Shopify’s e-commerce platform powers more than one million online stores in 175 countries, making it one of the most popular e-commerce platforms for business owners worldwide.
And, to help e-commerce small businesses grow, Shopify provides various tools and features to help store owners manage their operations.
Shopify’s inventory management tools aim to help streamline one of the most time-consuming aspects of running a small business.
In the past, many merchants manually tracked inventory to determine when to re-order stock. However, an e-commerce business often has to manage inventory levels across multiple warehouses and logistics providers.
Costs related to poor inventory management can add up quickly. Overstocking and understocking are equally problematic. In the retail industry, bad decisions around inventory planning led to $300 billion in lost revenues due to markdowns, one report found. Another report found that out-of-stock orders cause $634.1 billion in annual losses for retailers.
Shopify’s inventory management system tracks, organizes, and controls the inventory of products within a Shopify store. In this guide, we’ll break down some key strategies to help you make the most of this inventory management software, as well as third-party apps and integrations you can use to improve inventory management for your Shopify e-commerce store.
Inventory Management Strategies
Efficient inventory management helps online stores avoid stockouts, control costs, improve customer service, and make better business decisions.
Before you select an inventory tool, however, you need to adopt an inventory management strategy that serves your business. The right approach can help your Shopify store keep its products in stock, fulfill orders quickly, and minimize waste, ultimately leading to increased profits.
Here are a few inventory management strategies to consider implementing.
Just-in-time (JIT) Inventory Management
Just-in-Time (JIT) inventory management is an approach to inventory control that emphasizes minimizing inventory levels by receiving goods or materials just in time for production or customer demand. It aims to reduce the carrying costs associated with excess inventory while maintaining efficient production and delivery processes.
JIT inventory follows a few key principles:
- Demand-driven approach: Accurately forecasting demand is essential for JIT inventory management. Goods are ordered or produced based on actual customer demand rather than estimates.
- Close supplier relationships: JIT inventory management requires close communication with suppliers to ensure the timely delivery of materials and components. Suppliers are expected to provide inventory restocks in small, frequent shipments, enabling businesses to maintain low inventory levels while still meeting customer needs.
- Efficient production: JIT inventory management only works if your production process is efficient. This often involves using techniques like Kanban.
- Continuous improvement: JIT inventory management is a continuous improvement process. You need to constantly be looking for ways to improve your forecasting, communication, production, and other processes.
The JIT inventory strategy results in lower inventory costs, since the amount of inventory you have on hand should match customer demand. It also helps e-commerce retailers improve customer service by avoiding stockouts. And, JIT inventory can help reduce waste, thereby saving money.
However, JIT inventory management requires highly accurate demand forecasting. This can be difficult, especially when planning for holiday shopping and other seasonal demand curves. Overselling and low stock can become big issues for retailers that use JIT inventory management.
Likewise, close communication with your supply chain is imperative. If something goes wrong in the supply chain, as it did on a macro-level in recent years, you could end up with low stock. JIT inventory management only works if your production process and supply chains are efficient.
First In, First Out (FIFO) Inventory Management
First In, First Out (FIFO) inventory management is a method of stock management and valuation that assumes that the first items received or produced are the first to be sold or used.
In other words, the oldest inventory items are considered to be sold or used before the newer ones. The cost of those items is used to calculate the cost of goods sold (COGS).
FIFO is a popular strategy for many e-commerce brands: It is relatively simple to implement and tends to result in lower COGS, which can lead to higher profits.
Additionally, by following the FIFO principle, businesses are more likely to sell or use older inventory items before they become obsolete or outdated. This reduces the risk of holding inventory that may lose value over time or become unsellable.
FIFO can also be disadvantageous to some e-commerce businesses that are concerned with rising prices or stockouts. For example, if prices are rising, FIFO will result in higher COGS than other methods, such as Last In, First Out (LIFO).
Shopify e-commerce business owners that wish to keep their accounting simple and conservative are best served by using FIFO as their inventory valuation method.
Minimum Viable Inventory (MVI) Inventory Management
Minimum Viable Inventory (MVI) inventory management is a method of inventory management that aims to maintain the minimum necessary inventory levels required to meet customer demand. It is based on the concept of lean inventory management and aims to reduce inventory holding costs while maintaining adequate stock to fulfill customer orders.
