Illustration by Melanie Peters
Out-of-stock messages exceeded $2 billion last October, up 250% from January 2020 and 325% from October 2019.
What’s interesting, however, is consumers' intent to spend—especially during the upcoming holidays—is not receding. Adobe reports Americans are spending $72.4 billion online with an 8% year-over-year growth.
With consumers still spending, any stock outages can drive your customers to competitors and result in a huge loss in ecommerce sales.
On the opposite end of the spectrum, too much inventory can also negatively impact your bottom line. Stats show US retailers sit on approximately $1.43 in inventory for every $1 in sales.
The good news is, with the right stock management tools and apps, it’s possible to predict sales and choose the correct amount of safety stock.
Table of contents:
- What is stock management?
- The true value of effective stock management
- How is stock management related to inventory management
- Different types of inventory vs. stock
- Common types of stock problems
- How to choose the correct amount of stock
- Receiving stock at the right time
- Make stock management easy with an IMS
- Stock management FAQ
What is stock management?
The term stock management is the process of determining and properly managing how much stock a company should have at any given time. It involves all of the processes associated with ordering, tracking, controlling, and storing inventory.
Stock management involves:
- Tracking fluctuations in your stock
- Monitoring the condition of your stock
- Understanding customer demand for stock
- Determining costs for materials
- Calculating shipping, handling, and storage costs
Proper stock management makes it possible to meet customer demands without wasting money on excess stock.
“Stock management is crucial for ecommerce companies for many reasons. First, it guarantees that goods are offered when clients wish to buy them. Second, it helps prevent overstocking, which can waste money and cause storage and logistical issues, says Rohit Bimbra, EO/founder of HomeHealthcareShoppe.com.
“Finally, by making sure that products are delivered on time and in the right quantities, effective stock management can contribute to increased customer satisfaction.”
The true value of effective stock management
“Stock management is important for ecommerce stores because it directly impacts the customer experience. If a customer visits a store and can't find the product they're looking for, they may leave and never come back. Good stock management helps ensure that products, SKUs and barcodes are always in stock and easy to find,” says Colm Hanley, finance officer at Healthier Trajectory.
The perfect example of shifting customer loyalties due to stock outages happened in the 1990s during the price wars between Walmart and Kmart.
With the rise in competition between the two stores, Walmart made a strategic move and updated its supply chain system to the just-in-time (JIT) method, allowing it to restock shelves based on fluctuating customer demand.
Kmart, on the other hand, did nothing to adopt evolving supply chain management systems and frequently let their stock run out.
Customers became increasingly frustrated with Kmart’s stock outages and shifted its loyalties away from Kmart toward Walmart.
The evidence? From June 1998 to 2000, stock prices rose for Walmart by 82%. Kmart’s dropped by 63%. Eventually, Kmart filed for bankruptcy, closing most of its stores across the nation.
How is stock management related to inventory management?
Stock management and inventory management are often used interchangeably. However, stock management is only one part of your inventory control and management process.
“Stock management is closely related to inventory management, which includes tracking inventory and managing the stock of products in a business,” says Cameron Toole, CFO at the IBR.
With stock management, you keep track of the quantity, condition, and demand of your stock—or the final goods that are ready to hit the shelf.
Inventory management, on the other hand, includes the entire process of monitoring and tracking products, inventory, customer demand, fulfillment, forecasting, and supplier information.
Inventory management is related to stock management because it is responsible for tracking the stock that is in the store in real-time. This includes not only products that are for sale but also products that are out of stock, back ordered, or on sale,” says Colm Hanley.
Different types of inventory vs. stock
As mentioned above, inventory and stock are slightly different. Inventory is all encompassing; it’s anything you use to make your products or run your business. It can include the raw materials you use to make a product, the final product itself, and the packaging that goes on the finished goods.
Stock, on the other hand, is the finished goods you sell to your customers. In other words, stock is part of your inventory. But, not all of your inventory is your stock.
There is some debate about how many different types of inventory there are. Let’s look at the four main types of inventory (one of which is stock).
1. Raw materials and components inventory
Raw materials and components include any part of your inventory that you use to make your finished products, consisting of direct and indirect materials.
Direct materials are a separate piece of the final product. For example, if you sell sunglasses, the lenses would be an example of a direct material.
