Excess inventory sitting in the warehouse and lost opportunities due to inventory shortages. These issues may be quietly eating away at your business. In fact, according to survey data 1, 16.2% of companies that were closed, went out of business, or were dissolved nationwide in 2024 experienced a bankruptcy despite being profitable2.
In this article, we will introduce the purpose and benefits of inventory management, points for optimization that can be implemented immediately, and inventory management success stories.
In this article, we will introduce the purpose and benefits of inventory management, points for optimization that can be implemented immediately, and inventory management success stories.
1 Teikoku Databank | Nationwide Business “Closures and Dissolutions” Trend Survey (2024)
2 A situation where a company goes bankrupt due to a lack of funds (cash) on hand and payment becomes impossible, even though the balance calculation on the company’s records is in surplus
2 A situation where a company goes bankrupt due to a lack of funds (cash) on hand and payment becomes impossible, even though the balance calculation on the company’s records is in surplus
What is inventory management?
Inventory management is the process of tracking and managing products and the product quantities available in stores and warehouses to meet customer needs. By managing inventory, you can determine what is in stock, when to place an order, and supply it when necessary. Effective inventory management makes it possible to meet customer demand without running out of stock, while also reducing the risk of sell remainders.
The four objectives of inventory management
The four main purposes of inventory management are as follows.
1. Improve work efficiency and productivity
With proper inventory management, you can accurately grasp where and how much inventory is stored, which reduces the time and effort spent searching for inventory. As a result, this allows you to allocate the time saved to other tasks, increasing the amount of work you can handle, which in turn is expected to improve productivity and enable you to generate profits more efficiently.
2. Reduce management costs
By tracking the exact inventory quantity, you can expect to reduce extra storage costs caused by excess inventory. Additionally, regularly classifying and organizing inventory to use space efficiently can lead to reductions in various warehouse management costs, such as equipment and labor costs.
3. Improve cash flow
Cash flow refers to the movement of cash (money). Poor cash flow increases the risk of deterioration in cash flow and experiencing bankruptcy despite having a profitable business. If time passes without inventory being sold, it can halt cash flow and lead to financial troubles, such as being unable to pay accounts payable by the due date. Maintaining an appropriate amount of inventory via inventory management will lead to stable and improved cash flow.
4. Reduce opportunity loss
Opportunity loss refers to missing out on potential sales due to products being out of stock. For example, if a customer tries to buy a product and it’s out of stock, you not only lose a sales opportunity but also risk that trust and your brand image will decline. By implementing proper inventory management, you can establish a system where necessary products can be provided when they’re needed, and minimize lost sales opportunities.
How to manage inventory
So how exactly is inventory management carried out? While you could record it manually on paper, here we’ll introduce management methods using tools.
Inventory management tools
Benefits
Disadvantages
With Excel, it’s common to manage inventory with an inventory management table. Since there’s a template for the inventory management table in Excel, you can avoid the trouble of creating it from scratch. On the other hand, since data entry and updates are done manually, there’s a relatively high possibility that human error will occur.
With an inventory management system, barcodes are scanned by a machine and the data is registered directly into the system. This reduces the risk of manual transcription errors and input errors. Also, since you can check accurate inventory quantities in real-time, you can expect to reduce the risk of excess inventory and shortages.
After understanding the advantages and disadvantages of each, be sure to carry out inventory management in the way that best suits your business.
The next section will introduce in more detail the advantages of an inventory management system, which has many features for optimizing inventory management.
With an inventory management system, barcodes are scanned by a machine and the data is registered directly into the system. This reduces the risk of manual transcription errors and input errors. Also, since you can check accurate inventory quantities in real-time, you can expect to reduce the risk of excess inventory and shortages.
After understanding the advantages and disadvantages of each, be sure to carry out inventory management in the way that best suits your business.
The next section will introduce in more detail the advantages of an inventory management system, which has many features for optimizing inventory management.
Advantages of implementing an inventory management system
Inventory management systems have a wide range of functions that are useful for optimizing and streamlining inventory management. Here are the benefits that can be obtained by implementing an inventory management system.
Prevention of human errors
When recording inventory status manually or in Excel, there’s a possibility of errors, such as errors in copying product codes, errors in entering inventory numbers, or forgetting to update records. With an inventory management system, barcodes are scanned by a machine and the data is registered directly into the system, preventing human error.