MVI inventory management is similar to the JIT method. It requires:
- Accurate demand forecasting: If you don’t know how much demand you have, you can’t order the right amount of inventory.
- Lead time: Retailers must know the amount of time it takes to order and receive inventory to ensure there is enough inventory to cover demand during the lead time.
- Safety stock: Safety stock refers to inventory held in reserve to cover unexpected demand or delays. This is an important consideration for e-commerce stores that operate in volatile markets or that have long lead times (for instance, a furniture supplier).
Businesses that use the MVI approach to inventory management can reap similar benefits to the JIT approach—lower costs, less waste, improved cash flow, and better customer service. There’s no risk of overstocking since the only product you have on hand should immediately move to the customer.
However, it can be complicated to find the right balance between maintaining minimum inventory levels and ensuring sufficient stock to meet unexpected demand or supply disruptions.
Dropshipping is a retail fulfillment method where the e-commerce store doesn’t keep the products it sells in stock in a warehouse. Instead, when a customer buys a product, the Shopify storefront purchases the item from a third party and has it shipped directly to the customer. As a result, the Shopify merchant never handles the product directly.
Dropshipping is popular among entrepreneurs because it allows you to start an online store with minimum upfront investment. There are no warehouse management expenses, no lease for a physical store, and no need to store or procure raw materials.
Additionally, dropshipping can be a great way to test new products and markets without risking a lot of money. Some businesses use dropshipping to test different sales channels, too.
Dropshipping allows for easy scaling of the business. As the store owner doesn’t need to worry about inventory management or fulfillment logistics, they can focus on marketing and sales to drive growth without the constraints of physical inventory.
However, dropshipping can be a little tricky. The quality of the product you sell will depend on the quality of the product from your supplier. If the product is not good, you will be responsible for dealing with customer complaints.
In addition, the retailer doesn’t have control over shipping times; shipping is handled by the supplier. As a result, if the shipping takes too long, you may lose customers. Any returns or refunds are your responsibility to manage.
Shopify Inventory Management Apps
Shopify offers a range of different inventory management apps via the Shopify App Store. These apps can help businesses effectively track, manage, and optimize their inventory — no matter what inventory management strategy you choose.
Shopify inventory management apps can help you keep your inventory levels accurate and avoid stockouts and overstocking. Many of the popular apps can automate tasks such as order fulfillment and return management to save time and money.
Additionally, Shopify’s inventory management apps can provide you with insights into your inventory performance. Armed with this information, e-commerce merchants are empowered to make better decisions about pricing, marketing, and product development.
Some of the most popular apps in the Shopify app market include vendors such as Rich Commerce, Skubana, Stocky, Stock Sync, and SKUSavvy. Each of these options features different inventory tracking capabilities, as well as ways to automate your restock or reorder process.
No matter which vendor you choose, adding inventory control to your Shopify store can result in the following business benefits.
Real-time Inventory Updates
Whether you’re managing inventory across physical and online locations or simply seeking to monitor inventory levels across different sales channels, these tools make it easy to see what’s happening.
Shopify inventory management apps allow you to track your stock levels in real-time and see how your products are performing (and how much stock you have on hand). As a result, your Shopify store can maintain accurate stock counts, prevent overselling or stockouts, and improve order fulfillment accuracy.
Low Stock Alerts
Set up low stock alerts to stay informed when it’s the optimum time to reorder a product. Many Shopify inventory tracking tools can be set up to trigger low stock alerts and even reorder stock automatically, based on real-time sales. This benefit makes JIT inventory and MVI inventory strategies possible for e-commerce stores of all sizes.
Streamlined Order Fulfillment
Inventory management apps automate and streamline tasks such as stock tracking, order fulfillment, and reordering. This benefit reduces manual efforts, minimizes errors, and enhances overall operational efficiency. Businesses that sell a large number of products or that have a high volume of orders can improve their stock management without the need for hiring.
