No matter how big your business is, you need to keep track of your inventory. It’s one of the biggest challenges that business owners face, and there are lots of logistical issues that go into it. It’s not just as simple as writing down what you sell… and, in fact, most ecommerce shops should realize by now that the old “spreadsheet” routine just doesn’t cut it.
Using old methods isn’t the only inventory management mistake that small businesses make, though. While large shops typically have their inventory systems figured out through years of trial and error, smaller businesses don’t yet have that luxury. They are bound to make mistakes as they figure things out, and those mistakes can take their toll.
And that’s where this article comes in. We’re going to go over the most common inventory management mistakes that small businesses make so that you can avoid making them in your own path towards growth and greatness. We can’t guarantee that you will never make these errors after reading about them (after all, to err is to learn), but you’ll hopefully be more prepared for them after this quick overview. Let’s get into it!
Reliance on spreadsheets
Okay, before we get into the meat and potatoes of this article, it’s probably best that we go over this one really quickly. Although we mentioned it earlier, we may as well dig in a bit further to help you understand. Many new business owners are starting to learn that spreadsheets aren’t the best way to go, but in case you’re still using this antiquated method, let us explain why you should stop.
We’ll start by admitting that spreadsheets are an alright way of handling your inventory management in the very early days of your business. If you’re only moving a few products here and there with a small amount of total revenue, a spreadsheet might be a reasonable way to keep track of things.
But if you haven’t already hit the stage of growth where spreadsheets no longer handle your inventory, you soon will. Manually entering all of your data into Microsoft Excel or a similar program takes a ton of time, and it’s just not realistic to spend all of your time on data entry once you start becoming more busy. Additionally, entering in hundreds of transactions by hand means that you are at a high risk of making a mistake.
Beyond this, though, spreadsheets are just outdated. We now have advanced inventory management software that will either help you keep track of everything or just outright do most of it for you. Using a piece of software will free up more of your time so that you can put those hours right back into progressing your business.
Do you really want to spend all of your future days digging through rows and columns? Our guess is no. There’s a whole world of inventory management software out there to explore. You’re bound to find something that suits you.
Too much distance between business and warehouse
Nearly every seller starts off very small. They find a few things that they want to sell, start up a small business as a side hustle, and make a few bucks here and there. These golden days are challenging, but they’re also intoxicatingly simple. You just keep some inventory in your house, sell it off when you can, and then get some more.
But as business starts to ramp up, you’ll find that using your house as your own personal warehouse just isn’t a good idea. Sure, there are benefits to it, but no one wants their daily existence to be disrupted by boxes and boxes of products. This is the stage when the business owner gets a warehouse to store their goods. It frees up space in their homes and signifies a transition from a hobby business to a much more legitimate company.
That’s very exciting, but it also presents an opportunity to make a crucial inventory management mistake. Too many small business owners choose a warehouse that is just too far away from them. They might find an excellent deal on a warehouse four hours away and think that the savings outweigh the negatives.
Here’s the thing: you don’t want to be separated from your inventory by too much distance. You may think that you don’t need to visit your warehouse very often, but that’s a dangerous mindset to get into. If you pick a warehouse that’s super far away, you’ll simply never visit. That can lead to a variety of inventory errors. If you can’t possibly check up on the physical state of your products, you won’t ever be able to find and correct these errors.
Creating a disconnect between a business and its inventory is something that you never want to happen. If you are forced into picking a warehouse that’s really far away from you, make sure that you have a solid team either working in it or otherwise nearby to check in and report on it to you.
Alternatively, don’t be afraid to shell out a few extra bucks to get a warehouse in a more convenient location. It might seem like a drag at the time, but it will be worth the investment in the long run. How much you’re willing to spend for this convenience, though, will ultimately be up to you.
Offering outdated inventory numbers
Look, we get it. The world of ecommerce moves quickly. That can be a good thing, but it also presents unique challenges. If you are constantly making sales and having inventory changes behind the scenes, it can be hard to have a perfectly accurate idea of what your inventory actually looks like.
But standards are changing. Customers these days expect you to have a perfect idea of how many items you have left. And unlike in a physical store, they can’t just take a look at the shelf to see what’s still for sale. They need to rely on your understanding of your own inventory to know if their order will actually go through or not.
