How to Manage Inventory for Your Online Store

While setting up your online store, it’s important to have a clear ecommerce inventory management strategy. 

Your inventory is whatever physical goods you’re putting up for sale. Inventory management is the process of organizing and controlling those goods as they move through the supply chain. An ecommerce inventory management strategy ensures you have enough physical product on hand to fulfill orders between when you order products and when you sell them. 

A good ecommerce inventory management system helps you keep stock levels in line with the demand for your products. It also minimizes your cost of stocking inventory, which benefits your return on investment (ROI). 

Having a system for inventory management and analytics ensures that sales and returns don’t slip through the cracks, and makes it easier to audit what you have.

Deciding how to stock your inventory

There are two main methods for stocking inventory: 

1. Outsourcing to third-party dropshippers or print on demand suppliers

2. Stocking and storing your own inventory

Working with third-party suppliers

Dropshipping or print on demand suppliers allow you to make online sales without inventory. This method cuts out the costs of renting and maintaining your own inventory storage space. That translates to lower startup costs. 

Dropshipping and print on demand are also more scalable than managing your own inventory. You won’t need to worry about making more personal storage space as your business grows.

That said, relying on third-party suppliers has its downsides as well. The two main things to keep in mind are:

1. You won’t have visibility on your products. You’ll need to trust your third-party warehouse management on quality control and inventory tracking. Prepare a customer service strategy in case anything goes wrong during order fulfillment or shipping. 

2. Fulfillment costs are typically higher with third-party suppliers. Compare costs when you set up your shipping and fulfillment strategy. For small businesses with fewer purchase orders, it may make sense to start on your own first.

Squarespace offers a few different dropshipping and print on demand tools to help you get started with inventory management for your ecommerce business. 

Learn more about third-party logistics (3PL)

Managing your own inventory storage

The benefits of holding on to inventory control can outweigh the downsides. When you stock your own inventory, you have more quality control over your products. 

The size of the storage space you need depends on the sizes of your products, what types of products they are, and the amounts you’ll need to stock at a given time. 

If you sell large products or need to keep a lot of products in stock, you may need to purchase or rent storage space in an off-site warehouse or stockroom. You can get creative with your options: Rent a studio that could transform partially into a stockroom or use an extra room in your home that works well for inventory storage. Or see if a local self-storage company has lower rates than warehouses. 

Remember to consider the environmental conditions of where you’re storing inventory items, especially if your goods need to be stored within specific temperature ranges. 

Managing inventory

There are three key aspects to building an inventory management solution that works for your business:

1. Organizing

2. Forecasting

3. Auditing 

Once you build these core systems, they’ll help you run a smoother order management and fulfillment workflow. Having a way to record all of the above also gives you more reliable inventory and sales reports.

Inventory organizing

When making an organization system for your inventory, it helps to focus on these four priorities: 

1. Categorization

2. Freshness

3. Convenience

4. Tidiness

Start by defining the categories of products you sell. Then, group similar items closest to each other. For example, if you run a shop that sells clothing and accessories, you could stock all of the apparel in one section, the jewelry in another section, and so on. Within each category, organize products by subcategories, such as color variants of the same type of earrings. If you sell products that are the same product in different sizes, organize by size too. 

Inventory freshness is also known as the “first in, first out” (FIFO) method. With FIFO, you organize your products with the oldest products at the front and new inventory closer to the back. This method is especially important if you sell perishable products, like food or makeup, to minimize the chance you’ll get stuck with expired products. Even if you don’t sell perishable products, this method ensures no one item is sitting on your shelves for too long. 

Next, organize for your convenience. Identify your bestsellers and stock those closest to your fulfillment station. That could mean removing those items from their broader categories and creating a section dedicated to bestsellers, or organizing your categorized sections so that bestsellers are at the front of each section. Organizing this way will create more efficiency in your fulfillment process. 

Tidiness is the final piece of your inventory organization. Keeping an orderly storage space will help to preserve the quality of your products and their packaging. Tidiness will also help you to keep an eye on low stock levels and see where there’s available space when new product shipments arrive. 

