Global ecommerce revenue is set to top $6.35 trillion by 2027. Yet online merchants everywhere continue to lose profits to a lack of inventory management processes and inventory distortion.
Among online sellers who manage inventory in-house, 37% say their biggest inventory-related challenges are stock issues like overselling and overstocking. 23% say it’s accounting issues like understanding profit and loss and forecasting inventory.
That’s all according to new inventory management statistics acquired by Webgility. But we wanted to get an expert’s take on the results and the state of inventory in ecommerce today.
So we sat down with our founder and CEO, Parag Mamnani. We dove into more of what these online sellers had to say and got some advice on better understanding profitability and getting an edge over the competition.
Set the scene for us. In your opinion, what has been the biggest driver of ecommerce sales adoption?
Parag Mamnani: The pandemic changed the entire shopping process for most consumers. But the trend of people shopping online isn’t new.
Now, it's all about convenience and the fact that you can sit on your computer or phone, order whatever you want, and get it delivered within hours. That's a pretty cool thing.
Ecommerce is here to stay, and the pandemic pulled the demand forward and accelerated things. But the trajectory is still on track even with retail reopening. And, if anything, consumers have now become global shoppers.
You can buy products from a seller anywhere in the world, which is fantastic for consumption, variety, and access. Overall, convenience is the root of what's helped propel ecommerce because it's so easy for consumers to buy what they want.
What shifts have you seen in sellers managing inventory in-house versus through a third party?
There's been a massive change, and it's happened over the last several decades. It used to be that retail was all about local. You'd go to your local retailer, pick stuff up, and get out the door. And as retailers grew, they started using warehouses.
But what disrupted it was globalization and access to an international supply chain and the ability to produce goods outside of America and have them shipped in a reasonable amount of time from when customers place orders.
You weren't restricted by the size of your retail location or, perhaps, even the size of your warehouse.
And then, over 15 years back, you had the rise of Amazon's fulfillment centers. And they pioneered the model of, "Hey, just ship the goods to our warehouse, and we'll ship them for you."
And that led to this second, massive wave of ecommerce where it wasn't just you not having to produce goods in your own location. But now, you don’t even have to store it in your own location. You can get a third party to sell it and store it.
And that's evolved into getting a third party to list and sell your products on the Amazon marketplace.
So it's given rise to a whole new breed of ecommerce sellers who don't produce the goods but send them straight to a warehouse they don’t own to be sold on a website that's not theirs and delivered by a shipping processor they have no sort of control over.
Effectively, ecommerce has gone from being this inventory-heavy, “let me store the packages, put them in a box, put a label on them, and send them to customers” to “let me watch the numbers move around on a screen.” It's just mind-boggling how that's all evolved.
Do you have any thoughts or predictions on the future of in-house inventory management
As I look ahead, I think the future of inventory is a diversified hybrid model where you produce some things in an outsourced way versus in-house entirely.
Now that we have FBA and other services, to some extent, it makes things a lot easier for merchants because they don't have to think about managing inventory.
But they also have to find that competitive advantage and separate themselves because most merchants have access to those capabilities.
But it gets to the heart of entrepreneurship. The field's definitely leveling in terms of merchants having access to all of these capabilities.
And I think that’s good for small businesses because they're not limited by warehouse space or even tech staff to manage inventory inside their locations. They can be more creative with how they do inventory in their businesses.
87% of respondents use an inventory management technique (ABC, FIFO, etc.). What advice would you give an ecommerce seller considering one method or another?
The way I see it, all inventory techniques are just ways to optimize cash flow. You're trying to figure out how to optimize inventory so that you don't have stock that's taking up space that could be occupied by faster-moving products.
Ultimately, I don't know if there's a technique that’s well-suited for any one seller. It depends on your catalog, business model, and fulfillment promises. And if your goods require customization, you might have a different technique for that catalog.
If anything, sellers today need to understand the different techniques and get smarter about inventory management strategies. Fortunately, lots of great inventory management solutions can give you some guidance. But this is where analytics becomes critical.
I talk to a lot of sellers who don’t realize how much more money they could make and the kind of cash flow they could generate by just optimizing their inventory. And that often comes down to being able to analyze your sales and your historical inventory trends.
According to our survey, ecommerce sellers with less than two years in business kept the same amount of inventory on hand year-over-year. They've sold more items but spent more on that stock. Why do you think that is?
Inflation. Inflation. Inflation.
It's real. And it's not just in the price of eggs. It’s in everything. And it's causing a lot of merchants to be very thoughtful about how much stock they keep in-house.
Inflation's also affecting the potential growth rates they saw last year. Those growth rates have come down across the board. And hopefully, all merchants feel a sense of comfort, knowing the largest of businesses are having these problems.
I’m not surprised by that answer from most sellers because, in these times, it's important to be more prudent than aggressive. And until last year, I think everyone was leaning in on accelerated demand and starting to stock up more.
But everyone's starting to see the pullback in the economy, and there's a potential recession ahead of us. So who knows what the impact will be on consumer behavior
It's very prudent for newer businesses to be thoughtful about not overextending themselves, waiting for the demand to come in, and understanding what that change in consumer behavior is before starting to pile up.
Would you say that prudence is as relevant to sellers going from one year in business to two as it would be for sellers who are maybe going into year five?
Sellers who have been here for more than five years have probably seen some pre-pandemic years. So they may understand what demand looked like when there wasn't a crazy mad rush to shop online but more free money flowing around.
