The inventory management process can sometimes feel like a game of Tetris. Every piece must fit in perfectly for the whole thing to work.

Stocking the right amount of products to meet customer demand is a delicate balancing act for even the largest of ecommerce business owners. And it has become even trickier in recent years, with U.S. retailers reporting an estimated $740 billion in unsold inventory in 2022 alone.

In this guide, we’ll explore the ABCs of inventory management and give you a step-by-step process that you can use to manage your inventory with confidence.

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What is inventory management?

Inventory management is the process of tracking, ordering, storing and selling stock. It covers the entire process, from how you source your products to how you get finished products off of your shelves. The main purpose of inventory management is to have the right amount of stock in the right locations at the right time, all while controlling costs so you can make a profit.

Why inventory management is important

Today, given the many small business challenges retailers face, successful inventory management may be even more vital than ever. According to BDO’s 2023 retail outlook survey, 82% of retail executives expected supply chain disruptions to be a serious threat to their businesses heading into 2023. What’s more, 34% of retailers expected to face extensive excess inventory.

With a winning inventory management process in place, you can help plan for or outright avoid these snags. Plus, you’ll gain multiple benefits as a small business owner, including:

• Reduced costs: When you monitor and track inventory correctly and forecast accurately, you’ll order the exact amount of stock. This helps you avoid the expenses associated with carrying excess inventory. It’s also more cost-effective than blindly ordering stock at set intervals, such as every 30, 60 or 90 days.
  

• Happy customers: Out-of-stocks leave customers unhappy, encouraging them to choose a different store. And this happens more often than not. The odds of shoppers seeing an out-of-stock message have increased by 235% from pre-pandemic levels. With optimized inventory management, your customers’ favorite products will always be ready-to-buy, allowing you to meet their expectations and keep them loyal to your brand.
  

• Less waste and/or theft: When you know exactly how much stock you have in your warehouses and storage spaces, you have a better chance of selling products before they expire. Plus, keeping a close eye on your inventory helps you quickly identify any shrinkage due to theft.
  

• Greater efficiency: Proper inventory management allows you to spot bottlenecks in how your products are received, stocked, packed, picked and shipped.
  

• Improved cash flow: By spending the proper amount of cash on inventory, you’ll have more funds to devote to marketing campaigns and/or staffing.

How does software help with inventory management?

Achieving proper inventory management takes great precision. It’s tempting to use spreadsheets to manage your inventory, especially when you’re first starting out and operating on a limited budget. But trying to do so is often difficult and fraught with errors, especially as your business grows.

A better option is to use software to automate parts of the inventory management process. In fact, according to the BDO survey linked earlier, nearly half (46%) of all retail CFOs said they expected to boost their investments in supply chain technology in 2023 alone.

When you choose Wix to build your eCommerce website, you have access to a variety of ready-made inventory management features, including:

• Multichannel inventory sync: Wix’s multichannel sales capabilities automatically update your inventory each time you make a sale on your online store, eBay, Amazon or other channels.
  

• Out-of-stock capabilities: From the “Store Products” menu in your website dashboard, you can automatically track how many items you have left in stock, or manually assign products as “In Stock” or “Out of Stock.”
  

• Pre-order options: You can enable pre-orders for new, anticipated or out-of-stock products to capture more sales and reduce your customers’ wait times. This can also be a smart way to gauge demand for an unavailable or soon-to-launch item.
  

• Mobile business management: Manage your inventory, take payments, fulfill orders and more from the Wix app.

Many retailers also choose to invest in other inventory-focused technologies, including order management systems (OMS), warehouse management systems (WMS) and/or enterprise resource planning (ERP) software. If you're a larger seller, you may choose to install these more specialized programs to handle other key parts of the supply chain. As you evaluate your options, ask yourself:

• What are your current inventory-related challenges and goals?

• What channels do you sell on?

• What types of inventory do you need to track?

• Who will be using your software?

• What other apps and systems does the platform need to integrate with?

• What is your budget?

4 types of inventory

Inventory can be grouped into four categories:

Raw materials and/or components

These are materials you need to create your product. For example, this could be leather to make handbags or screws to fasten parts of your product together.

Works-in-progress (WIP)

As the name implies, these are items that are still in production. WIP includes any raw materials, components, labor costs and packing materials being used to create your product.

Finished goods

These are items that are fully produced and ready to be sold to customers.