Reduction in excess inventory and shortages
Inventory management systems store data on past shipments and inventory. Since predictions can be made for customer demand and orders based on sales and purchase results, this helps reduce excess inventory and shortages.
Improved productivity
By accurately tracking real-time inventory volume with an inventory management system, you can prevent unnecessary manufacturing and purchasing. Producing or purchasing unnecessary inventory not only fails to directly contribute to sales, but also incurs corresponding costs such as labor and storage fees. Therefore, the more excess inventory there is, the lower productivity becomes.
When recording inventory status manually or in Excel, there’s a possibility of errors, such as errors in copying product codes, errors in entering inventory numbers, or forgetting to update records. With an inventory management system, barcodes are scanned by a machine and the data is registered directly into the system, preventing human error.
Reduction in excess inventory and shortages
Inventory management systems store data on past shipments and inventory. Since predictions can be made for customer demand and orders based on sales and purchase results, this helps reduce excess inventory and shortages.
Improved productivity
By accurately tracking real-time inventory volume with an inventory management system, you can prevent unnecessary manufacturing and purchasing. Producing or purchasing unnecessary inventory not only fails to directly contribute to sales, but also incurs corresponding costs such as labor and storage fees. Therefore, the more excess inventory there is, the lower productivity becomes.
Four elements required for efficient inventory management
Here are four essential methods and analysis techniques for improving inventory management efficiency.
1. Location management
Location management is about knowing exactly where inventory is stored in a warehouse. By linking and managing the storage location (location) with the product, you can reduce the time and effort required for picking work. Fixed locations, where specific products are always stored in the same location, are commonly used.
2. Inventory checks
An inventory check is the process of confirming whether the inventory you hold matches the inventory in your records. Conducting inventory checks improves inventory accuracy and allows for the early detection of errors.
In addition to checking quantities, it's also important to confirm the management status and quality of your inventory at the same time.
In addition to checking quantities, it's also important to confirm the management status and quality of your inventory at the same time.
3. ABC analysis
ABC analysis is a method that involves classifying inventory based on the importance of products. By tracking product groups that move quickly, you can prioritize products for management and determine which products to handle less often. Products are divided into the following three groups.
A products: The most profitable best-selling products. These need to be closely managed.
B products: Moderately-important products that are sold on a regular basis.
C products: Products with a small sales composition ratio and a low turnover rate.
A products: The most profitable best-selling products. These need to be closely managed.
B products: Moderately-important products that are sold on a regular basis.
C products: Products with a small sales composition ratio and a low turnover rate.
4. Inventory turnover rate
The inventory turnover rate is an index showing how efficiently inventory is being replaced within a certain period of time. If the inventory turnover rate is high, it indicates that inventory is being used efficiently; on the other hand, if it’s low, there’s a possibility that the risk of sell remainders or items for disposal will increase.
The inventory turnover rate can be calculated using the following formula.
The inventory turnover rate can be calculated using the following formula.
Inventory turnover rate = total number of shipments during the period/average inventory quantity during the period*
*Average inventory quantity during the period = (inventory quantity at the beginning of the period + inventory quantity at the end of the period) ÷ 2
*Average inventory quantity during the period = (inventory quantity at the beginning of the period + inventory quantity at the end of the period) ÷ 2
The total number of shipments during the period is the total number of quantities shipped during the target period. Also, the average inventory quantity during the period is calculated by adding the inventory quantity at the beginning of the target period and the inventory quantity at the end of the period and dividing by 2.
Calculation example: If the number of units shipped in one year is 900 units, with a beginning inventory quantity of 40 units and an ending inventory quantity of 160 units
The average inventory quantity during the period = (40 + 160) ÷ 2 = 100
Inventory turnover rate = 900 ÷ 100 = 9
The average inventory quantity during the period = (40 + 160) ÷ 2 = 100
Inventory turnover rate = 900 ÷ 100 = 9
Five points to optimize inventory management for ecommerce sales
There are several ways to sell products, such as selling in stores or managing your own website. Among these, selling on existing ecommerce sites is appealing because it’s relatively low-cost to start, and gives you access to a variety of marketing tools. Below, we’ll introduce key points for optimizing inventory management in ecommerce sales.
1. Conduct regular inventory checks
Even with an inventory management system in place, mistakes such as missing barcode scans can cause discrepancies between the actual inventory and system records. Conducting regular inventory checks leads to early detection of issues.
