12 Inventory management mistakes and how to avoid them
June 24, 2022
Often, inventory management mistakes can result from a single process oversight that’s fixable with minor tweaks. However, be aware that minor inventory management mistakes may be symptomatic of more significant organizational issues, so check each error against your foundational processes – the path of least resistance shouldn’t lead to the same mistakes happening repeatedly.
In this article, we’ll identify 12 of the most common inventory management mistakes (in no particular order) and provides tips on avoiding them.
1. Poorly Controlled Product Catalog
The most apparent eCommerce inventory management mistake is also the most common: not having a central database of all products and the necessary details for inventory management.
This means ALL products, including new products that are not yet in inventory and discontinued products for which you still have stock.
The product catalog can be as simple as an Excel file or as complex as specialized database software for inventory management.
At a minimum, the following details should be tracked:
- Product Tree (product type, category, family)
- Reference Number
- Product Name/Title
- Product Status (new or used)
- Purchase Price
- Supplier Lead Time
- Minimum Order Quantity
- Catalog Selling Price
- Actual Selling Price
- Product End Date
- Sales History by Quantity and Value (1 Year, 1 Month, 1 Week)
- Current Stock by Quantity and Value
- Average Stock Coverage
- Product End of Life Date
- Future Sales Forecasts
- Average Stock History
- Reference Product (Older, Similar Product)
- Product Photo
The catalog database is a necessary foundation for efficient eCommerce inventory management. It should be updated regularly after being built – it’s not a “one and done” sort of ordeal.
2. Too Few (or Too Many) Performance Indicators
Performance measurement for your inventory and supply chain management is crucial to progress. If you don’t establish a consistent baseline of progress, how will you know (with confidence) whether your process is improving or degrading until it becomes blatantly obvious?
At a minimum, you should implement at least two supply chain KPIs:
- Customer Availability Rate
- Stock Life Expectancy
- Forecast Quality
- On-Time Delivery Percentage
Although you can certainly have more KPIs, it’s easy to wind up juggling more than you need. These two (or four) are the ones that you really must keep up with to help avoid common eCommerce inventory management mistakes.
Remember that the goal is to keep your customers satisfied with product availability levels while operating as “lean and mean” as possible to maximize profit.
3. Focusing on Price instead of Cost
Buying inventory at the lowest price possible is always important, but focusing only on the purchase price is another common eCommerce inventory management mistake. You need to consider the entire cost, often called Total Cost of Ownership (TCO).
A product’s TCO could include all of the following:
- Purchase Price
- Minimum Order Quantity
- Defective Product Percentage
- Payment Lead Time
- Sales Forecast Certainty
- Product Life Span
- Supplier Lead Time
- Supplier Reliability
- Supplier Service
- Supplier Flexibility
Some of these are much easier to measure than others. The point is to have as close as possible to a full-cost approach to selecting inventory.
If choosing between two suppliers is difficult after considering all the relevant cost factors, go with the one offering an edge in customer satisfaction.
4. Manual Inventory Management
Several studies have demonstrated that orders placed by people relying on manual inventory controls are nearly always for significantly higher quantities than needed or warranted. It’s simply human nature to fear missing out (FOMO) by not ordering enough.
This inventory management mistake alone should motivate companies to manage inventory orders with an Excel spreadsheet or enterprise resource planning (ERP) software.
Humans are superior to formulas regarding exceptions caused by calendar shifts, promotions, etc. But for the other 95+% of orders, automated management is proven to be more accurate and cost-efficient.
5. Inconsistent Employee Training
Many organizations see training as an expense rather than an investment. In addition to lacking knowledge on using company resources properly, untrained employees will eventually lose motivation.
Inventory systems – even automated ones – can be complex, unintuitive, and difficult to operate. Often only a small percentage of workers know how to use it, and critical pieces of data may easily fall through the cracks if anything goes wrong. It’s another common inventory management mistake.
Rather than postpone or cancel training sessions, go virtual. The advent of easy-to-access, low-priced video conferencing has made employee training and communication more accessible. Inventory management training expenses will more than pay for themselves in the long run.
6. Poor Housekeeping
Poor housekeeping – starting with something as simple as regularly sweeping warehouse aisles – can directly impact the accuracy of inventory management and order fulfillment.
Clean warehouses are more pleasant workplaces, naturally leading to increased team productivity and accuracy. Regular housekeeping also helps prevent easily avoidable health and safety issues and lower maintenance costs over time.
7. Too Many Storage Points
The more storage points there are for the same product, the more you risk increasing inventory without an associated improvement in customer service level.
For example, a single retail store with a stock reserve in addition to shelf stock could find itself increasing total stock by as much as 10-50% without achieving any measurable improvement in customer satisfaction.
