Inventory Management System in E-Commerce

Published by MBA Skool Team, Published on May 21, 2016

The process of sourcing, procuring and using the raw material during processing and the process of controlling and monitoring of the final product which is ready to be delivered to the end consumers. Inventory is a major portion of the asset and will not reap any profit unless it is sold. Because of this reason, whether a business is small or large, online or brick and mortar, it is a major concern.

While tracking, storing and insurance a major investment is done in inventory management and if mismanaged can cause the significant financial problem for the business. The ideal plan for inventory management is such that there is neither any shortage nor surplus. Inventory is important because the firm must provide the required item within the required time.

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Firms will generally try to minimize the inventory and can support many functions which consist of:

1. Balance between demand and supply

2. Safety stock which will ensure the delivery if there are more sales than a forecast or any unexpected delays in new inventory.

3. Geographical location can also be taken into consideration for inventory management as some have less cost for labour and transportation.

A number of factors have to be taken into consideration by the retailer for inventory management in e-Commerce. If the inventory is located in a large number of location and more channels are available for distribution, then inventory system will become complex. Following are the steps followed for simplification of the inventory management system:

1. Real Time Automation: Updates in real time are critical in inventory management. It will require having the connection between suppliers, warehouses, drop-shippers and 3PLs. Real-Time system will automatically update the inventory so if the items are out-of-stock then it will be removed from all online channels so as to avoid any over-selling and will list these items in the stock as soon as the new inventory is received.

2. Synchronization of Inventory across the various channels: Same inventory is sold by the retailer on multiple channels to increase the chances of selling. As orders are received inventory in each channel will adjust in real-time, and will remove automatically all out-of-stock items by using the right e-Commerce inventory management system.

3. Integration of Warehouse: Generally most retailers have warehouses in multiple locations, which consist of internal, external, and fulfilment centres. It will give the ability to retailers, to select a primary warehouse that can provide the view about the amount of inventory in stock.

4. Integration of Store: At present retailer is selling on more than one online channel which comprises of B2B, B2C, and mobile so their need to be the consolidated view of inventory.

e-commerce have to engage the customers across multiple channels across the websites which need to be updated 24 hours a day. Inventory need to be optimized so that no critical sales are missed out. Best practices for inventory management across multiple channels are:

1. Keeping Core and Non-core products Separate: Core products are those that business does not want to face shortage while non-product are every else product that businesses uses apart from the core product.

2. Just in Time Inventory Management: It is used to increase the efficiency and to decrease waste which is achieved by receiving the required goods at the required time. It depends on upon the company ability to forecast sales and demands and foresee potential periods of fluctuation.

3. Forecasting: For successful inventory management, accurate forecasting is essential. If the retailer knows what the customer needs and in what quantity it will be in better position to meet the customer expectation and can stock according to that. Market research needs to be conducted in order to observe the market demand pattern and analyse the demand patterns and can estimate required stock levels.

The following are the challenges faced in inventory management system are:

At present, internet customers are impatient and expect the exact delivery of product and services. Reverse logistics is one of the major challenge faced by internet retailers and on which they have to work upon. A process by which supplier, producers, or retailer manages the returned product for recycle, resale, remanufacturing or disposal. Retailers with brick and mortar or click and mortar have an advantage over e-commerce retailers because of third-party logistics distribution providers. A number of returned product are more in the case of online retailers as compared to brick- and- mortar retailers. Returned product have to be categorized into distinct categories.

Today’s internet customer demand reliable and fast service. Enterprise resource planning (ERP), automated material flow system, management of order and supply chain management system should enhance the customer experience and transportation management system should be cost-effective and efficient. Drop shipping is holding no inventory and outsourcing the inventory management process so as to focus on front-end activities. Drop-shipping has the advantage because wholesalers provide service to many retailers by having the centrally located inventory system i.e. Risk Pooling. Drop shipping provides benefit to retailers by having products of wide-variety for consumers. Generally, the large firms own the inventory because of having huge financial resources. Because of lack of capital in case of smaller firms, usually, they do not own the inventory because of involvement of huge fixed cost. The greater the size of inventory larger will be the inventory cost as they occupy large space and more costly to hold. The lifecycle of a product has also be taken into considerations.

Hybrid strategy is the third option which the retailers can have and retailers should prefer this because of reduction of risk as safety stock is present at other locations. Hybrid strategy in terms of stocking inventory is about to carry lower amounts of inventory. Having a large number of retailers provide benefits in term of economies of scale and risk pooling. The addition of retailers in the channel benefit all players in term of profit. As retail margins decline, the retailer will be inclined to stock less.

Carrying lower inventories has its own advantage but the stock-out risk increases. Stock out experienced by the retailer also cause customer dissatisfaction, declining sales, moving of consumers to competitors and declining sales. Company’s bottom line improves by working upon the stock out. E- Commerce retailers have to embrace the internet and process need to be continuously assessed. Click and mortar retailers integrate the process through online and physical channels with advertising and logistics which will help in achieving synergies. Click and mortar strategies will provide customers satisfaction which is the ultimate goal for all the business.

This article has been authored by Reena Pal from IIM Kashipur






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