That sounds like a pretty simple problem to solve. Customers want to know how many items are left? Okay, then you’ll just display an accurate inventory number, right?
Well, yeah, but it’s actually a bit more complicated than that. There’s a reason (well, actually, a few different reasons) why multiple businesses out there make the same mistake of saying that they have something in stock when they actually don’t. For one, they might be manually counting inventory, something which can cause them to be behind. For two, they may just not have updated their stock online.
Luckily, modern day inventory management software allows you to count inventory and display what’s still in stock in real time. You don’t need to worry about constantly checking whether you have something in your warehouse or not. If you get automated software, it will be able to keep all of your numbers updated when sales or other changes are made.
No matter whether your software takes care of this issue or not, you still need to make sure that your shop accurately reflects what you actually have. Needing to cancel a customer’s order because you aren’t able to fulfill it with your current inventory is embarrassing. It can also result in a nasty review, and that’s definitely the last thing that you want.
Ordering too much
Inventory management largely deals with keeping track of what is in your warehouse. However, the process of inventory management really starts at the very beginning: ordering items from your manufacturer or vendor. Having a steady flow of items is really important in order to prevent stockouts, so factoring your ordering into your inventory management is key.
To that point, it’s wise to deeply consider how much you are ordering. You always want to make sure that you order enough that you never end up with an empty warehouse. That means that you can’t fulfill purchases from your customers, and that in turn means that you’re losing out on revenue.
But the opposite of that is true as well. You don’t ever want to order too much inventory all at once. While it might seem like a smart way to avoid ever running out of items, having too much poses its own host of issues. And, unfortunately, many otherwise savvy business owners can get restless and find their warehouses stocked with way too much stuff.
Why is this a problem? Buying in bulk saves money and lets you avoid stockouts, right? While that is true, it makes your entire inventory management system less flexible. Let’s look at an example to drive that point home.
Say you’re supposed to have 60% of your inventory be made up of product A, 30% made up of product B, and 10% empty. You might get the urge to buy more of product B to fill in that 10% so that your inventory is 100% full. So you do this and you feel good about your decision.
But then you get a new market research report that says that no one cares about product B anymore; instead, they only want to buy product C. You scramble to sell product B so that you can free up space to store and sell product C, but you’re just unable to move any of those pesky product Bs. You’re then stuck with a stagnant inventory, unable to capitalize on new trends. You watch as your competitors make lots of money selling product C… and you feel sad.
It’s a bit of an exaggerated scenario, but you see our point. Buying way more than you actually need might seem like a safe move, but it can make it so that you don’t have the flexibility to capitalize on other opportunities. Instead, calculate your inventory turnover ratio and try to make decisions based on whether it seems too low or too high.
Tunnel vision on your vendor’s cost
The bottom line is always going to be money. While there are plenty of other issues to consider in the ecommerce world, your goal is to make revenue while supplying customers with a product that they actually want or need. With that in mind, a natural component of inventory management is figuring out how to get the most affordable products possible.
This involves talking to many different vendors to find who will give you the best deal. But what really defines whether something is a good deal or not? Most small business owners tend to tunnel vision on the price that they pay to receive the item, but there’s actually way more that goes into it. There are many factors to consider – both financial and logistic – to decide whether a price is actually good or not.
One great example of this is the supplier lead time. This refers to how long it actually takes for your order to get to you once you order it. A vendor might offer a low price because of their incredibly long lead time. You’ll wind up waiting a ton of time for your items to arrive. Whether that price is justifiable or not is up to you, but it may cause you to spend even more money on expedited shipping and other costs to speed things up on your end.
Another factor that you need to keep in mind is the actual quality of the items that you’re getting. Cheap prices generally coincide with cheap goods, and cheap goods generally coincide with dissatisfied customers and defects. Those are both very costly problems.
If your customers aren’t happy with what they receive, they might return their product and demand a refund. And if your inventory is defective, you can’t even sell it. You are naturally going to have some level of both of these problems, but focusing only on finding a cheap purchase price for inventory will increase the frequency of them.