Inventory forecasting

Inventory forecasting is a way of describing the inventory management method that will most reliably help you prevent going out of stock or overstocking. You might also see this referred to as demand forecasting, which is when you use a variety of factors to predict what your customers will want to buy from you next. 

Your most crucial inventory forecasting tool is inventory management software, which will help you do things like analyze your sales data. You’ll also want to consider factors like seasonal trends and the timing of your marketing efforts when predicting demand. 

Accounting for past customer orders, trends, and marketing will help you decide how to set a reorder point for each of your products. A reorder point is the lowest possible number of each product you could have without selling out. 

Inventory management software has a functionality that alerts you when inventory falls below the reorder point you set. 

For example, say you sell handcrafted sweaters. Your historical sales data and seasonal trends tell you that you tend to sell around 15 medium-sized sweaters every month from September through March. That average increases to 30 sweaters per month before the holidays in November and December, and decreases to only five per month in April through August. 

In this example, you might want to update your reorder point based on the seasonality of your product. Your reorder point could be 10 units in September, 20 units in November, and only three units in May. 

But once your sweater inventory falls below 10 units in September, how will you know how many sweaters to order? Set a maximum stock level for each of your products to automate this part of your inventory too. 

For example, your sweater maximum stock level could be 20 in September. Maximum stock levels help reduce the risk of creating dead stock in your inventory. Dead stock is a product that you’ve stocked too much of but can’t sell anymore, typically because it’s outdated. New Year’s sweaters from past years would be considered dead stock. 

When setting your reorder points and maximum stock levels, include lead time in your estimates. Lead time is the window between when you order more stock from a supplier and the point when you actually receive new stock. If you’re not ordering something ready-made, this involves some supply chain management. Build in lead times for all of your materials and creation time so you can meet your order deadlines..

Inventory auditing

An inventory audit when business owners physically count every unit in their inventory to confirm it matches the current quantities in their inventory management software. Even with the best inventory management software, it’s common for inventory to get misplaced, damaged, or somehow entered incorrectly into your system. That’s why it’s best practice to perform regular audits of your inventory.

It’s helpful to schedule regular inventory audits. Especially when you have a lot of stock, multiple stock locations, or a particularly busy fulfillment or returns period, it’s easy to misplace products or store inaccurate numbers in your software.

Audits help check the physical count against the digital record and keep your items in order. Audits also support your re-ordering process, since you might find during an audit that you’ve dropped below a product’s reorder point without the system registering it.

There are a few different ways to audit inventory. A common method is to do a full inventory count at the end of the year or each quarter, around the time you file income taxes.

An alternative is to perform cycle counts: Choose a different category each week to count and compare against your recorded quantity. This way, you can audit on an ongoing basis and avoid the all-at-once hassle of an year-end audit.

Audits also help you maintain quality control of your inventory. Do you sell perishable items? If you’ve been using the FIFO method, you’ll be able to easily check expiration dates at the front of your inventory. Do you sell fragile items? Regular audits will help make sure none of those products have been accidentally damaged. 

Setting up ecommerce inventory management software

Inventory management software should be the central point of all of your ecommerce inventory management. This software will help you sync your inventory across multiple storefronts. That means you can see real-time inventory levels across online stores like Squarespace Commerce and any popular online marketplace—all from one dashboard. 

Many tools even include the ability to create barcodes for your products. Scanning barcodes makes counting products more efficient and less manual, which can remove room for error.

Squarespace Commerce even includes a product import tool that makes it easy to import your inventory from other online marketplaces to your Squarespace shop. That way, your customers can make a purchase no matter where they find your product.

Whichever inventory management software you choose to streamline your operations, consider putting one person in charge of overseeing inventory management operations. An inventory manager will have the complete picture of your inventory and stock levels, and they’ll be set up to create processes for receiving stock, auditing inventory, and managing your inventory software dashboard.

This post was updated March 15, 2023.