How Your Inventory Restocking Strategy Can Make or Break Your Business

What is inventory restocking and why is it important?
Inventory restocking refers to the system in place for the cycle of stocking products and replacing them once they’ve been purchased. This restock cycle is generally based on demand and projected future sales. In other words, it’s one heck of a tricky balancing act for your business. However, it’s an essential one for any business owner to master if they hope to make consistent profits. That’s why every business needs a strong system for replenishing inventory. 

Without a reliable structure in place for restocking inventory, your business might find itself with too little or too much of its product. This can lead to expensive consequences. With too little of the product, your business misses out on valuable sales. Consequently, you risk having to deal with the customer fallout that comes from frequent stockouts. With too much inventory, your business’s income is now wrapped up in unsold products. These items then tend to languish on inventory shelves. By the time they’re ready to be sold, the extra products are often at risk of becoming obsolete.

So how do you create a strong inventory restock system? Fortunately, there are a number of equations that can guide you in ordering and maintaining inventory. For instance, the reorder point (ROP) formula helps you calculate the lowest an item number can drop before you should launch a product reorder. The formula is as follows: (Avg. daily unit demand x Lead time) + Safety stock. With the addition of your safety stock levels, you minimize the chances of reaching a product stockout. 

However, the reorder point formula doesn’t calculate how many items you should order in total. To figure this out, you can use the inventory turnover ratio. To do this, divide the cost of goods sold by the average inventory. 

Although both these equations are helpful for overseeing inventory, there’s still much to take into consideration when it comes to inventory management strategy. For instance, you also have to factor supplier lead times and seasonal demand into your strategy. Not to mention that there are several different strategies for what’s considered to be inventory best practices. 

Additionally, if you hope to scale as a business, it’s wise to consider investing in third-party software. This technology can help you save major time on inventory planning. You’re likely aware that the tiresome task of counting inventory can steal hours away that could be better spent elsewhere. And worse, if you succumb to human error during your tracking process, the mistakes can be costly.

How incorrect inventory restocking can hurt your business

So what’s the worst that can happen if you find yourself with a stockout or an overstock? It may not be a big deal if it happens once or twice, but if you don’t have a strategy in place, things can quickly get dire for your bottom line. Here are four consequences of frequent stockouts and overstocks.

1. Loss of sales

Perhaps the most obvious consequence of your products being out of stock is the income lost from sales that would’ve otherwise occurred. In 2021, retailers lost out on $82 billion dollars in revenue from stockouts alone. It’s hard enough targeting and nurturing leads, so losing out on a potential sale after walking a prospective customer through the buyer’s journey can be highly frustrating. With overstocks, items can depreciate in value the longer they sit in warehouses waiting to be purchased. In some cases, you may be forced to finally offload them by offering them to customers at a high discount, an undesirable outcome for any retail business. 

Retail juggernaut Target recently experienced this unfortunate repercussion after a shift in consumer trends left them with an unusual excess of inventory. The popular chain was then forced to offload stock at major discounts in order to remedy how much the overage was taxing its supply chain. Consequently, it goes to show that even the most well-known brands sometimes struggle with the inventory stock balance. So putting as many checks and balances throughout the process is beneficial to any business, no matter how infallible.

2. Breaks customer trust and impacts customer loyalty

Your customers want to be able to trust that when they need an item, you’ll be their answer. The more times they seek out a product at your store and find it to be out of stock, the more they’ll shelve your store in their mind as a viable option for when they’re in need. The last thing you want is for them to think of your store as a place where nothing they want is ever available.

However, even with a strong inventory management strategy in place, it’s inevitable that sometimes items will not be available to stock (say, if a container ship with your product gets stuck in the Suez Canal for 6 days). When that happens, instead of hiding the item from availability, you can give your customer a third option. Through apps like Back in Stock, you can replace the buy button with a notify me when available button and hopefully, save the sale.

Additionally, if you’re sold out of numerous products, you can add a badge to any sold out items on your site. This way, potential customers can easily see which of your stock is available without having to click around themselves.

3. Adds additional hidden expenses

When you don’t have a restock strategy in place, it ends up costing you in more ways than just the lack of profit. First, if you have no method for tracking trends, how can you hope to predict what your customers may want in the future? An inventory strategy helps you forecast what types of products will be worthwhile future investments. Second, excess stock quickly raises the carrying costs of your inventory, adding to the prices of storage, labor, and transportation. 

Third, there’s a surprising hidden cost when your business is investing money into ads that are marketing products not currently in stock. Often your best-selling items are the first to go. So running an active campaign for a best-seller that’s not currently available not only costs you in income, but also ends up frustrating your customer base. 

Finally, there’s the opportunity cost, meaning the money you’ve spent on overstock that could have been used on other more profitable means. Overall, your business stands to lose significant income when you avoid strategically planning ahead.  

4. Leads to disorganization and a lack of scalability

When your strategies for stocking inventory are out-of-date and rely primarily on manual input, the time costs can be staggering. What might take several employees a full day to do by hand can be done in a series of clicks with automated software.  Not to mention that when several employees are in charge of tracking and organizing inventory, you risk finding yourself with a messy stockroom, which can lead to issues with phantom inventory. Phantom inventory is one of the primary causes of stockouts, as the disorganization leads businesses to believe they have more stock than they actually do. 

Without technology in place to carefully track order fulfillment and restocking, you lack the ability to identify any inefficiencies in your current inventory strategy, and errors often go unnoticed until it’s too late. Consequently, if you hope to scale your business to serve a wider range of clients, manual processes will eventually be overwhelmed, regardless of how efficient those strategies are. Instead, it’s wise to implement automated strategies now, before your business gets deluged with new orders and the systems you have in place are pushed to their limit. 

How to efficiently manage inventory restocking

Constantly tracking orders manually can be a major time suck, and the likelihood of human error is great. Instead, take the time now to invest in third-party tools to assist you in accurately tracking your inventory management system. With an automated system for inventory restocking, you’ll not only minimize risk by automating the restock process, but also easily track your product analytics. This helps you to forecast trends and get ahead for future sales.

Additionally, if you sell on multiple platforms, using an automated inventory restock system will help you consolidate all sales data into one place. With this method, you avoid any accidental oversights or missed analytics. 

5 ways to automate inventory restocking & management

Thankfully, there are numerous apps on the market to help you manage your inventory efficiently and accurately. Here are five of our favorites. 

1. Simple Purchase Orders

Not to toot our own horn, but we’re proud of how effectively Simple Purchase Orders has assisted hundreds of businesses in easily automating the inventory process. Our Shopify app helps you to automate order fulfillment from the moment a customer hits purchase. Within a click, the app automatically creates a PDF purchase order and forwards it to the respective suppliers.

Additionally, the app helps you automate reordering stock and transferring it into your inventory upon arrival. And if you use dropshipping, Simple Purchase Orders also can help fulfill dropship orders, even from multiple suppliers.