When thinking over your inventory, remind yourself that a cheap purchase price isn’t the only thing to consider. In fact, “cheap” orders might end up costing you more in the long run.
Working with decentralized inventory
How big your business is will determine what your storage situation looks like. As discussed earlier, sellers with the smallest shops can get away with storing their items in their own home. The next level, of course, is getting a warehouse. But sometimes having just one warehouse isn’t enough. When the inventory levels get big enough – or when large warehouses aren’t available – many sellers opt to work with multiple warehouses in different locations.
Similarly, some smaller sellers will opt to pay for some kind of warehouse or storage unit for item storage while still keeping some inventory in their homes. This is much like the multiple warehouse strategy: it allows for increased storage without relying on one large location.
At a glance, this doesn’t seem like a huge mistake. Having more than one warehouse just means you have more room for storage, you might be thinking. But having your inventory spread out in multiple locations is a recipe for disaster in the long run, and it’s definitely a common inventory management mistake among small business owners.
One of the major reasons why this is a problem is that it makes the entire inventory management process far more complex. Whether you’re handling things automatically or manually, working with multiple locations means more steps that are hard to configure with one another. Keeping track of inventory in five locations is undeniably trickier than doing it in one. More mistakes are bound to crop up for this reason.
Additionally, multiple locations means that you (or anyone else, for that matter) will never be able to visually verify your total inventory. If problems ever arose, you would need to visit multiple locations and remember what the situation was like at each of them. This is troublesome.
For these reasons, it’s wise to try to make your inventory as centralized as possible. At the end of the day, it really is just the simplest way of doing things. And when it comes to inventory management, it’s smart to keep things simple.
Complex product classification
In the vein of keeping things simple, let’s talk about product classification. It’s important to make sure that you have specific ways of keeping track of the different items that are in your inventory, particularly if you carry many products that are in completely separate categories. However, this is only helpful to an extent. If you get too complex with your product classification, you can run into some issues.
Let’s say that you’re selling a certain item that comes in three different colors. It makes sense to assign each color a different SKU, or stock keeping unit. That will allow your system to automatically keep track of how many of each color variation you have, and it will also make it relatively easy for a warehouse worker to know which item they should package.
But what if you have, say, 20 different colors? And what if each color has a small, medium, and large variant? That means that that one product will now have a grand total of 60 different SKUs associated with it. Across a diverse inventory, this can really add up. If you start having hundreds of strange SKUs that are so specific they all start to blur together, your workers will get confused. And even worse than that, your automatic inventory management systems might also start making mistakes.
We’re not saying that you should stick to just two or three different SKUs and then call it a day. But you should aim to hit a middle ground between not enough specificity and way too much specificity. If your inventory system requires tons of explanation, it might be complicated enough that it will cause problems down the road.
Not planning for growth
For most shop owners that haven’t yet hit it big, the ultimate goal is growth. Sometimes there doesn’t even need to be a concrete end goal. You might not yet know how big you want your business to get, and that’s okay. Just knowing that you want to grow your shop and make more money is enough to get you motivated to innovate and get a leg up on your competitors.
But as we’ve already highlighted, growth can complicate your inventory management process. You probably already intuitively understand that having more customers means that you are going to need a larger inventory, but are you actually prepared for that? Do you have a flexible system in place that will allow you to grow?
Far too many shop owners get started, pick a way to handle their inventory, and then leave it at that. They don’t consider how they can get more storage space, how they will hire more employees, and all the other things that they will need to do as they grow. And because they aren’t prepared for all the inventory changes that growth brings, they simply don’t grow. They stay where they are.
There isn’t anything inherently wrong with not growing. But if your goal is to make your shop bigger and better, you need to make sure that your inventory management system is ready to handle change.
What does this look like, exactly? It depends. The main goal is to make your inventory system as flexible as possible from beginning to end. If you’ve signed a multi-year contract with a vendor that can only supply you with your current inventory and nothing more, that means that you won’t be able to step things up with rising demand.
Think through your entire supply chain. Will you be able to quickly and efficiently make changes without crippling your business, or will you have to deal with an unfit inventory system while your business grows? Make sure to answer these questions now so that you don’t have to deal with them later on when it’s too late to really capitalize on growth opportunities.
