The Ultimate Guide to Shopify Inventory Management: Tips, Tricks, and Tools for 2024

OpenStore Staff

Sep 10, 2024

When you're running a Shopify business, managing and organizing stock — all the way through the supply chain — is a huge challenge. It becomes an even bigger challenge as your business scales or if certain products become more in demand than others. 

There are many different ways to approach Shopify inventory management: techniques, best practices, and software solutions to implement. Choosing the right solution for your business isn’t easy — and without the right inventory management practices, you may inadvertently limit your brand's growth.

Whether you're starting a business or already have a growing Shopify brand that needs a new or more comprehensive inventory management strategy, you've come to the right place.

This guide covers:

• How modern inventory management works

• Why inventory management is so important

• 12 inventory management methods and best practices

• Inventory management software

The bottom line: Good inventory management practices are key to scaling your Shopify business and running it efficiently. Trying to grow without a solid inventory management strategy may mean you spend too much time managing inventory — and cause you to lose money to waste, spoilage, and unnecessary overhead.

What is inventory management?

Inventory management is the process of overseeing and controlling the ordering, storage, and use of a business's inventory. This includes managing, warehousing, and processing raw materials, components, and finished products. 

The goal of inventory management is ensuring you have the right amount of inventory available at the right time to meet customer demand while minimizing costs. 

Effective inventory management helps businesses avoid stockouts (which can lead to lost sales) and overstocking (which can tie up capital and increase storage costs). In essence, it’s about striking a balance between supply and demand to optimize profitability and operational efficiency.

What is inventory?

Inventory refers to the goods and materials a business holds for resale or production. For a Shopify business owner, inventory includes the products you sell — physical items like clothing or electronics, or digital products like eBooks or software.

Inventory can be separated into several categories, including:

• Raw materials

• Work-in-progress (items still being manufactured)

• Finished goods (products ready for sale)

Managing your inventory efficiently helps ensure your Shopify brand can meet customer demand without holding excess stock that could increase costs.

How does modern inventory management work?

Modern inventory management has evolved significantly from traditional, manual methods. It's become more sophisticated and efficient, thanks to digital technology. For Shopify business owners, this means better control over stock levels, less risk of human error, and a more optimized supply chain process. Here's a breakdown of key developments in modern inventory management:

1. Automation and software integration: Today’s inventory management systems are often integrated with e-commerce platforms (like Shopify) to allow for real-time stock-level tracking, automatic reordering, and seamless updates across all sales channels. Integrations between platforms reduce the manual effort involved in tracking inventory and keep stock levels more accurate, preventing stockouts and overstocking.

2. Data-driven decision-making: Advanced inventory management tools collect and analyze data on sales trends, customer behavior, and supply chain performance. Shopify brand owners can use the data to forecast demand, optimize reorder points, plan promotions, and make other data-driven business decisions.

3. Multi-channel inventory management: For Shopify brands that sell across multiple channels, like Amazon and Facebook, modern inventory management systems provide a unified way to manage inventory. This keeps stock levels consistent and accurate, no matter where sales are made.

4. Mobile accessibility: Many inventory management solutions offer mobile apps, allowing brand owners to manage inventory on the go. This is particularly useful for small business owners who need to stay connected to their operations without being tied to a desk.

5. Scalability: As a Shopify business grows, so does the complexity of its inventory management needs. Modern systems scale with your business, accommodating more products, suppliers, and sales channels without compromising efficiency.

The big question: Why is inventory management so important?

Inventory management isn't just behind the scenes — it's a critical driver of your Shopify brand's success. Effective inventory management directly impacts your ability to meet customer demand, manage costs, and maintain a healthy cash flow. 

Below, we explore how proper inventory management can help you avoid common pitfalls, reduce expenses, and ultimately, set your business up for long-term growth and profitability.

It helps you avoid spoilage, waste, and dead stock

One key benefit of effective inventory management is the ability to maintain optimal stock levels. 

By carefully tracking and managing your inventory, you can ensure you have just the right amount of stock on hand to meet customer demand. It's a good idea to avoid overstocking because it can tie up valuable capital in unsold products or risk spoilage or waste, particularly for perishable or seasonal items.

