Shopify Inventory Management: Best Practices 2023

Inventory management is at the core of the world’s growth. The food we eat, the clothes we wear, and the gadgets we use all go through inventory management before reaching us.
Right now, we’re not so good at inventory management as inventory distortion stands at $1.1 trillion, including shrinkage, stockouts, and overstock.

The solution is to use inventory management software and follow the best practices. However, less than one-third of professionals are satisfied with their inventory management practices.

If you’re starting your eCommerce business, Shopify is a clear choice. It is the leading eCommerce solution with a cloud-based implementation. Here, you get access to many features to sell your products online. In addition, Shopify offers an extensive ecosystem, making it great for startups and multinational companies.

In this post, we’ll take a closer look at the Best Shopify Inventory Management Practices for 2023. By the end of the post, you’ll have all the strategies and tools to manage your Shopify inventory effectively.

What is Shopify Inventory Management?

Shopify is one of the most popular eCommerce platforms which offers excellent inventory management. It has tools that help manage your inventory, including stockpiling, ordering, and selling stock (raw/finished products).

eCommerce platforms need to have proper inventory management to succeed. It lets them improve operational efficiency, employee productivity, and time management.

As a Shopify business owner, you must follow Shopify inventory management practices to sell products at a steady pace without running out of stock. For Shopify stores proper inventory tracking means a smooth selling process, as well as intelligent stock replenishment. Shopify offers a clean yet effective way to manage inventory. With its inventory tracking, you can keep a tab on your stock and ensure proper stock flow.

Shopify Stock Management: Benefits & Challenges

Shopify stock management comes with its benefits and challenges. Businesses must know both of them, as they can use the knowledge to use stock management properly.

Shopify Stock Management Benefits

From the onset, Shopify stock management lets you know product quantity and the right product for which you need it. This simplifies your inventory management, where you don’t need to overstock or run in a situation where you are out of stock, especially for your high-performing product. As a result, you reduce the chance of missing sales, covering both scenarios of out-of-stock and overstock. In addition, a good stock management solution such as Shopify gives you real-time updates on your inventory, enabling you to manage proper inventory flow.

Clearly, it also benefits the store profitability, considering that you always have stocks to sell and are not burdened with overstock that costs you money to keep and store. All of these also make cost management more effective. You gain deep insights into spending by ensuring proper inventory management. For example, you can now optimize storage (with bin locations), customer delivery, and even transportation costs. So, if you have multiple SKUs with different sale volumes, you can keep higher inventory for products with higher sales volume and lower stock for products with lower sales volume.

Furthermore, Shopify stock management benefits customer satisfaction and improves your store service level.
In summary, you get the following Shopify stock management benefits:
  • Know which product you need in stock and how many;
  • Improve cost management by optimizing goods on stock, purchase amounts, storage volumes, customer delivery, and transportation costs;
  • Improve customer satisfaction by optimizing fulfillment;
  • Improve store profitability and cash flow.

Shopify Stock Management Challenges

Even though Shopify deploys built-in inventory management with care, it still needs more functionality. To ensure you don't discover these challenges during operation, we list them below for you so that you can try to offset these benefits with your solutions.

Shopify's stock management challenges start from its limited tracking capability. You'll find Shopify inventory management minimal if you're a business with complex supply chains and workflows. To resolve it, you may need to manually handle some aspects, which can increase the risk of errors, directly impacting over ordering or overselling. For example, you don't get barcode or dropshipping technology in Shopify, making you install alternative apps.

Businesses generally opt for multi-channel selling to maximize profits. However, Shopify lacks in this department as it doesn't support multi-channel selling. This means it cannot sync data from other sources. So, if you're using different platforms to sell, such as Amazon, Walmart, etc., you won't be able to keep track of all the inventory across channels. It also restricts you from doing advanced analytics and reporting.

Furthermore, Shopify only stores data for the past 90 days. This is very limiting as you cannot do long-term reporting and miss out on insights that can help you grow your business. The lack of historical data also means you cannot understand business growth over time. Otherwise, you need to additionally export it and keep it elsewhere for longer periods’ analytics.

Also, Shopify has product restrictions. For example, it doesn't support tobacco, pharmaceuticals, and alcoholic drinks. It means you need to set up separate inventory management if you have products that fall under its restricted list.

