Inventory Management Systems for E-Commerce: A Brief Guide

A sound inventory management system (IMS) is a vital component of an e-commerce tech stack. Once your e-commerce business reaches a specific size, you'll likely need one to stay on top of your business. This guide will cover what an IMS does, why you need it, and how to choose the right one for your business.

What is an Inventory Management System?

An inventory management system is a software platform designed specifically for businesses that deal with physical products to track and report on their inventory. Instead of painstakingly tracking and updating inventory data in a spreadsheet, the IMS offers a centralized, granular, real-time view of your stock levels. A good IMS will also provide a single location to manage ordering, receiving, and fulfillment.

Why Do You Need an Inventory Management System?

For most retail and e-commerce businesses, inventory is one of the most significant uses of working capital. Unfortunately, it can be challenging to track and calculate by hand, mainly as your business grows. 

At the same time, getting your inventory tracking and forecasting wrong can be costly in either direction. Underestimate the inventory you'll need, and you may sell out at the worst time – but overestimate. On the other hand, you may waste money and space on inventory that isn't moving fast enough.

An inventory management system helps you understand what inventory you have on hand, how much money you have tied up, and how well your inventory sells across your various sales channels. This, in turn, helps you better forecast which items you'll need, how many units you should order, and how much to invest in that inventory. Moreover, it can do all of this at very high fidelity, like the size and color of a particular item, enabling your forecasts to get more granular and your inventory investment to be more efficient.

As an added benefit, an IMS can also lower your operating costs. For example, a good IMS will streamline purchase orders, invoicing, inventory tracking, and fulfillment into a single system, helping you save money on overhead.

How to Choose an Inventory Management System

When considering which IMS is suitable for your business, look for these characteristics:

• Ease of Use. Your inventory management system will be one of your company's most-used, most-critical systems. Ensure you choose an intuitive interface that's easy to pick up and learn (for you and your team).
• Necessary Integrations. As a central piece of your technology stack, your IMS will interact with many of your business's other systems, like your sales platform (e.g., Shopify) and your fulfillment system (e.g., ShipStation). For that reason, it's a good idea to do homework on which systems the IMS will need to talk to and how to make that happen. Suppose a potential IMS offers a broad range of integrations but not the one you need. In that case, you're setting yourself up for an interoperability headache.
• Mobile Functionality. Your team is as likely to use the IMS on the warehouse floor as at their desks. For maximum efficiency, your IMS should work well on mobile devices, and make it easy for the right people to get the correct information, at the right time.
• Comprehensive Reporting. While tracking your inventory levels is essential, it's only part of what a good IMS offers. Calculating your SKU-level costs and profit margins by hand is difficult because the numbers can change rapidly as material and shipping costs fluctuate. Look for an IMS that can programmatically calculate and report these and any other information that will improve your ability to forecast.

Questions to Ask an IMS Vendor

Deciding which inventory management system to implement for your business can take time and effort. Therefore, we recommend asking potential vendors questions as part of your diligence process.

Can all revenue channels connect to the inventory management system, including wholesalers, stores POS, and e-commerce? 

Why it matters: Your IMS can only be fully effective if some transactions are in the system. For example, to get the full benefits of installing an inventory management system, it must account for sales made on your channels.

Can you create purchase orders (POs) from within the IMS?

Why it matters: Creating POs from within the same system that tracks your inventory streamlines your purchasing process. When you see in the IMS that you need something, you can place the order without switching to a new system, saving time and eliminating manual data re-entry. Bonus points if your IMS lets you modify a PO after it's been created; you may want to finalize the PO after you receive your supplier's invoice, which will include the final landed costs.

Are stock levels updated as soon as the product is received?

Why it matters: Your system's tracking is only as good as its inputs. So ensuring prompt updates when you receive new inventory helps keep the system up-to-date and accurate.

Is there batch tracking and expiration tracking?

Why it matters: If your business sells perishable goods, your IMS can help track losses due to expiration and help you better forecast the right amount to stock in the future. If you have product quality issues, it can also help you isolate the problem to specific batches of products, reducing the impact radius of the issue.

Is there a fulfillment/shipping system connected to the IMS that updates the fulfillment status for your customers' orders?

Why it matters: Integrations with shipping/fulfillment systems like Shipstation and ShipBob allow you to automatically deplete inventory in the IMS as soon as the goods are shipped, helping keep your records accurate.

If you use a 3PL to store and/or ship your goods, you'll want to ask if the IMS can be integrated with the 3PL's systems.

Does the system offer granular analytics and reporting?

Why it matters: To improve your forecasting and optimize your cash flow, you need detailed insight into how various parts of your business are performing. Your IMS is well-positioned to provide valuable data like gross profit per SKU per channel over time, as long as the system's reporting capabilities provide enough granular detail.

For manufacturers: does the system have production planning capabilities?

Why it matters: If your IMS can handle functions like creating production orders for products and manually depleting component inventory using a recipe, it can further streamline your backend processes.

Can the system automatically connect and integrate with your accounting software?

Why it matters: Your accounting software system (QuickBooks Online, etc.) is another vital piece of your backend technology, and your inventory information will play a role in generating your financial statements. Automated integration between the two systems will save time and reduce the opportunity for manual errors.