How Inventory Optimization Affects Profitability
Successful eCommerce retailers should optimize their inventory to boost their margins and profitability. An eCommerce retailer’s profit is not dependent on marketing KPIs alone.
In fact, your inventory optimization and merchandising strategies play a crucial role in both growing your brand long term and ensuring you meet revenue projections.
Despite this, so many brands focus solely on overall digital ad optimization and conversion rates. They don't consider the right retail KPIs, and they gloss over inventory operation mismanagement.
However, now more than ever, it’s vital for online retail and merchandising managers to adjust their inventory optimization to increase profitability.
Because of these three eCommerce retail market shifts:
- Growing competition
- Supply chain issues
- The rise of non-moving stock due to one-dimensional merchandising
Ultimately, by improving your inventory optimization, you can lower stock levels, create customer demand, and prevent profit loss.
In this post, we will show you exactly how inventory optimization affects profitability, and explain what retail managers and eCommerce brands can do to tweak their operations to boost profits.
We will cover:
- What eCommerce inventory optimization is
- Why inventory optimization is vital for eCommerce retail success
- How poor inventory optimization affects your brand’s bottom line
- The key elements of successful inventory optimization and how they boost profits
Before we get to the what and how, let’s look more closely at four significant eCommerce shifts that are making it more imperative than ever to tweak your inventory optimization.
eCommerce Retail Market Trends Driving Improved Inventory Optimization Strategies
There are four main factors driving the need for increasing profits through inventory optimization:
1. Changing Competitive Landscape
The eCommerce niche has become increasingly competitive, and it’s happening much more quickly than anticipated. This is primarily due to the increase in retailers taking their products online during and after the pandemic. This means eCommerce sales as a percentage of total retail spend for omni stores are increasing year on year.
This means it’s becoming more important to ensure you are getting the right product in front of the right potential shopper at the right time.
2. Supply Chain Issues
Retailers saw their inventory fall nearly 6% YoY in January 2021. Supply chain bottlenecks, which were first initiated at the end of 2020, have been felt for months now.
This means retailers need to ensure they are optimizing the inventory they have and getting the most amount of revenue for stock-in-hand. In other words, they need to diminish non-moving stock.
3. Stale Personalization Practices
As more brands push marketing conversion rates only, they prioritize personalization alone as a product sorting parameter. This catches them in a loop where potential shoppers and customers only see a small fraction of their available products. You can read more about this trend in our Why Product Sorting Personalization Is No Longer Enough article.
4. The Rise of Non-Moving Stock
Depending on your goals and business niche, this is generally stock that sits 90+ days in warehousing. With increased competition, supply issues, and outdated one-dimensional merchandising strategies, slow-moving products or non-moving inventory can account for anything from 20–80% of a business’s total inventory.
So what is inventory optimization, and why is it so crucial to your bottom line?
Let’s take a closer look.
What Is eCommerce Inventory Optimization?
eCommerce inventory optimization can be described as the balance between eCommerce retailers’ capital investment, service-level goals, and changing demand and supply market volatility.
Inventory optimization is a relatively new term and forms part of a retailer’s overall inventory management and operations strategy. Think of it as the bridge between your marketing KPIs and goals and your backend stock management and operations.
Or, to put it another way, it’s the flipside of inventory control.
While the primary goal of inventory control is to keep only the necessary product units on hand without spending too much money up front, inventory optimization ensures you are able to constantly move (sell) inventory, by adapting to continuous market and stock changes.
Why Inventory Optimization Is Vital for eCommerce Retail Success
eCommerce inventory optimization is not only crucial for profitability, but for ensuring sustained growth. It:
- Boosts sales long term by allowing you to increase exposure (and sell) a wider variety of products
- Reduces operational costs, such as warehousing, inventory management, and storage costs and expenses
- Eliminates non-moving stock by ensuring your merchandising, inventory, and marketing strategies sync with retail KPIs and inventory levels
- Prevents overstocking through more refined retail metrics and accurate forecasting
- Satisfies shoppers by ensuring you are constantly meeting demand while avoiding inventory problems
- Improves overall operations efficiency by better managing SKU performance and having sound inventory allocation strategies – this will help improve delivery times while lowering your costs
All of this boosts profits and improves overall business profitability.
How Poor Inventory Optimization Affects Your Brand’s Bottom Line
Poor inventory optimization can have a negative impact on flow throughout your eCommerce retail store and result in:
- Too much focus on best-selling products, without reducing overstock or slow movers
- Non-moving stock costing your business in terms of storage and backend flow blockages
- Lost profit potential when forced to radically reduce all stock prices
- Overstock or slow-moving inventory clogging capital flows for new growth categories or product variants
- Skewed demand forecasting metrics
All of this can lead to weaker cash-on-hand positions, negative revenue growth, weak profit, and decreased overall profitability.