Maintenance, repair and operations (MRO) goods

This refers to supplies, materials and parts used for routine maintenance, repair and operations. MRO goods are not part of the product itself.

If one type of inventory is held up, most of the other types will likely be impacted as well. So, your inventory management strategy should account for all four categories. This will help you know where you’re spending your time, money and resources and guide you in identifying any potential bottlenecks.

Inventory management process: 7 steps

The success of your inventory management directly affects your business’s cash flow. That’s why it’s crucial to know every stage of the inventory management process, even if you’re just starting a business. While all eCommerce businesses are different, most will follow these seven steps:

1. Receive the products at your facility 

2. Inspect the products for defects 

3. Sort and store the products 

4. Accept orders 

5. Fulfill orders 

6. Reorder new stock 

7. Monitor and review 

01. Receive the products at your facility

The first step happens when items travel from your suppliers and arrive at your warehouse. If you manufacture your own products, then this step happens as soon as you receive the raw materials you need to start creating. If you work with wholesalers, then the process begins once you receive finished goods that are ready to sell.

02. Inspect the products for defects

As soon as your inventory arrives, you should dive into an inspection. Make sure that the number of materials or products you receive matches the amount you ordered. Check all raw materials and products to make sure they’re defect-free. If you’re in the food-and-beverage sector or sell other fresh goods (such as flowers), make sure your shipment arrived at the correct temperature.

03. Sort and store the products

Small businesses may store their products on site or at a warehouse. In either case, it’s wise to set up your storage space for maximum efficiency. Arrange items by stock keeping unit (SKU) number or product type so they’re easy to find. Keep your best-selling products in easy-to-reach locations so you can expedite those orders.

04. Accept orders

Once your products are received and sorted, it’s time to sell. Customers can place orders on your website, a third-party marketplace or, if you have a brick-and-mortar location, inside your store. Each time an order is received, the products ordered get removed from your inventory. In-store technologies like Wix’s point-of-sale system can automatically update your inventory data with each order placed.

05. Fulfill orders

Fulfillment refers to the physical process of picking the item out of your storage room or warehouse, packaging it and sending it to the end customer. The speed with which you can do this will depend on how well you’ve organized your storage space.

06. Reorder new stock

To keep customers satisfied, you’ll need to continually replenish your inventory by reordering products. This is where accurate demand forecasting comes into play. By estimating sales trends before they happen, you can reduce your risks for overstocks and dead stock and ensure optimal inventory turnover.

07. Monitor and review

The last step in the process isn’t the end. Rather, you should monitor and review your inventory levels on a regular basis. This includes reviewing the inventory metrics in whatever software platform you choose to use. It also should involve regularly scheduled physical inventory counts to make sure that what you see on your computer screen matches what’s actually in your warehouse.

Inventory management process for dropshippers

The exception to this process is for retailers who choose a dropshipping business model. In dropshipping, a supplier handles the storage and fulfillment of all products. But dropshipping doesn’t mean you don’t need to handle inventory.

Instead, if you run a dropshipping business, you should sync data from your dropshipping partners with your online store, which you can do with Wix’s dropshipping website builder. This will let you know where your inventory is located and how much inventory your dropshipping partners have in stock.

See more: How to create a website with Wix.

Inventory management techniques

When it comes to managing your inventory, it's not a one-size-fits-all situation. Different techniques can be employed, each with its own perks. Let's explore some of the most common:

• First-in, first-out (FIFO): This classic method is as straightforward as it sounds. The first items you add to your inventory should be the first ones out the door. It's especially useful for perishable goods or products with an expiration date.

• Last-in, first-out (LIFO): Consider this the inverse of FIFO—the most recently acquired items get sold first. This technique works best for non-perishable items or products where style doesn't matter as much.

• ABC analysis: Picture your inventory as a high school class. Some items are the straight-A students that drive the bulk of your sales. These are your “A” items. Then you have your “B” and “C” items. They're important, but not your all-star sellers. ABC analysis helps you focus on stocking and maintaining “A” items while not forgetting about “B” and “C.”

• Just-in-time (JIT): This technique involves only ordering inventory as needed, minimizing storage costs. However, it requires meticulous planning and trustworthy suppliers.

• Dropshipping: As we’ve already outlined, dropshippers don’t hold any inventory. Instead, when you make a sale, you purchase the item from a third party who ships it directly to the customer.