2. Analyze inventory demand
Since the needs of customers are constantly changing, it’s essential to conduct regular research and analysis. Use past shipments and sales data to predict which products need to be shipped inbound more in the future and what should be reduced, and then place orders.
Also, most existing ecommerce malls regularly hold Lightning Deal events and campaigns. Since the risk of inventory shortages tends to be higher during that period than during normal times, you’ll need to be careful about the quantity of inventory you’ll ship inbound.
Click here for details on Amazon's Lightning Deals (add link to the new Lightning Deals page here)
Also, most existing ecommerce malls regularly hold Lightning Deal events and campaigns. Since the risk of inventory shortages tends to be higher during that period than during normal times, you’ll need to be careful about the quantity of inventory you’ll ship inbound.
Click here for details on Amazon's Lightning Deals (add link to the new Lightning Deals page here)
3. Centralize inventory management for multiple sales channels
Centralizing management of inventory from multiple sales channels leads to more efficient inventory management. This is because everything can be automatically managed, including not only the inbound shipment and purchase of products, but also irregular inventory changes such as returns.
Amazon's multi-channel fulfillment (MCF) is a service that allows you to ship and deliver products sold through other channels from Amazon's fulfillment centers (FC). Inventory can be centralized across other sales channels, which can reduce the burden of inventory management.
Amazon's multi-channel fulfillment (MCF) is a service that allows you to ship and deliver products sold through other channels from Amazon's fulfillment centers (FC). Inventory can be centralized across other sales channels, which can reduce the burden of inventory management.
4. Promote sales to increase the inventory turnover rate
Existing ecommerce websites often come equipped with a wide range of sales promotion features. By implementing the right sales promotion measures, you can improve your inventory turnover rate. For example, by presenting attractive conditions to customers, such as discounts on food items nearing their expiration dates, you can expect to reduce waste caused by expired products.
Amazon offers a wide range of sales promotion features. If you are about to start selling on Amazon, you can promote sales at a reasonable price by taking advantage of various incentives that new sellers can use.
Amazon offers a wide range of sales promotion features. If you are about to start selling on Amazon, you can promote sales at a reasonable price by taking advantage of various incentives that new sellers can use.
Fulfillment by Amazon (FBA)
Fulfillment by Amazon (FBA) is a service that helps businesses grow by providing access to Amazon's logistics network.
If you use FBA, the Prime badge will be displayed for the product, so you can show off your products. Amazon Prime members can use free delivery options such as Expedited Shipping/Same-Day Delivery for products that qualify for Prime.
Learn more about FBA here
If you use FBA, the Prime badge will be displayed for the product, so you can show off your products. Amazon Prime members can use free delivery options such as Expedited Shipping/Same-Day Delivery for products that qualify for Prime.
Learn more about FBA here
Coupons
Coupons can be used to offer discounts on single products or set products.
Setting up coupons adds an exclusive badge to your products, helping to attract customers, and potentially increasing sales conversion.
Setting up coupons adds an exclusive badge to your products, helping to attract customers, and potentially increasing sales conversion.
Advertising
With Sponsored Products, products can be displayed in search results and on the product detail pages of related products. This makes it easier for customers to find sellers’ products, helping to increase your sales opportunities.
Learn more about Amazon’s ads
Learn more about Amazon’s ads
5. Manage reverse logistics
Reverse logistics refers to the movement of products being returned from the customer back to the manufacturer or seller. Whereas standard logistics is the movement of products from the manufacturer to the customer, reverse logistics indicates the opposite.
The main elements of reverse logistics are as follows.
The main elements of reverse logistics are as follows.
1. Return processing: Management of returns for defective or unwanted products
2. Recycling: Collection, reuse, and resale of waste and recyclable products
3. Repairs: Refurbishing or repairing defective products
2. Recycling: Collection, reuse, and resale of waste and recyclable products
3. Repairs: Refurbishing or repairing defective products
In online sales where there’s no face-to-face interaction between customers and sellers, it’s especially important to handle inquiries and returns smoothly. If not, customers will feel uneasy, and there’s a relatively high possibility that it will lead to a bad purchasing experience. By properly managing reverse logistics and establishing a smooth return process, customer satisfaction and your company’s image can be expected to improve.
By using Fulfillment by Amazon (FBA), return processing and customer service from buyers can also be outsourced to Amazon, reducing labor costs and work man-hours spent on reverse logistics.
By using Fulfillment by Amazon (FBA), return processing and customer service from buyers can also be outsourced to Amazon, reducing labor costs and work man-hours spent on reverse logistics.