By carefully managing your inventory, you also avoid missed revenue opportunities and customer dissatisfaction that can occur when popular items are out of stock. 

Regularly monitor your inventory turnover — how quickly you sell and replace stock. High inventory turnover indicates healthy sales and effective inventory control, helping you reduce waste and keep your stock fresh and relevant to your customers.

It reduces your storage and overhead costs…

When you manage your inventory efficiently, you can significantly reduce the costs of storing and handling products. Excess inventory takes up valuable storage space. This not only increases storage costs but also can lead to other expenditures, such as higher insurance premiums and handling fees. By optimizing your inventory levels, you can minimize these overhead expenses and allocate more resources to other areas, like marketing or product development.

Reducing inventory levels can lower the costs of inventory shrinkage due to theft, damage, or obsolescence. This is a careful balancing act between having enough stock to meet demand and not overstocking. Getting it right will help you run a lean operation and increase your profitability.

…Which results in improved cash flow

Another advantage of effective inventory management is its positive impact on your cash flow.

By keeping your inventory levels aligned with demand, you free up cash that would otherwise be tied up in excess stock. You can then reinvest this cash into your business to drive growth. For example, you could expand product lines, invest in marketing, or hire new team members.

Reducing costs also means improving your profit margins. A healthy cash flow is essential for your brand's financial health and to position it for long-term success — particularly if you ever seek an exit so you can pursue your next dream business.

It optimizes order fulfillment

Finally, inventory management plays an important role in optimizing your order fulfillment process, which is directly related to customer satisfaction. You want to have the right products available when your customers need them.

Predicting demand accurately is one part of this. By analyzing sales data, customer behavior, and market trends, you can anticipate which products will be in demand and when. Then, you can adjust your inventory levels accordingly to meet customer demand without overstocking.

12 inventory management methods and best practices every Shopify seller should know

Inventory management isn't a one-size-fits-all solution. There's a wide variety of methods and best practices, each with its own advantages, depending on your business model and goals. The real challenge for Shopify brand owners lies not in identifying "right" or "wrong" methods, but in understanding the available options and selecting the strategies that best align with your specific needs.

Exploring and experimenting with these different approaches lets you develop a customized inventory management system that optimizes your operations and supports your business's growth and profitability.

1. First in, first out (FIFO)

FIFO is an inventory management method where the oldest stock is sold first. This way, older inventory is used up before newer inventory, which is especially important for perishable goods or items with expiration dates.

Best for: Businesses dealing with perishable goods, food products, cosmetics, or any items with a shelf life. It’s also beneficial for businesses looking to maintain product freshness and reduce the risk of obsolete stock.

Tips for implementing FIFO: 

• Organize your inventory so that older stock is easily accessible and marked to be sold first.

• Regularly audit your stock to prevent older items from getting lost in the shuffle.

2. Last in, first out (LIFO)

LIFO is an inventory management approach where your most recently acquired inventory is sold first. This method works well in environments with rising costs. It matches higher-cost items with current sales, potentially reducing your taxable income.

Best for: Businesses in industries where inventory costs fluctuate significantly or where product freshness is less of a concern, such as construction materials or certain types of consumer electronics.

Tips for implementing LIFO:

• Set up your storage and inventory management system so that the newest items are the first to be shipped or sold.

• Regularly review your stock rotation to make sure older inventory isn’t becoming obsolete or taking up unnecessary space.

3. Just-in-time (JIT)

JIT is an inventory management strategy where you order and receive products only as they are needed for sale or production. This minimizes the inventory you keep on hand, reducing storage costs and freeing up cash.

Best for: Businesses with reliable suppliers and consistent demand, like those in the fashion industry, or those with limited storage space, such as small e-commerce businesses.

Tips for implementing JIT:

• Develop strong relationships with suppliers to make sure you get timely deliveries.

• Monitor sales trends and customer behavior closely to predict demand accurately and avoid stockouts.

