locations” feature. Set up all your locations in Shopify settings. When listing products, enter the stock quantity based on their locations.
With this feature, you can follow the location stock level and transfer products from one location to another. It also enables you to fulfill orders from the nearest warehouse, ensuring faster delivery and lower shipping costs.
05: How do I stop overselling on Shopify?
Answer: To stop overselling on Shopify, unmark the “Continue selling when out of stock” checkbox in the inventory section of the product details page. It will disable the customers from placing an order when you are out of stock.
06: Do I need Shopify Plus for advanced inventory management?
Answer: You don’t need Shopify Plus for small to mid-sized Shopify stores, but it is essential for more complex enterprise-level inventory management. Shopify Plus has advanced features like up to 200 inventory locations, priority support, extensive multichannel syncing, and up to 200 POS Pro locations, among others.
