Inventory management plays a significant role in ecommerce. The way businesses handle their inventory can either set them up for success or pave a path to financial strain. Different strategies apply to various types of your stock not only in terms of the products but also the time your stock spends on the shelves. This aging inventory requires careful examination and efficient management.
In this article, we delve into the intricacies of aged inventory, its effects on various facets of an ecommerce business, and strategies to optimize inventory for sustained growth.
- How does aging inventory impact SKU selection and planning?
- How does aging inventory affect supply chain management?
What is aged inventory?
Aged inventory refers to inventory that has been in stock for a prolonged period without being sold or moved. It can be a leading indicator for many challenges tied to ecommerce businesses since it directly impacts the ability to get revenue in the door and inventory out of a business’s hands.
Evaluating aging inventory
When considering the effectiveness of a product lineup, aged inventory by SKU can also show which products are more popular and which don’t seem as attractive to the market. However, the inverse is also true, where items lacking aging inventory can be highlighted as a potential opportunity to capitalize on.
When diving into an ecommerce store’s financials, aged inventory can help guide where further analysis is needed to understand why certain products aren’t selling as quickly as others. This can be viewed alongside other ecommerce metrics like conversion rate, cart abandonment rate, inventory turnover, and product page views to understand an ecommerce store’s performance better.
With the above metrics factored in, a business can make a better decision on how to handle the aged inventory and what adjustments need to be made to prevent inventory from staying with a business for an excessive amount of time.
It’s important to consider the whole ecosystem of the ecommerce business to prevent jumping to the conclusion that there might not be product-market fit – sometimes, it could be a much simpler challenge if, for example, not enough people are browsing that particular page on the website or the price needs to be adjusted.
What challenges do ecommerce companies face with inventory management?
Beyond being merely unsold stock, aged inventory intertwines with several critical areas of a business, from cash flow dynamics to storage costs and even product relevance over time.
Aging inventory and cash flow
The first and foremost challenge tied to poor inventory management or issues with aging inventory is its impact on the business’s cash flow. The longer a company holds on to inventory, the longer they inevitably have to wait to get the revenue associated with selling those products.
A lack of cash on hand can prevent a business from pursuing new strategies or investing more heavily in successful product lines. Imagine a t-shirt vendor that predicts the wrong Super Bowl winner but chooses to move forward with production. Their cash is tied up to a product that inevitably won’t sell, which could prevent other opportunities down the line.
Aging inventory and storage costs
Another consideration for businesses that handle the storage of their inventory is the lack of space available for other product lines & the increased costs of storing products longer than anticipated. The longer the inventory is held, the less space is available for other SKUs, and the higher the potential cost of storage. Consider a furniture company that specializes in large sofas. If products aren’t moving, they might have to look into additional space to handle the storage needs of other products to meet the foundational needs of their business.
Aging inventory and depreciation, obsolescence, & shelf life
Inventory management can lead to issues around depreciation, obsolescence, and shelf life. On the one hand, if an ecommerce business specializes in technology of some sort – consider the impact if a new model is introduced that happens to render previous versions obsolete. Similarly, if the ecommerce store specializes in CPGs (consumer packaged goods), attention should be paid to the possibility that products can expire before they’re sold. In both of these cases, the company might have to realize a loss due to the issues tied to aged inventory.
How can aging inventory affect different elements of an ecommerce business?
The intricacies of inventory management extend beyond just storage, directly influencing SKU selection and the efficacy of supply chain strategies.
How does aging inventory impact SKU selection and planning?
Aging inventory can impact a business’s ability to adjust and perfect its SKU selection within its storefront. Due to some of the challenges resulting from aging inventory, a business might not have enough cash, space, or data to understand customers’ buying behaviors to better focus on products that sell more efficiently.
If a large portion of the current inventory is gathering dust, it becomes much harder to plan out when additional purchases need to be made and which products need to ramp up or slow down. Decisions that would be beneficial to be made sooner might have to be delayed until SKU performance is better understood across the board.
How does aging inventory affect supply chain management?
Aging inventory can also impact the ability to deploy a good supply chain management strategy. If a company doesn’t realize the aging inventory issue for a particular product and inadvertently orders more products, it’ll further add to the challenge associated with managing that inventory. On the other hand, if inventory is sold, but at a slower-than-expected rate, there could be issues with the products going out of stock should the purchase process be lengthy. In either case, the business will be negatively impacted by a lack of understanding of the efficiency within inventory management.
What is inventory aging analysis and why does it matter?
Inventory aging analysis is the process of reviewing inventory levels across the board by category, and even by SKU to better understand the sales performance across the business. This analysis can lead to insights that help show where potential problematic SKUs are as well as where the business might be able to double down on SKUs that sell more rapidly than others.
Taking into account the types of products being sold, it’s helpful to compare against industry averages and benchmark goals to understand how your ecommerce business compares to similar business models in the market. A business focusing on CPGs will analyze aging inventory much more differently than a business specializing in clothing.
Sometimes the lack of inventory being sold could be expected with higher price items, however, it usually is an indicator of other issues that could potentially be impacting the business.
Using the insights that surfaced from this analysis, better decisions can be made regarding restocking, SKU distribution, storage agreements, and more. This process can also help inform other departments about upcoming work that will be needed to correct aging inventory challenges. For example, if a certain SKU isn’t moving quickly, the marketing department might want to be consulted to determine what kind of promotions will be needed to address the challenge. Additionally, aging inventory might inform ecommerce business owners about existing agreements within the supply chain to pivot a strategy before it leads to a larger cash flow problem.
How to optimize your ecommerce inventory?
To optimize ecommerce inventory, it’s important to regularly analyze aging inventory and inventory turnover ratios alongside key performance metrics for the ecommerce website. Keeping an eye on the health of the financials within the business will quickly guide strategic decisions around product distribution, where to potentially increase sales, and which products might be hurting the business.
Strategic promotions and product pairing
Leaning on in-depth financial visibility into the ecommerce store will help flag potential issues before they become serious challenges and can guide promotion strategies to mitigate risks tied to inventory management. For example, if a certain product isn’t being sold quickly enough, that opens the door for loss leader strategies or bundling promotions. By associating a slower-selling product with one that is popular, the inventory challenge can be addressed while potentially offering a higher perceived value to the customers. It’s important to compare the costs of holding on to inventory against the discounts that might have to be offered to move the product. At the end of the day, the opportunity cost of either strategy has to make sense financially.
Storage and distribution strategy
Finally, it’s helpful to use these insights to approach storage and evaluate the best strategy to use for that business function. One consideration is performing a cost-benefit analysis on whether to store inventory yourself or lean on a third party.
Evaluate if multiple distribution centers is the best strategy or if there are potential savings to centralize inventory to gain a better rate per square foot. Additionally, it’s a good idea to assess strategies that reduce the risk of aging inventory by deploying the drop-shipping tactic across the product line to ship directly from a manufacturer and avoid the inventory issue altogether.
There are countless ways to improve the margins of an ecommerce business when the proper consideration is given to aging inventory combined with insights into other key performance metrics of the business.
Aged inventory is a multifaceted challenge that requires keen attention and a proactive approach. By understanding its intricacies, ecommerce businesses can not only prevent potential financial pitfalls but also identify opportunities to boost their bottom line.
Through consistent inventory aging analysis and strategic optimization methods, companies can ensure that their inventory management aligns with market demand and customer preferences. As the ecommerce landscape continues to change, businesses that stay vigilant and adaptive in their inventory strategies will undoubtedly remain at the forefront of your industry sector.