Indirect materials are used to make the products, but aren’t part of the final product for sale. For example, lens cleaning supplies would be an indirect material.
2. Work-in-progress inventory
Any material used to create a finished product is work-in-progress (WIP) inventory. If you stick with the sunglasses example, all of the glasses that are partly assembled—but not fully ready—are considered WIP inventory.
WIP inventory isn’t raw materials, but it’s also not a fully assembled product that’s ready for the shelves.
Packaging includes anything you use to hold your product and box up and ship your product. For example, if you sell sunglasses, the case would be packaging.
Packing stock could also include labels, tissue paper, and cardboard boxes.
4. Finished goods (this is your stock)
Finished goods are any product you sell in its complete form. If you sell dressers, then the entire dresser with all its parts intact would be a finished good. Finished goods are the part of your inventory that is ready to hit the shelves.
Common types of stock problems
“The most common types of stock problems are stockouts, overstocks, and shortages,” says Avi Lebovitz from Marketplace Fairness.
“A stockout is when the store runs out of stock of a particular item. This can lead to lost sales and customer frustration. An overstock is when the store has too much stock of a particular item. This can lead to financial losses, as the store may need to sell the items at a discount or may need to return the items to the supplier. A shortage is when the store does not have enough stock of a particular item, which can lead to lost conversions at the point of sale (POS) and customer frustration.”
As illustrated by the Kmart and Walmart stock management debacle of the ‘90s, there’s a correlation between stock management and customer loyalty. When Kmart’s customers couldn’t get what they needed from Kmart, it didn’t take them long to patronize Walmart instead.
Not much has changed for consumers in this regard in today’s modern world. Since 2019, 75% of US consumers report they’ve switched brands or stores, according to McKinsey.
The primary reason for customers shifting loyalties today is the same as it was in the ‘90s: supply chain issues—namely not being able to get preferred products from favorite brands.
Bottom line: If you want to hold onto your customers, it’s critical to have systems in place to identify potential stock problems and solve them preemptively.
“If you are consistently out of stock or take forever to clear inventory, then you may have a stock problem,” says Shiv Gupta, Founder and CEO of Incrementors.com.
To evaluate whether you have stock problems, consider the following:
- Do you have customers regularly ordering products that are out of stock?
- Do you have a congested warehouse with low inventory turnover that takes up storage space?
- Do you often end up writing off a large amount of unsold, dead stock or spoilage?
- Do you have trouble allocating your stock to multiple channels?
- Do you find it difficult and time-consuming to differentiate bestselling and worst-selling stock?
- Do you find yourself overpaying suppliers because you’ve mistimed stock replenishment points?
If you answered yes to any of these questions, your stock management processes are most likely lackluster.
Thankfully, there’s a better way to identify common stock problems, provide adequate solutions, and foster ongoing customer loyalty.
“There are a few ways to identify stock problems in an ecommerce business. One way is to track your inventory levels over time and compare them to your sales,” says Ben Rollins, Co-founder of Axon Optics.
“If you see a consistent discrepancy between your sales and your inventory levels, it could be an indication that you have a stock problem. Ecommerce platforms also typically have built-in inventory management features and functionality that can help you track your inventory counts and identify stock problems.”
How to choose the correct amount of stock
“Stock management is essentially cash flow management. When you decide to produce inventory you are converting your cash into something that you think will yield more cash down the road,” says Aaron Alpeter, Founder of Izba.
“Most ecommerce customers will expect that inventory is readily available and will ship quickly after ordering. The two most common issues are overstock (tying up cash on dead stock that won't sell for a long time) and understock (not having enough stock to sell).”
Keeping the right amount of stock on hand is a challenging balancing act. If you don’t have enough stock, you’ll disappoint your customers.
Sixty-three percent of today’s consumers expect businesses to know their unique needs and expectations. And one of the most significant expectations is streamlined shopping experiences that let them buy what they want the second they want it.
Not only do today’s customers want their demands met immediately, but 61% of consumers will pay at least 5% more for a good customer experience, and 65% of consumers will pay more for faster delivery of their desired product.
In today’s fast-paced economic landscape, even the most loyal customers will buy from your competitors if you don’t have products on hand.
The opposite is also a problem. If you have too much stock, it can mean a loss in revenue, take up valuable warehouse space, and boost carrying costs. Either way, you lose money.
