Optimizing inventory management for online retail

Dec 3, 2019 3 min

Online stores — whether for a pure e-commerce retailer or as part of an omnichannel operation — allow retailers to offer customers a vast assortment that simply can’t be rivaled by traditional brick and mortar locations. Online retailers aren’t even physically limited by warehouse space, as not all products need to be stored in their own warehouses. In fact, it’s quite common for retailers to place supplier orders for most items in their online assortment only when a customer makes a purchase. This level of flexibility allows retailers to boast online catalogues that run into the millions of items, even if most are never sold. But is that a good idea?

Automating E-Commerce Assortment Decisions

While traditional inventory limits may not apply to many online retailers, they still need to make smart, data-driven decisions about what to stock if they want to attract and retain a loyal customer base. E-commerce inventory management should never be approached as a one-time or even as a periodic decision. The pace of online retail is simply too fast for that.

While retail in general has always been rich in data, online retail in particular provides an absolute abundance of information — page visits, visit durations, click-through rates to other products, conversation rates, and more. More data means more opportunity to curate the right assortment. Online retailers should be constantly monitoring their stock and data, making sure their assortment hasn’t gone obsolete in the eyes of their shoppers.

But how do you choose a few hundred items from millions of possibilities — not just once, not occasionally, but continuously and correctly? Online retailers should be applying the wealth of data available to them toward a fact- and cost-based inventory model.

A data-driven model like this can provide a reliable foundation for the automation of inventory decisions. Retailers who invest in technology that can accurately automate these decisions ultimately free their inventory managers to focus on higher-level tasks, rather than asking them to create assortment recommendations from scratch on a continuous schedule. Inventory managers can take the data-driven output from their inventory management system as a starting point, then integrate external factors and their own personal expertise as exceptions to the automated recommendations.

Choosing the Right Stocking Strategy

But inventory strategy goes beyond assortment choices alone. Retailers still have to implement stocking strategies that make sense for their business.

After real estate, labor, and all manner of other costs, keeping inventory in your own warehouses isn’t cheap. Still, warehousing overhead can be balanced against the fact that unit-costs are generally lower when retailers place large batch-size orders with their suppliers. The amount of time spent per product in all phases of the ordering process is also quite small, and you can take advantage of freight-free limits and cheaper means of transportation.

When ordering against customer orders, on the other hand, the cost of warehousing tends towards zero. However, per-unit costs increase significantly when retailers source in small batches — or even single units, as some do. Shipping costs also rise steeply when retailers need to quickly transport purchased items from multiple suppliers to their customer. The whole endeavor can grow quite expensive, even without significant warehouse costs.

At the end of the day, online retailers have to compare the costs of these two models and decide what balance of the two will be most productive and cost-efficient for their business. As a general rule, though, it makes most sense to stock low-priced items that sell well in your own warehouse, and order high-cost items that sell infrequently directly from the supplier’s warehouse.

There are always, of course, a number of exceptional situations that need to be addressed, most of them concerning sales rates. For example, there’s no way of accurately predicting how well a new item will sell. Still, retailers can start from a baseline estimate that draws from previous introductions of similar products. As data on the newly introduced item populates the inventory management system, it should be capable of automatically updating its decisions. Once this basic configuration is in place in the inventory management system, managers can easily tag exceptional items to ensure they stay in stock.

While the underlying principles at play are simple, gathering and maintaining all the relevant data then running these processes efficiently is a complex challenge. With the right technology strategy, though, online retailers can optimize and automate their inventory management decisions to maximize their profits.

Written by

Tommi Ylinen

Chief Product Officer