Fulfillment by Amazon
Outsource order management, delivery, and customer service to Amazon
Fulfillment by Amazon (FBA) is a service that helps businesses grow by providing access to Amazon's logistics network. After a business sends their products to Amazon's warehouse, we will handle inventory storage, order handling, packing, shipping, customer service, and returns. Effective, reliable fulfillment delights customers. If you use multi-channel fulfillment (MCF), where Amazon handles the packing and shipping of products sold through channels other than Amazon for you, inventory management can be consolidated, which makes it more possible to run a smooth business.
Inventory management for selling on Amazon
We provide a wide range of inventory management tools and data for sellers who sell on Amazon.co.jp using Fulfillment by Amazon (FBA). By combining these, it’s possible to achieve more efficient inventory management. Let's take a look at the differences between general inventory management methods and FBA inventory management methods.
Comparison between general inventory management and inventory management when selling on Amazon (FBA)
Managing Inventory
FBA
Common methods
The following is an example of the tools and data that can be used by implementing FBA.
Inventory Performance Index (IPI)
The inventory performance index (IPI) is an index for measuring inventory performance over a period of time.
The seller's inventory performance index is calculated based on how well they drive sales by securing inventory for popular products and efficiently managing inventory at Amazon fulfillment centers.
Recommendations to help improve your inventory performance index score are divided into the following four categories, with a performance bar displayed for each.
The seller's inventory performance index is calculated based on how well they drive sales by securing inventory for popular products and efficiently managing inventory at Amazon fulfillment centers.
Recommendations to help improve your inventory performance index score are divided into the following four categories, with a performance bar displayed for each.
1. Reduce excess inventory
2. Increase your sell-through rate and balance it with a few weeks' worth of inventory
3. Make sure that inventory can be purchased by correcting listings for stranded inventory
4. Increase sales by always keeping popular products in-stock
2. Increase your sell-through rate and balance it with a few weeks' worth of inventory
3. Make sure that inventory can be purchased by correcting listings for stranded inventory
4. Increase sales by always keeping popular products in-stock
▲Performance bar
For more information, see the frequently asked questions about the inventory performance index.
Inventory replenishment notification
By setting inventory replenishment notifications, you can track the inventory status at Amazon fulfillment centers without having to regularly check each listing information. The number of replenishment notifications can be set for each product or for multiple products at once. When the number of sellable products that can be sold reaches the number of replenishment notifications (number of weeks until inventory is sold out based on the number of items or sales results for the past 30 days), Amazon will send a replenishment notification email.
Learn more about how to set it up
Learn more about how to set it up
Inventory management success stories
Here, we’ll introduce an example of successful inventory management optimization by implementing Fulfillment by Amazon (FBA).
koala began to use FBA in 2023 and successfully increased their sales and optimized inventory management. We interviewed them about their journey to success.
koala began to use FBA in 2023 and successfully increased their sales and optimized inventory management. We interviewed them about their journey to success.
koala
koala is a bedding and furniture brand founded in Australia in 2015 which continuously strives to develop mattresses that improve sleep quality (sleep performance). We expanded into Japan in 2017. Also, we are actively engaged in environmental conservation efforts and contribute to the protection of koalas and Japan's endangered animals through donations to WWF (World Wildlife Fund).
Q: What led you to consider using FBA?
A: Our products are large in size, so logistics and storage costs were a challenge. In particular, the shipping times and personnel adjustments before and after sale periods were becoming a significant burden. By using FBA, we believed we would be able to leverage Amazon's logistics network to deliver products to customers quickly and efficiently. Also, the goal was to provide the convenience of Prime-eligible products and expand sales opportunities. Using FBA was very much in line with our business priorities, enabling fast and hassle-free shipping while providing a smooth purchasing experience.
Q: What changes have occurred since you started using FBA?
A: By using FBA, sales have grown significantly, and sale quantities have increased significantly - not just for popular products, but for all products. Additionally, it’s made smooth order processing during busy periods possible, leading to reduced workload and improved inventory management accuracy. Furthermore, the delivery SLA to customers has also improved, allowing us to provide a better purchasing experience.
Q: What efforts have you made to make inventory management more efficient?
A: We try to prevent excess inventory and shortages by forecasting demand and making appropriate replenishment plans. In particular, we are striving to maximize sales opportunities by appropriately restocking inventory in line with our sales events. Additionally, we are properly managing both FBA inventory and inventory in our own warehouses, while making adjustments to maintain an optimal sales strategy.