Lastly, Shopify, even with native POS, suffers from one major problem. It continues selling products even when the inventory reaches zero.
In summary, Shopify's inventory management challenges include the following:
  • No multi-channel support/selling.
  • Limited tracking capability
  • POS suffers from proper inventory check
  • Only stores data from the last 90 days
  • Product restrictions make it harder to manage all your inventory

How to Manage Your Shopify Inventory Effectively

With Shopify inventory management benefits and challenges clear, it is time to learn how to manage your Shopify Inventory tracking effectively.
If carefully planned, you can benefit immensely, including:
  • Ability to track your Shopify store’s stock
  • Identify trends and use them to increase business sales
  • Offer optimal sale offerings for your customers
  • Ability to make informed decisions for product procurement and pricing
You need to plan and follow steps carefully to reach all the benefits. As it is a multi-step process, each stage has its quirks. Let’s go through it below.

Categorize and Plan Your Shopify Inventory

Shopify stock planning starts at the Inventory process flow. During the inventory process flow, there are multiple steps, including Purchase, Store, Use, Track, Reorder, and Forecast. However, the flow can differ depending on whether you’re a product/manufacturing organization or a retailer. Regardless, inventory management is crucial to almost every organization.

With Shopify stock planning, businesses can learn two things: how often to reorder and how much amount of stock to reorder.

But how do you approach it? The answer is inventory categorization. It is also known as inventory classification. Here, you categorize products based on their demand, the revenue they generate, and their associated costs.
As a Shopify owner, you can categorize your products into these three categories:
  • On stock items: Stock items are the goods that a business trades (purchase or sell) or manufactures. It defines the inventory entity.
  • Items to order: This category defines the items that need ordering. It is specified in the sales order context.
  • Obsolete items: Lastly, items defined in this category that do not require any new stock or are primarily out of circulation or not in demand. These items are mainly at the end of the product life cycle.
But what approach should you take for product categorization? We recommend the ABC/XYZ analysis. With this approach, you can focus on products that bring you the best revenue.

In ABC/XYZ analysis, there are two dimensions: ABC and XYZ categories.

ABC Analysis

Here, the ABC category is composed of three classes:
  • Class A - High priority → Small warehouse quantity(20%), but offers the highest turnover value. In most cases, they should generate 80% of the revenue.
  • Class B - Medium priority → Average warehouse quantity(about 30%) and offers average turnover rate.
  • Class C - Low priority → Large warehouse quantity(50%) with little demand and low turnover rate.
ABC analysis uses the Pareto principle(80/20 rule) to find the best products that sell. The principle states that 80% of the results result from 20% of the processing time. In simple terms, you need to find the 20% of your inventory items that generate 80% of the goods movements or sales. Due to the high impact, these inventory items are classified under Class A, followed by Class B and C.

Most companies rely on a few goods to perform heavily. Once a company realizes it should focus on the products that make them the most money.

XYZ Analysis

In the XYZ Analysis, you understand demand uncertainty. For example, if you’re selling a Christmas-based product, it’ll perform only during or around Christmas every year(Z items). However, products such as toilet paper sell throughout the year(X items). Therefore, any product that falls under the X and Y demand curve falls under the Y.

With ABC and XYZ analysis done, we’re left with two dimensions, giving access to the nine-category matrix.
These include:
  • XA, XB, and XC
  • YA, YB, and YC
  • ZY, ZB, and ZC

We recommend this post if you want to read more about ABC/XYZ analysis.

Replenish Your Shopify Stock Reasonably
To sustain your business and gain profitability, you need to do stock replenishment(also known as inventory replenishment). It involves meeting customer demand by moving items through the supply chain while minimizing associated costs.

As a Shopify business, you need to do it intelligently to optimize storage and correct demand forecasts. Also, it is vital to do stock replenishment periodically so that your business can meet sudden customer demand.