4. Economic order quantity (EOQ)

EOQ is a formula-based inventory management method that determines the optimal order quantity to reduce the total costs associated with ordering and holding inventory.

Best for: Businesses with stable demand patterns or those looking to optimize their ordering and holding costs (i.e., manufacturers or retailers with steady sales cycles).

Tips for implementing EOQ:

• Calculate your EOQ using the standard formula: EOQ = √[(2DS)/H], where D is demand, S is the ordering cost per order, and H is the holding cost per unit per year.

• Regularly update your EOQ as costs and demand fluctuate.

5. Minimum order quantities (MOQs)

Minimum order quantities (MOQs) refer to the smallest amount of a product that a supplier is willing to sell. When you set a minimum sales volume, you can better control order amounts and profitability.

Best for: Sellers who need to avoid wasting resources on orders that deliver little or no profit, such as wholesalers who sell in bulk or retailers with high turnover rates.

Tips for implementing MOQs:

• Negotiate MOQs with your buyers to balance your inventory needs with their sales requirements.

• If you're a retailer, consider splitting orders with other businesses or adjusting your product mix to meet MOQs while minimizing excess stock.

6. Average costing

Average costing, also known as the weighted average cost method, calculates the cost of inventory based on the average cost of all similar items in stock. This method smooths out price fluctuations and provides a consistent cost basis for inventory valuation.

Best for: Businesses with large volumes of similar products or those in industries where inventory costs fluctuate frequently, such as electronics or retail businesses with a diverse product range.

Tips for implementing average costing:

• Regularly update your inventory records to reflect purchases and sales, helping your average costs stay accurate.

• Review your pricing strategy to make sure it aligns with your average cost calculations and maintains profitability.

7. Cycle counting

Cycle counting is an inventory auditing method where a small subset of inventory is counted on a rotating basis, rather than counting all inventory at once. With this method, you can conduct regular inventory checks without the need for a full physical inventory count.

Best for: Businesses with large inventories or high-value items that require frequent accuracy checks, such as retailers or warehouses with a diverse product range.

Tips for implementing cycle counting:

• Divide your inventory into categories or segments and set up a schedule for counting each segment at regular intervals (e.g., weekly or monthly).

• Regularly review and analyze cycle count results to identify discrepancies and take corrective action as needed.

8. ABC analysis

ABC analysis is an inventory categorization method that ranks items based on their business value. "A" items are the most valuable, "B" items are of moderate value, and "C" items are the least valuable but still necessary.

Best for: Businesses with a wide range of products where it's important to prioritize inventory management efforts on the most valuable items, such as retailers or manufacturers with varied product lines.

Tips for implementing ABC analysis:

• Classify your inventory into A, B, and C categories based on factors like sales volume, revenue contribution, or profitability.

• Focus your inventory management efforts on A items to make sure they are always in stock and accurately tracked, while allocating fewer resources to B and C items.

9. Perpetual inventory system

A perpetual inventory system uses a point-of-sale (POS) system to continuously update inventory records in real-time as sales and purchases occur. This provides an accurate, up-to-date view of inventory levels at all times.

Best for: Businesses with high sales volumes or those that require real-time inventory tracking, such as multi-channel e-commerce brands or retail chains.

Tips for implementing a perpetual inventory system:

• Integrate your POS system with your inventory management software so that both systems automatically update whenever a sale is made.

• Regularly audit your inventory to ensure your perpetual inventory system is accurate and any discrepancies are promptly corrected.

10. Demand planning

Demand planning is a forecasting method that uses historical sales data, market trends, and other factors to predict future customer demand. This helps businesses plan their inventory levels accordingly to meet expected demand without overstocking.

Best for: Businesses with seasonal products or fluctuating demand, or those looking to optimize their inventory levels based on accurate demand forecasts, such as fashion retailers or consumer electronics brands.

Tips for implementing demand planning:

• Analyze historical sales data, market trends, and customer behavior to create demand forecasts.

• Regularly review and adjust your demand forecasts to account for market changes or customer preferences, so your inventory levels remain aligned with actual demand.