Let’s say you’re a substantial online fashion retailer who is using bestseller and onsite personalization to populate your collections. Without inventory optimization, chances are 80% of your profits are being generated by 20% of your products. This leaves you with a lot of non-moving inventory, which is costing you.
What Are the Costs of Non-Moving or Excess Inventory?
- Warehousing costs
- Excess personnel
- Handling costs
- Insurance costs and other admin expenses
- Lost revenue opportunity costs
- Cash on hand for business growth
However, by introducing inventory optimization that factors retail KPIs and accurate forecasting into your merchandising strategies, you could not only boost revenue but lift profits by as much as 30%. Ultimately, it could improve your overall profitability and limit long-term damage to your bottom line.
Key Elements of Successful Inventory Optimization and How They Boost Profits
We now know that inventory optimization plays a vital part in the overall profitability of your business. Next, we will look at the key elements of a successful inventory optimization strategy and how they play a role in boosting profits.
These elements include:
- Inventory level optimization strategies
- Inventory storage optimization strategies
- Demand forecasting optimization strategies
- Advanced merchandising and optimization strategies
1. Inventory Levels and Replenishment Optimization Strategies
We know that balancing inventory levels is a vital part of inventory optimization. Too much inventory and you tie up capital; too little, and you have missed revenue opportunities and diminished brand loyalty.
However, it also plays a vital role in overall profitability.
By getting their stock levels optimized, merchandising and retail managers and teams can reduce the risk of non-moving products, high storage costs, or out-of-stock products. To optimize your inventory level strategies, here are some tactics you can implement:
- Establish and drill down your supply chain KPIs
- Review and redo ABC analysis
- Tweak and reduce the number of references
- Renegotiate and reduce your MOQ (Minimum Order Quantity) and lead times with suppliers
- Automate your replenishment with tools like Occubee
- Review and redefine safety stock or buffer inventory
Alternatively, you can use 3LP services like ShipBob, which will do these automatically.
2. Inventory Storage Optimization Strategies
Reviewing and optimizing your inventory storage can help boost your overall profitability.
Efficient and cost-effective inventory storage strategies and systems will not only help you better manage inventory in terms of customer satisfaction, but also ensure you have real-time retail KPIs on hand you can use for advanced merchandising.
To optimize your inventory storage, you can try a few of these strategies:
- Do a full inventory audit
- Optimize warehouse receiving procedures
- Review holding costs to look for productivity and expense leaks
- Review and tweak your warehousing regularly, so product demand and storage location are aligned
3. Demand Forecasting Optimization Strategies
Any retail manager knows that demand forecasting is vital to optimizing your inventory levels and setting important retail KPIs that form part of a robust eCommerce merchandising strategy.
Successful and profitable retailers constantly optimize their demand forecasting at the macro and micro levels, as well as in the short and long term. Consciously doing this:
- Helps reduce financial risk
- Mitigates out-of-stock products
- Decreases inventory expenses
- Optimizes pricing strategies
All of these help boost profitability.
4. Advanced Merchandising and Optimization Strategies
Finally, the most essential strategy at your disposal in terms of improving inventory optimization to improve profitably lies with your merchandising.
Advanced merchandising doesn’t just take one parameter, such as bestsellers, into consideration when promoting inventory. Instead, it uses multiple parameters that include both marketing KPIs and inventory optimization KPIs. They should consist of a mix of the following sorting criteria, with the combination depending on your inventory optimization and business goal needs:
- Personalization based on real-time shopping behavior
- Margins and/or real margins (with discounts)
- Conversion rates
- Days to finish inventory (based on product daily sales rate)
- Inventory value
- Sales by quantity and/or revenue
- Variants stock ratio
- Number of days in stock
- Product reviews
- Product page views
A multi-dimensional product sorting strategy can be an incredibly powerful revenue driver and inventory optimization tool. For example, when using Kimonix advanced merchandising, Swarovski IL saw the following lifts after implementing smart collections over one-parameter sorting:
- 8% increase in overall profit
- 18% conversion rate boost
- 29% reduction in deadstock
- 72% increase in daily sales rate of top products by inventory volume
Final Thoughts: Inventory Optimization Boosts Profits
To ensure long-term growth, it is vital that eCommerce retail managers and brands use inventory optimization strategies. Strategies that combine marketing and retail KPIs and adapt in real-time to market and business goal changes.
This will ensure online retailers:
- Reduce overall costs and wastage
- Boost sales
- Optimize revenue potential while staying within margin goals
- Reduce non-moving stock levels considerably
- Boost productivity and efficiency
- Prevent overstocking
- Increase customer retention
- Support fulfillment and inventory management strategies
All of this boosts profits and drives long-term growth and profitably.
Got inventory optimization questions? Post them in the comments below.