Storage units that are more than a single piece (such as a pallet), additional inventory management complexity caused by multiple storage points, unsuitable stock distribution in case of shortage, and no display of total stock are all causes of unintended (and unnecessary) increases in inventory, a common inventory management mistake./inventory-management.
To avoid this problem, centralize your stock as much as possible, especially stock that moves slowly. Decentralization is only recommended for products with very long lead times, an unpredictable sales volume, or high transport costs (large/bulky/heavy items).
8. Same Stock Coverage on All Product Variations
Due to a lack of method and time, inventory management is often averaged. As a result, high-demand product variations often go out of stock even as low-demand variations are in overstock status.
One approach to solving the problem is to apply the Pareto Principle, i.e., 80% of the benefit comes from 20% of the work. Even if not precisely accurate, a Pareto analysis usually results in product variation order levels closer to sales realities.
The Pareto Principle is named after Italian economist Vilfredo Pareto, who realized in the early 20th century that 80% of the land in Italy was owned by just 20% of Italians. Others noticed that Pareto’s assessment appeared to apply much more widely than just land ownership in Italy. The concept that 80% of impacts result from 20% of causes has been used as a rule of thumb across many industries ever since.
To apply the Pareto Principle to inventory management, identify the 20% of products that generate the bulk of sales and profits. Pay attention to inventory flows for these and keep the shelves stocked.
Of the 80% remaining, identify those at the middle level – generally, between the top 20% and the bottom 30%. Consider how to make them more appealing and profitable.
Robotic Process Automation
A more accurate resolution is to adopt robotic process automation (RPA).
RPA involves software “bots” that can mimic and execute rules-based digital processes, such as inventory updating. RPAs can perform such tasks as:
- Barcode scanning for real-time inventory checks
- Forecasting for greater efficiency and accuracy in stocking decisions
9. New-Product Forecasting Failures
The first order placed with a supplier for a new product (the “implementation order”) often runs 30% to 40% of the annual quantity forecast, up to 80-100% for limited-edition products. It’s obvious what can happen if the forecast is seriously flawed.
A good implementation order should be based on a combination of factors, including:
- Sales Histories of Similar Products
- Supplier Delay
- Stock Coverage
- Minimum Order Quantity
- Win-Lose Risk (based on Margin and Cost)
10. Warehouse Space: Too Much and Too Far
Regarding your warehouse operations, you don’t want comfort; you want efficiency. Tight spaces beget vigilance.
Companies with more warehouse space than they need tend to fill it with inventory they don’t need eventually. That’s a common inventory management mistake. Aim for a filling rate of 85% or higher, which will force you to optimize inventory.
There’s a reason why the best supply chain companies work alongside their inventory (sometimes even in the middle of it), not far away. No matter how good your product catalog is, it helps to see your inventory regularly. If you cannot keep your storage points nearby, visit them regularly. Otherwise, you can become disconnected from the reality of products on which you have too much stock.
11. Too Many Inventory Management Tools
One of the most frequent causes of poor inventory management over the last couple of decades is not having too few tools but too many. With no global solution available until relatively recently, companies spread their needs across product cataloging, accounting, inventory, supplier, quality, pricing, marketing platforms, etc.
After a while, companies can have problems knowing where to find reliable data in their systems, and inventory management suffers.
Further, imagine the human cost of training new employees to use a disparate collection of inventory management tools over time.
This is improving in the wake of acclaimed ERPs such as SAP, but migration is expensive and can take years to achieve.
However, this migration to “big data” is essential to achieve better data management and gain a competitive advantage.
12. Failure to Call in an Expert
Nearly all successful eCommerce companies will reach a point where continuing to handle their logistics and fulfillment in-house becomes counter-productive, usually for cost reasons. Logistics consultants can help determine when it is optimal to begin outsourcing logistics and inventory management to a qualified and reliable third-party supplier.
Final Thoughts: Inventory Management is an Active Process
Eliminating inventory management mistakes adds value through streamlined warehouse management and enhanced customer order accuracy.
This article taught us everything from properly controlling your product catalog to setting appropriate KPIs to employee training.
Most importantly, there’s nothing wrong with calling in an expert to help solve current process inefficiencies or even just to poke around and audit your current inventory management system – you may find cost-saving gems simply by having a set of third-party eyes.
That’s easier said than done, though, so don’t let yourself become overwhelmed with a flooded “to-do” list. Being entangled in inefficient processes can feel suffocating, but remember, you can always take a few deep breaths.
List the pain points and snags in the process and some explicitly defined questions to troubleshoot. Document the errors.
For example, “Last October, we found out our primary supplier and order fulfillment partner for our Ugly Christmas Sweater line had gone out of business three months before. This completely threw our Black Friday campaigns out of whack. How can we stay on top of our partners and ensure we have backups for every item?”
Efficient inventory management is worth its weight in gold, and by implementing best practices, companies will begin seeing results in their inventory management and bottom line.
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