“Optimizing inventory management not only benefits our business, but our customers as well. Having the products customers want available when they need them improves their shopping experience. By using FBA, we are now able to deliver to remote islands, which was not possible with our in-house shipping. Also, by adding a Prime badge on the product, we were able to reach customers who were unfamiliar with our brand, leading to an increase in brand awareness. ”
*The above is an example and does not guarantee the same results.
Frequently Asked Questions
What are the benefits of optimizing inventory management?
By optimizing inventory management, you can expect to enjoy the following benefits.
1. Improved work efficiency and productivity
2. Reduced management costs
3. Improvement in cash flow
Check “The four objectives of inventory management” at the top of this page for details.
1. Improved work efficiency and productivity
2. Reduced management costs
3. Improvement in cash flow
Check “The four objectives of inventory management” at the top of this page for details.
What can I do to reduce human errors in inventory management?
The key points for reducing human error in inventory management are as follows.
Thoroughly implement inventory management manuals
If there are no clear manuals or rules in place within the company, such as inventory storage locations changing depending on the person in charge, there’s a risk that it will lead to mistakes. It’s important that all employees involved in inventory management thoroughly follow the manual and perform inventory management in the same way. Start by determining your operational rules and creating a manual.
Use an inventory management system
With an inventory management system, barcodes are scanned by a machine and the data is registered directly into the system. This reduces the risk of manual transcription errors and input errors.
Conduct regular inventory checks
Even with an inventory management system in place, mistakes such as missing barcode scans can cause discrepancies between the actual inventory and system records. Conducting regular inventory checks leads to early detection of issues.
Thoroughly implement inventory management manuals
If there are no clear manuals or rules in place within the company, such as inventory storage locations changing depending on the person in charge, there’s a risk that it will lead to mistakes. It’s important that all employees involved in inventory management thoroughly follow the manual and perform inventory management in the same way. Start by determining your operational rules and creating a manual.
Use an inventory management system
With an inventory management system, barcodes are scanned by a machine and the data is registered directly into the system. This reduces the risk of manual transcription errors and input errors.
Conduct regular inventory checks
Even with an inventory management system in place, mistakes such as missing barcode scans can cause discrepancies between the actual inventory and system records. Conducting regular inventory checks leads to early detection of issues.
Is there a benchmark for the inventory turnover rate?
The inventory turnover rate is an index showing how efficiently inventory is being replaced within a certain period of time. The inventory turnover rate can be calculated using the following formula.
Inventory turnover rate = total number of shipments during the period/average inventory quantity during the period*
*Average inventory quantity during the period = (inventory quantity at the beginning of the period + inventory quantity at the end of the period) ÷ 2
*Average inventory quantity during the period = (inventory quantity at the beginning of the period + inventory quantity at the end of the period) ÷ 2
Appropriate inventory turnover rates vary greatly depending on the type of business. Here’s how you can find the inventory turnover rate for businesses in the same industry as yours.
•Search average inventory turnover rates by industry on the internet
•Check financial statements published on the internet by other businesses in the same industry*
•Search average inventory turnover rates by industry on the internet
•Check financial statements published on the internet by other businesses in the same industry*
*Some companies do not publish financial statements on the internet.
What are the benefits of managing inventory with FBA?
Fulfillment by Amazon (FBA) is a service where Amazon handles inventory storage, order handling, packaging, shipping, customer service, and returns. By using FBA, you can analyze and manage inventory performance using a wide range of inventory management tools. Also, by utilizing recommended shipped quantities of inventory calculated from data and the inventory replenishment notification feature, you can expect to reduce the risk of excess inventory and shortages.
I’m selling in multiple ecommerce malls. Is there a way to centralize my inventory management?
By using a centralized inventory management system, you can automatically manage not only the inbound shipment and purchase of products, but also everything including irregular inventory changes such as cancellations and returns, making inventory management more efficient.
Amazon's multi-channel fulfillment (MCF) is a service that allows products sold through other channels to be shipped and delivered from Amazon's fulfillment centers (FC). Inventory can be centralized across other sales channels, which can reduce the burden of inventory management.
Amazon's multi-channel fulfillment (MCF) is a service that allows products sold through other channels to be shipped and delivered from Amazon's fulfillment centers (FC). Inventory can be centralized across other sales channels, which can reduce the burden of inventory management.
