What is inventory?
Inventory, also known as ‘stock’, refers to the physical goods and materials that a business owns with a view of future resale.
Inventory can be divided into:
- Raw materials – materials or components used in making a product
- Work-in-progress (WIP) – materials and components that are being used to make a product
- Finished goods – goods ready for sale
- Goods for resale – returned goods that can be resold
Inventory is one of the most important business assets because the turnover of inventory typically represents the primary source of revenue of any retail business.
How to form your inventory?
A smartly formed inventory can not only contribute to a higher turnover, but can also help you alleviate seasonality slumps and capitalize on market trends. This is especially relevant if you’re running a drop shipping online store, as you can add and remove products in minutes without any upfront investment.
The essential elements to take into account when assembling your inventory include:
- Stocking niche products: niche eCommerce stores have quickly gained ground and become the new eCommerce trend. There is no point in fighting the big players – focus on discovering niche products that are underserved and supply to special interest groups to secure steady income and potential for growth.
- Stocking trending products: catching a trend just before it explodes would be an ideal scenario. Products that are trendy enjoy high search volume and can generate a fair bit of traffic, a portion of which you can hopefully convert into sales. However, be careful not to source products that are available everywhere else because high competition will eat into your margins.
- Stocking bestsellers: regularly checking bestselling product categories on retail giants like AliExpress and Amazon will help you quickly and accurately identify the best sales opportunities and pinpoint emerging trends early.
- Stocking products that sell all-year-round: there are certain products, such as sunglasses or winter hats that yield great margins but expose you to seasonality risks. It’s always a good idea to base the core of your business on products that sell all-year-round and stock season bestsellers to capture the fleeting trends only.
What is inventory management?
Inventory management is the process of controlling the flow of a company’s stock. It encompasses ordering, transfer, and storage of goods in order to ensure the business maintains the right quantity of stock on hand to meet customer demand.
Effective inventory management is a dynamic process that focuses on balancing stock levels to ensure a company doesn’t suffer any financial losses due to overstocking or understocking. Whether you run out of stock or order too many items, your bottom line will take a hit. For eCommerce businesses that have to manage multiple factors around the clock, including handling different payment channels and maintaining a functional eCommerce platform backed by just the right amount of stock, implementing concrete inventory management practices from the start is crucial to make sure everything stays under control as the business scales. A real-time inventory management system can prove to be a helpful tool.
The most common methods of sourcing products and inventory
Depending on the product you sell, your market and niche, you can choose the method that is most suitable to your business. These are the four most common methods:
- Make. As the name implies, this method is suited to people who can physically make the products themselves. Producing the goods manually can be resource and time-intensive, especially if your business takes off. However, it’s a very low-risk startup option that also gives you full control over the quality of your products and your brand.
- Manufacture. Although a viable option for people who have a unique idea for a product that doesn’t exist, it’s also the method that requires the greatest financial investment upfront. Sourcing a manufacturer to produce the product for you could lead to achieving the greatest margins and maintaining a full control of your brand and product quality, but it also presents the greatest risks in terms of setup costs and the time it takes to take the product from the prototyping to production stage.
- Wholesale. This is a less risky option compared to manufacturing, which allows you to buy ready-to-sell goods at discounted wholesale rates and sell them for a higher price. Minimum order quantities vary from manufacturer to manufacturer, but are typically reasonable and can require only a minimal investment upfront. It is not unusual for wholesale goods to achieve 50% margins.
- Dropship. As the cheapest method to get started, drop shipping is a great option for people who don’t want to deal with inventory management and product shipping. The essence of drop shipping is that you can sell products you don’t actually own by partnering with manufacturers who fulfill the orders for you. Because of the low startup costs and the fact that you don’t need to purchase any inventory upfront, drop shipping is one of the most popular methods and is, therefore, a very competitive playing field.
Just-in-time (JIT) inventory refers to an alternative method of stock control, which focuses on reducing spending and improving business competitiveness by ordering and receiving inventory exactly when it’s needed and neither sooner nor later.
JIT system is driven by the objective to reduce costs related to inventory maintenance, such as warehousing costs, staff required to look after it as well as waste costs. It allows companies to invest savings into other opportunities.
However, just-in-time inventory management has its challenges. It requires businesses to be exceptionally good at forecasting demand to make sure they don’t run out of a product because this would lead to lost sales and customer dissatisfaction.
While reducing non-essential costs is a smart strategy to improve your return on investment, it’s essential to keep accurate track of inventory levels to prevent stockouts and meet the constantly changing consumer demand.
If you’re running a drop shipping business, Oberlo’s Inventory Auto-Updates feature can take care of this for you by constantly updating your product price and stock levels, so that you never put yourself in trouble by selling out-of-stock products or selling them above your retail price.