Reduced Inventory Holding Costs
Many inventory management apps offer demand forecasting capabilities, allowing businesses to analyze sales patterns, trends, and historical data. This helps avoid overstocking and improves purchasing decisions, optimizing stock levels to meet customer demand. Businesses that are worried about inventory control can benefit from key metrics related to sales data, inventory levels, and other sales trends.
Accurate Product Listings
As a customer, there’s nothing more frustrating than browsing a website and finding a product you want—only to discover that it’s sold out. Inventory apps on Shopify can automatically update product listings with “sold out” alerts or waiting lists that customers can sign up for to find out when a product is back in stock.
Choosing the Right Inventory Management Strategy and App
A simple search for “inventory management” on Shopify’s app store shows hundreds of results. Ideally, you’ll have an inventory strategy in mind as you explore the different apps on the market.
In addition, make sure that the app is compatible with your Shopify store. As you review your options, look for solutions that provide the following functionality and features.
Look for an app that’s designed to scale with your inventory volume and handle future requirements. Many Shopify inventory management apps are flexible enough to add new products or channels as your business grows.
Check if the app integrates smoothly with Shopify and any other platforms, POS providers, or tools you use. Seamless integration ensures data synchronization and eliminates manual data entry tasks. Many apps, like Rich Commerce, use an API to easily sync with your Shopify and get started quickly. If you use other tools for demand forecasting or shipping and logistics, check if the app can sync with those platforms.
Real-time Inventory Tracking
Central to any app should be the functionality to see what stock you have on hand at any given time. Real-time inventory tracking is crucial for managing purchase orders, forecasting pricing and profitability, and improving customer satisfaction. Look for additional features that could be valuable for your specific business needs.
If you ever decide to branch out — and sell on Etsy, Amazon, or Ebay, for instance — can your inventory management solution keep up? Shopify is just one of many marketplaces available to e-commerce retailers. Look for a solution that can help with order fulfillment across all platforms where you may potentially sell.
Lastly, what kind of customer experience does the inventory management app offer? Take into account the user interface and ease of use. Look for an intuitive app that’s easy to navigate and use effectively. Check the availability of customer support: Can they be reached on multiple channels, 24/7?
Best Practices for Shopify Inventory Management
Effective inventory management can save your online business thousands of dollars in lost sales, deadstock, and waste. These best practices can help you streamline your operations and improve your logistics with relatively low overhead costs.
Regular Inventory Audits and Tracking
Conduct periodic inventory audits to reconcile physical stock with recorded quantities. This helps identify discrepancies, such as missing or misplaced items, and allows you to make necessary adjustments to maintain accurate inventory levels.
Utilizing Barcode Scanners
Use a barcode scanner to scan products as they are received, shipped, or returned. These scanners help prevent errors in inventory management and ensure smooth order fulfillment.
Streamlining Order Fulfillment Process
The order fulfillment process — which includes receiving, processing, and delivering customer orders — can be optimized with the right inventory tracking workflows and controls. Barcode scanning, automated picking and packing, and efficient order routing are all ways to enhance efficiency and accuracy in meeting customer needs.
Managing Returns and Cancellations
Returns are a normal part of doing business. But, they can also clog your workflows and manage managing inventory more complicated. Set up a system to sync inventory and stock levels to include product returns and exchanges.
And, if you sell on multiple channels, ensure that your inventory levels are synchronized across all platforms. Implement and inventory management app that enables real-time inventory updates to prevent overselling or underselling.
Optimizing Product Listings
Finally, make sure your product listings are up-to-date and accurately reflect what you have in stock. Pull inventory data automatically to your Shopify storefront in order to make sure customers know what you have in stock.
Managing a Shopify store is easier with the right approach to inventory management. Most of the best Shopify inventory management apps provide a way to sync inventory with your point of sale, Quickbooks accounting tools, and other key business tools. These apps will also automate some of the most time-consuming aspects of tracking inventory, reducing human error and improving customer satisfaction.
Prioritizing inventory management is vital for the success of your e-commerce store. Whether you employ Just In Time inventory management or dropshipping, look for a tool like Rich Returns. Rich Returns makes it easy to manage customer returns and keep your inventory updated, preventing the risk of deadstock and wasted product.
Learn more about Rich Returns and sign up for a free 14-day trial.