Poor use of storage space
Here’s an inventory mistake that can apply to literally all business owners. It doesn’t matter how big or small your shop is: you need to use your storage space efficiently. If not, you are basically throwing your money away. Let’s look at a few examples at different scales to understand this common mistake.
Imagine that you just started your business. You’ve got a pretty small inventory that you are storing completely in your home. You’ve made a few sales, and it seems like demand for what you have is going up as the word spreads. That’s a great thing! You start to get a lot of orders, but you can’t actually act on the demand because you don’t have enough space to store the inventory. Your bedroom is already filled with items, and you just can’t fit anymore. So you start turning down orders, and your business doesn’t grow.
But you forgot about one thing in this scenario: your basement. You neglected a whole other area of your home that you could have used for storage. In this example, your storage space is your home, and you are using it inefficiently by only using a small area of it for your inventory.
Let’s look at a more practical example. Let’s say that Ms. Commerce owns a warehouse for her inventory. She has 30 shelves, each of which can hold a total of 100 items. That means she has a maximum capacity of 3000 items. That sounds like enough to her, so she makes sure to operate as if she can never go above 3000.
However, what she doesn’t realize is that her shelves are high enough that items could be stacked on them. She has the room to create a stack of two items rather than just one, essentially doubling her storage. Rather than her maximum being 3000, it is actually at 6000.
It’s not super likely that a seller would fail to notice that they have another storage room in their house or that they have space to stack items, but it’s also not wholly unrealistic. It is quite likely, though, that someone wouldn’t take full advantage of the space that they have for inventory storage. In fact, it actually happens quite often. So take a critical look at how you are storing your items and ask yourself if you can make any small optimizations.
Disconnect between vendor orders and customer orders
Here’s a question for you. How often do you order from your vendor or supplier? Once or twice a month? That’s a very common answer. Most sellers schedule their orders ahead of time and buy new inventory on a regular basis. They think that this will help them avoid stockouts, and it also lets them free up time that they otherwise would have spent worrying about when to order new products.
Here’s a follow-up question. How often do your customers buy things from you? Do they follow a strict ordering schedule? We’ll answer that for you: no, they do not. Your customers buy products whenever they feel like doing so. That might mean 100 orders in the first half of the month and only 20 in the second half. The orders you get are mostly out of your control, and that means that what you have in stock is also largely a factor of your audience’s demand rather than anything else.
You probably see where we’re going here. It might seem like a good idea to make regular and scheduled orders from your supplier, but it also means that your inventory is disconnected from the demand of your customers. If demand goes way up, your order schedule won’t be ready to handle it. And if demand is really low for whatever reason, your warehouses will wind up overstocked with items that no one really wants.
Of course, it’s not a great strategy to just make your orders reactively. You might find yourself in a sticky situation if you wait to order more until the very last second. Instead, you can set up your inventory management software to constantly keep an eye out for how demand is fluctuating and to change your orders based on that.
Managing supply in real time is a difficult task for human beings, but computers can do it relatively easily as long as they are able to access all of your sales data. If you find that your supply doesn’t often match up with the demand of your customers, this might be a smart move to make.
Being unwilling to change
Here’s the thing: being a business owner requires you to be open to change. Even if you think your business is being run as well as it can be, it’s always in your favor to try new things and to innovate. Those who do the same thing over and over will likely be overtaken by competitors as time goes on.
This same principle of being open to change should apply to your inventory management system as well. It’s important to know about the mistakes we’ve discussed in this article, but it’s even more critical to be willing to change how you do things to make sure that you don’t make these same mistakes yourself. In other words: it never pays to be stubborn.
One way to go about making sure that you make the proper changes is to closely monitor your KPIs and other business metrics. Look at how often you are overstocked or understocked. If either or both of those issues happen often, you should change your ordering schedule. Are you losing lots of money somewhere along the supply chain? That means that you should address whatever is causing you that financial loss.
Pay close attention to the data and don’t try to argue against it. If the numbers are telling you that you are doing things in an inefficient way, you should listen to them. Don’t worry, you can trust them. The numbers have your back.