Hopefully, these sellers have some historical context around what their demand was pre-pandemic, what the acceleration was into the pandemic, and now the flat or down-sloped demand.
With a wider range of experiences, they can make even better decisions, compared to sellers who have just seen the COVID highs and not the pre-pandemic trends, and certainly be a lot more mindful.
In our survey, sellers with over six years in ecommerce were the only group with more single-channel sellers than multichannel sellers. Why do you think that is?
I was a bit surprised when I read that. I can only surmise that folks have done a lot of experiments on various channels.
And as they’ve reached a certain level of maturity of six or more years in business, they've found their sweet spot in a channel that works for them. Maybe they’ve been able to fine-tune where they're making money.
However, I think experimenting on multiple channels is a must for every merchant. You have to try a lot of different channels until you can find that sweet spot of what works. Single-channel selling has a lot of risks, especially in rough times.
If you only have your own store and you're not selling on a marketplace, how might consumer behavior affect you? Will they be looking on search engines more, or will they go straight to marketplaces where they can get fast delivery?
If you're only on a marketplace, what happens if the marketplace decides to shut down your category or you experience a major delay in shipment that gets your account blocked for weeks? Retailers aside, every business book would tell you not to put all your eggs in one basket.
You'd want to be a diverse merchant, and certainly, multichannel inventory sync solutions can help you achieve that. But you also, again, just like in how you manage your inventory, you want to be very thoughtful about where you sell. Different channels present different models of success.
Does the trend of these experienced retailers selling the same amount of inventory, spending the same amount, and keeping the same amount make a case for longevity?
Absolutely. It takes time to figure out your sweet spot, hit the right margins, and understand your cash flow and the capital needs of your business.
But I firmly believe in growth, growing faster, and always challenging yourself as an entrepreneur. So you should always be looking at new channels and marketing techniques. And certainly, the most creative solutions emerge in times of adversity. I mean, who knew there would be such a thing as buy-online, pick up in-store?
Far be it from me to scare people, but ecommerce was very hard before. And ecommerce is actually very easy now. But easy for you also means easy for your competitors.
The biggest inventory-related challenge among all sellers surveyed was understanding profit and loss. What's something about profit and loss or profitability you wish more ecommerce sellers knew?
I don't know how many merchants I've talked to who, when you talk to them about profitability, always go back to their business P&L, like, "This is how much money I made." And that's their business profitability, which totally makes sense.
But when you dive in and try to understand which of your products made you money, most of them stutter. And that's where you find your edge. What products are you selling at what cost? What did it cost you? How much did it take for you to fill orders? And what were your sales?
Most often, sellers tend to look at profitability at a business level. But if you can get down to product- and order-level profitability, you’ll get to the heart of the unit that's making you money.
You'd be surprised to hear a lot of merchants just look at their cash flow and think that's profit. And ultimately, you have to be thinking about SKU-level profitability so that you can optimize your catalog and the sales of that SKU.
And if you're thinking of going multichannel, it's not that big of a task to launch a handful of SKUs somewhere else. You don't have to take your entire catalog and sell it on a new channel if you've found those SKUs that move. Understanding your SKU-level profitability is key, but it's not easy.
I'm a big believer in getting into some of those details, so you can get a sense of what's working in your business, and that's how you find your edge. It's great if you're making a profit in your business overall. But wouldn't it be great if you could accelerate that profit growth by identifying what's moving in your catalog?
The biggest challenge among sellers who don't do any accounting is losing items to orders shipped but refunded. Are there any long-term advantages to that no-accounting approach?
Not at all. Maybe they don't understand accounting or don't care what's happening with their money, which doesn't make sense to me. How are you running a business if you don't have a sense of your financials?
I understand the hesitation, but all sellers should understand that getting into their financials and making sense of the dollars is what's going to help them grow faster. And it doesn't mean you need to become an accountant. But you want to have a good sense of what's happening.
Engaging in ecommerce accounting and business analytics can help you answer questions about revenue trends for each channel, profitability trends across channels, which products sold more or less, and profitability at a SKU and order level.
Accounting doesn't have to be daunting, and it doesn't just have to be about compliance. Yes, you have to file your taxes, and yes, you have to comply with government regulations. But that financial data has so much power, and it can unlock a lot of insights to help you be more successful.
Going multichannel is critical, but when you start to sell on marketplaces, your fees add up. In some cases, you're looking at up to 30% of your sales revenue going to fees. It's important to understand that, so you can continue to fine-tune.
For a lot of merchants, that's the difference between making money and losing money. And it can be the difference between making a lot of money and making very little money. You need to have a good pulse on where you're making and what the trends are.
Do you have any other thoughts on in-house inventory management that you’d like to share?
I'm not surprised that, on average, merchants are spending five to 10 hours a week — some even 20 hours a week — on managing inventory. And I'm not surprised that many people still rely on Excel to do accounting — so much wasted time and energy.
At the end of the day, all of these challenges are solvable problems with technology, like Webgility, that offers great onboarding. To be a successful multichannel merchant and continue to accelerate and grow in the future, you've got to employ technology.
And not just technology for selling online. You need all the right ecommerce automation tools and analytics solutions to get a good sense of how your business is doing and stay in control.
Overall, the responses we got tell us we're focused on the right problems because we still have so many merchants that aren't adopting automation solutions and are still relying on Excel and not looking at profitability in the right way. There are lots of opportunities, which is very exciting for me.