11. Safety stock alerts

Safety stock alerts are notifications triggered when inventory levels fall below a predefined threshold, indicating that it's time to reorder stock to avoid stockouts. Safety stock acts as a buffer to make sure products remain available even if demand exceeds forecasts or supply chain disruptions occur.

Best for: Businesses with unpredictable demand or those operating in industries where stockouts can significantly impact customer satisfaction, such as health and beauty, electronics, or automotive parts.

Tips for implementing safety stock alerts:

• Determine the right safety stock levels based on factors like demand variability and supplier lead times.

• Set up safety stock alerts in your inventory management system to automatically notify you when it’s time to reorder.

• Regularly review and adjust your safety stock levels based on changes in demand patterns or supplier performance so they remain effective over time.

12. Outsource inventory management

Outsourcing inventory management means contracting a third-party logistics provider (3PL) or fulfillment service to handle your inventory storage, management, and order fulfillment. This frees up business owners to focus on other areas while leveraging the expertise and infrastructure of specialized providers.

Shopify Fulfillment Network is one example of this. It offers a network of U.S. warehouses where you can distribute your inventory to offer affordable, two-day delivery to your customers. As your fulfillment partner, Shopify takes customer orders, receives returns, and re-enters usable inventory on your behalf.

Best for: Businesses experiencing rapid growth, those with limited storage space, or those looking to streamline their operations and reduce the burden of inventory management, such as startups or e-commerce businesses expanding into new markets.

Tips for implementing outsource inventory management:

• Research and select a reliable 3PL or fulfillment service provider that aligns with your business needs and customer expectations.

• Integrate your Shopify business with your chosen provider’s system for seamless communication and real-time inventory updates.

• Regularly monitor your provider's performance to ensure they meet your standards for accuracy, speed, and customer satisfaction, and make adjustments as needed.

All about inventory management software

As your Shopify business grows, managing inventory can become increasingly complex and time-consuming. Manual inventory management might work when you’re starting out, but as your business scales, it can hold you back from achieving your growth goals. 

This is where inventory management software comes in.

Inventory management software can streamline and automate tasks associated with tracking, ordering, and storing inventory, allowing you to maintain accurate stock levels, fulfill orders promptly, and minimize costs with less time and administrative work. 

For growing Shopify businesses, adopting a software solution often isn't just a convenience — it’s a necessity. When you reach a certain volume of sales, managing inventory manually not only becomes impractical but also poses significant risks to your business in terms of lost sales, overstocking, and cash flow issues.

Different inventory management solutions offer a range of features, from basic stock tracking to advanced demand forecasting, multi-channel management, real-time analytics, and more. Whether you choose Shopify’s built-in inventory management system or third-party software, the right solution can streamline your operations, reduce errors, and take your business’s growth to the next level.

Pros and cons of using inventory management software

Pros of inventory management software

• Automation: Automatically updates inventory levels as sales are made, reducing manual errors and saving time.

• Real-time tracking: Provides real-time visibility into inventory levels, even across multiple locations and sales channels.

• Demand forecasting: Uses historical data and market trends to predict future demand, helping to optimize stock levels.

• Order management: Streamlines the process of managing and fulfilling orders for timely delivery and fewer stockouts.

• Cost reduction: Helps minimize holding costs by optimizing inventory levels and reducing excess stock.

• Multi-channel integration: Syncs inventory across various sales platforms.

• Data analytics: Provides insights into inventory performance, identifying trends and optimizing pricing.

• Accuracy: Reduces the risk of human error in inventory tracking, leading to more accurate financial reporting and compliance.

• Scalability: Supports business growth by efficiently managing larger inventories and higher sales volumes.

Cons of inventory management software

• Cost: May be expensive, particularly for advanced software with a wide range of features.

• Complexity: May have steep learning curves and require significant time and effort to implement.

• Initial setup: May be time-consuming and temporarily disrupt business operations during the transition period.

• Dependency on technology: Relies on stable internet connections and system uptime — any technical issues can disrupt business operations.

• Ongoing maintenance needs: Requires regular updates and maintenance, and possibly additional costs for support or training.