The answer to avoiding these potential problems lies in calculating the right amount of stock to have on hand.
“The amount of stock you need depends on a variety of factors, such as the type of products you sell, your shipping policies, and your average purchase order size. It is important to track your sales channel data to see how much stock you need to have on hand at all times,” says Colm Hanley.
“To ensure you have the right amount of stock, make sure that your inventory tracking is accurate and up to date. Second, set reorder points to trigger when you hit low stock levels. This will help you make sure that you never run out of stock. Finally, use demand forecasting tools to predict changes in demand and plan your stock levels accordingly.”
With all of the different moving parts involved in choosing the right amount of inventory—including changes in demand, supply chain problems, cost of goods, and seasonality—even the biggest brands can get it wrong if they’re not using the right tools.
The best way to choose the right amount of stock is to make sure stock and warehouse management is part of your full inventory management process. More importantly, it’s critical to adopt a robust and automated inventory management system to do the hard work for you.
An effective inventory management system takes human error out of the equation, uses proven formulas (e.g., economic order quantity (EOQ) formula) to gather data, sets up correct reorder points, and helps you with forecasting.
Receiving stock at the right time
The other part of the stock management equation is making sure you get the correct amount of stock at the right time.
It doesn’t do your customers much good if they can’t reorder their favorite products from you exactly when they need them.
What’s more, customers don’t take kindly to overselling. “Sixty-nine percent of consumers are less inclined to shop at an online retailer again if their orders are completed even two days late,” says Shiv Gupta.
As such, a critical part of your stock management process is getting the timing right.
Unfortunately, timing your stock reorders is just as challenging as making sure you’re ordering the correct amount of stock. It involves order management techniques like setting reorder points, using stock allocation, understanding your sales velocity and seasonality, having a good pulse on historical data to estimate future sales, potentially using a first-in-first-out (FIFO) system, and even using a proven reorder formula to determine the correct amount of stock.
In short, it’s complicated to get right without the help of an inventory management system that tracks data and automates and streamlines the process.
“There are lots of different applications out there to manage stock,” says Nick Malinowski of OTW Shipping. “An IMS [inventory management system] can track your stock and inventory and syncs with your selling platforms, like Shopify. Certain IMS have built-in forecasting tools, which makes it easy to know when to reorder products too.”
Make stock management easy with an IMS through third-party logistics
Stock management is an integral part of your overall inventory management technique. When you can track the data behind your brand’s unique supply and demand, you get an accurate look at exactly how much stock you need on hand and when.
While there are several ways to approach stock management, every brand should use an inventory management software. Even better, find a third-party logistics (3PL) partner who will take on managing inventory for you.
Stock management FAQ
1. How are stock management and inventory management different?
Stock management is the process of tracking, managing, and storing complete products to meet consumer demand. Inventory management is the process of keeping track of all the items you use to run your business.
All stock is inventory, but not all inventory is stock, making stock management part of the larger inventory management process.
2. What are the three most common problems brands have with stock?
There are three main problems brands face when managing their stock. The first problem is overstocking. Overstocking occurs when you order too much excess inventory. This means you'll have to pay for extra storage space and transportation costs.
The second problem is understocking. This happens when you don’t have enough product on hand to meet customer demands. If you don’t have enough stock, you risk losing customers to competitors or spending too much money on stock you can’t move.
The third problem is obsolescence. This is when you have inventory but it’s outdated, no longer in demand, expired, or can’t be sold for any number of reasons.
3. How does a 3PL help ecommerce stores with stock management?
A 3PL (third-party logistics) is a company that provides warehousing and distribution services to companies. If you work with a 3PL, it will handle all your stock and inventory from multiple suppliers and customers.
It’s challenging for ecommerce stores to handle all of the logistics behind stock, inventory, and shipping. Hiring a 3PL helps large and small businesses save time and money by reducing their reliance on internal resources.
4. How do you make stock management of your ecommerce store easy?
Running an online shop is a great business endeavor and can be highly profitable, especially as more consumers are shopping online.
However, today’s consumers are demanding and expect to be able to buy whatever they want and whenever they want.
To meet these customer demands, it’s essential to properly forecast your stock. The best way to do this is with the help of an inventory management system or a 3PL company.