Never run out of stock with Safety Stock

To do effective stock replenishment, you must accurately define your goods to store. Moreover, you also need to figure out the period between replenishment. To come up with the correct numbers, you need to use the Safety stock technique, which ensures that your warehouse doesn’t run out of stock while the new supply is on the way. In addition, it covers demand fluctuations and ensures high customer satisfaction.
To calculate safety stock, you can use any of the following methods:
  • Time-based calculations
  • Fixed safety stock
  • General formula
  • Heizer Render’s formula
  • Greasley’s method
Here, we’ll only list the general formula.
It is as follows:
Safety stock = (maximum daily usage x maximum lead time in days) - (average daily usage x average lead time in days).
So, according to the general formula, the safety stock is determined by multiplying the maximum daily usage(maximum units sold through a single day) by the maximum lead time(maximum time taken to get supply from the vendor). With this value determined, now subtract from it the average daily usage and average lead time.

You may also want to do an ABC/XYZ analysis to determine the high-demand product.

Ensure proper delivery date

To ensure that customers don’t get delayed, you should keep the goods to order in mind. Here, you need to identify the associated lead time (the time taken for the stock to reach the warehouse). Once you have all the info, you can inform the customer about the estimated delivery time.

Managing Obsolete Goods

You should keep a constant eye on Obsolete goods. They unnecessarily occupy the warehouse while not contributing to business growth. That’s why you need to be proactive in identifying them with ABC/XYZ analysis and then communicate with the supplier to close these items from ordering. Sometimes obsolete goods appear if the MOQ (minimum order quantity) was not considered properly during the replenishment process. For example, a customer ordered 10 pcs of ZC product, which is sold once a year, and the MOQ is 100 pcs. Thus, you sell 10 pcs and get 90 pcs on stock which means 9-year stock.

It is advised to constantly monitor the stock for potentially obsolete goods. You can deploy discounts on sales for these goods or sell them as part of combo kits, to free your stock.

Audit your Shopify Inventory Regularly

A stock audit is necessary if you want to manage inventory optimally. To get started, you should do a complete count on all your warehouse locations at least once a year. This will help you keep stock numbers correct and also identify obsolete goods. Moreover, you should also cycle counts for AX and BX products weekly in all your locations, considering they both have a stable and constant demand.

Moreover, you should also follow the FIFO procedure during shipment. This method is popular in industrial storage and helps keep the goods moving without clogging the warehouse. This method also benefits expired products such as medicine, foods, and cosmetics. In addition, you must also do expiration date monitoring so that goods waste is minimized or completely eradicated.

Lastly, regularly auditing your Shopify inventory will let you quickly identify and display overstocking, surpluses, and shortages.

Top 5 Shopify Inventory Management Apps in 2023

Shopify offers decent inventory management for businesses. However, it should be clear by now that it needs to fulfill the required demands by following the above mentioned practices. To overcome its limitation, you need to use Shopify inventory management apps, readily available on the Shopify App Store.

We recommend the following apps to amplify your Shopify inventory management:
  • Exportier: This Shopify inventory app lets you extract products, inventory items, customers, and order details into CSV/EXCEL. It also offers 20 pre-built report templates for easy Shopify data exports. It is an excellent app for businesses that use EXCEL to do all the calculations. For example, you can use the built-in inventory template which allows the quick export of inventory items at locations:
  • Stocky: Stocky lets you manage your inventory. With it, you can optimize inventory decisions by adequately communicating with suppliers about purchase orders, receiving product recommendations, replenishing stock quickly, conducting stocktakes, and doing in-depth reporting.
  • Skubana: The Skubana app enables you to unify your inventory management tools to focus on demand planning, forecasting, and profitability.
  • Power BI Connector: If you want to take your Shopify data to a fully-fledged Power BI solution, then you should use Power BI Connector. It is a no-code integration that allows you to sync Shopify data to Power BI automatically. Once done, you can create powerful reports to analyze customers, inventory, orders, etc. With deep insights, you can use them to improve your business profitability. Here is one of the examples of inventory related Shopify reports that can be built in Power BI:
  • Stock Sync: Stock Sync lets you sync products to your online store automatically. It does it by integrating with a warehouse management system or external inventory.

Final Words

Shopify is one of the leading eCommerce platforms. However, it is less open a platform than you would want it to be. And that’s why it has limitations across different features, including inventory management.

Our Shopify understanding started from its stock management benefits and challenges. Next, we explored how you can use different strategies and analyses, such as ABC/XYZ, to categorize products for better inventory management. In the end, Shopify could not implement these strategies, so we listed the top 5 Shopify inventory management apps.

We hope you found our best practices on Shopify Inventory Management helpful.
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