• Limitations: May not fully integrate with existing systems and may lack specific features your business requires.

Shopify inventory management vs. third-party inventory management software

When you implement a software solution, you have two options: use Shopify’s built-in inventory management system or opt for third-party software. Each option has its own advantages and potential drawbacks, depending on your business’s size, complexity, and specific needs. 

In this section, we’ll compare Shopify’s native inventory management tools with third-party solutions to help you decide which is the best fit for your brand as you grow and scale.

Ease of use

• Shopify: Shopify's built-in inventory management system is user-friendly, especially for beginners. It integrates seamlessly with your Shopify business, allowing you to manage products, track stock levels, and fulfill orders directly from your Shopify dashboard.

• 3rd Party: Ease of use varies depending on the software solution you choose. If you opt for a third-party provider, look for one that offers a good user experience (UX).
  

Advanced features

• Shopify: Shopify's inventory management covers essential functions like stock tracking, product categorization, and low-stock alerts. It's well-suited for businesses with relatively straightforward inventory needs.

• 3rd Party: Third-party solutions often offer more advanced features, such as demand forecasting, multi-channel management, and advanced reporting. These tools can handle complex inventory needs, such as managing multiple warehouses, international shipping, and batch tracking.
  

Customization

• Shopify: Shopify's inventory management offers some level of customization through apps from the Shopify App Store, which allow you to extend its functionality. However, it may not be as flexible as some third-party solutions.

• 3rd Party: Third-party software tends to be more customizable, allowing businesses to tailor the system to their needs. This includes integration with other e-commerce platforms, accounting software, and enterprise resource planning (ERP) systems.
  

Cost

• Shopify: Since it's included with your Shopify subscription, there are no additional costs, making it a cost-effective solution.

• 3rd Party: While more feature-rich, third-party inventory software typically comes with additional costs, which may be an obstacle for some Shopify businesses.
  

Learning curve

• Shopify: Shopify has a relatively low learning curve, making it accessible for beginners and small business owners who may lack extensive technical expertise.

• 3rd Party: These solutions often have a steeper learning curve and may require more time and resources to implement and maintain.
  

Integration

• Shopify: Shopify's inventory system integrates seamlessly with other Shopify features, including sales channels, order management, and reporting tools.

• 3rd Party: Third-party software may require additional setup to integrate with Shopify and other sales channels. However, many offer integrations with other tools.
  

Scalability

• Shopify: While it works well for small to medium-sized businesses, Shopify's built-in system may become limiting as your business grows or if you have complex inventory needs (for example, multiple warehouses or international sales).

• 3rd Party: Many third-party solutions can scale with your business, offering the flexibility to manage large inventories, complex supply chains, and rapid growth.
  

Support

• Shopify: Shopify offers dedicated customer support for its inventory management system, so you have help when needed.

• 3rd Party: Depending on the provider, support may vary in quality and availability. If you choose third-party software, find a provider with reliable customer service and ongoing support options.
  

The importance of inventory management in your brand’s long-term success

As you've learned throughout this guide, inventory management is far more than just keeping your shelves stocked — it’s a vital component of your brand’s growth, profitability, and overall success. By finding a system that works well for your Shopify business, you can meet customer demand, unlock critical cash flow to reinvest in your brand, minimize sunk costs like dead stock and holding costs, and avoid missed revenue opportunities due to stockouts and unnecessary overhead.

But the benefits of the right inventory management strategy go beyond just day-to-day operations. When it comes to your company’s long-term health, how you manage your inventory also plays a significant role. Proper inventory management boosts not just your profit margins but also your brand's potential value. 

If you’re ever considering selling your Shopify business to pursue new ventures, having a well-managed inventory system can be a key factor in getting the valuation you want.

Are you considering starting a new business, spending more time on a hobby, or taking time off before your next big project? At OpenStore, our experts are ready to help scale your brand's inventory management strategy — and our straightforward, transparent process makes it easy for Shopify business owners to maximize their exit with less hassle. Connect your Shopify account and provide performance metrics to request a valuation and an offer.

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