A good inventory management system (IMS) is a vital component of an e-commerce tech stack. Once your e-commerce business reaches a certain size, you’ll likely need one in order to stay on top of your business. This guide will go over what an IMS does, why you need it, and how to choose the right one for your business.

What is an Inventory Management System?

An inventory management system is a software platform designed specifically for businesses who deal with physical products, to track and report on their inventory. Instead of painstakingly tracking and updating inventory data in a spreadsheet, the IMS offers a centralized, granular, real-time view of your stock levels. A good IMS will also provide a single location to manage ordering, receiving, and fulfillment.

Why Do You Need an Inventory Management System?

For most retail and e-commerce businesses, inventory is one of the largest uses of working capital. It can be very difficult to track and calculate by hand, particularly as your business grows. 

At the same time, getting your inventory tracking and forecasting wrong can be costly in either direction. Underestimate the inventory you’ll need and you may sell out at the worst time – but overestimate and you may waste money and space on inventory that isn’t moving fast enough.

An inventory management system helps you understand what inventory you have on hand, how much money you have tied up in it, and how well your inventory is selling across your various sales channels. This in turn helps you better forecast which items you’ll need, how many units you should order, and how much to invest in that inventory. It can do all of this at a very high fidelity, like size and color of a particular item, enabling your forecasts to get more granular and your inventory investment to be more efficient.

As an added benefit, an IMS can lower your operating costs as well. A good IMS will streamline purchase orders, invoicing, inventory tracking, and fulfillment into a single system, helping you save money on overhead.

How to Choose an Inventory Management System

When considering which IMS is right for your business, look for these characteristics:

• Ease of Use. Your inventory management system will be one of the most-used, most-critical systems in your company. Make sure you choose an option with an intuitive interface, that’s easy to pick up and learn (for both you and your team).
• Necessary Integrations. As a central piece of your technology stack, your IMS will interact with many of your business’s other systems, like your sales platform (e.g., Shopify) and your fulfillment system (e.g., ShipStation). For that reason, it’s a good idea to do your homework on which systems the IMS will need to talk to, and how to make that happen. If a potential IMS offers a broad range of integrations, but not the one you actually need, you’re setting yourself up for an interoperability headache.
• Mobile Functionality. Your team is just as likely to be using the IMS on the warehouse floor as at their desks. For maximum efficiency, your IMS should work well on mobile devices, and make it easy for the right people to get the right information, at the right time.
• Comprehensive Reporting. While tracking your inventory levels is obviously very important, it’s only one part of what a good IMS offers. Calculating your SKU-level costs and profit margins by hand is very difficult, because the numbers can change rapidly as material and shipping costs fluctuate. Look for an IMS that can programmatically calculate and report these, along with any other information that will improve your ability to forecast.

Questions to Ask an IMS Vendor

Deciding which inventory management system to implement for your business can be a difficult task. Here’s a few questions we recommend asking a potential vendor as part of your diligence process.

Can all revenue channels get connected to the inventory management system, including wholesaler, store POS, e-commerce, etc? 

Why it matters: Your IMS can’t be fully effective if only some of your transactions are in the system. To get the complete benefits of installing an inventory management system, it needs to account for sales made on all of your channels

Can you create purchase orders (POs) from within the IMS?

Why it matters: Being able to create POs from within the same system that tracks your inventory streamlines your purchasing process. When you see in the IMS that you need something, you can just place the order without needing to switch to a new system, saving time and eliminating manual data re-entry. Bonus points if your IMS lets you modify a PO after it’s been created; you may want to finalize the PO after you receive your supplier’s invoice, which will include final landed costs.

Are stock levels updated as soon as product is received?

Why it matters: Your system’s tracking is only as good as its inputs. Ensuring prompt updates when you receive new inventory helps keep the system up to date and accurate.

Is there batch tracking and expiration tracking?

Why it matters: If your business sells perishable goods, your IMS can help track losses due to expiration, and help you better forecast the right amount to stock in the future. In the event that you have product quality issues, it can also help you isolate the problem to specific batches of product, reducing the impact radius of the issue.

Is there a fulfillment / shipping system connected to the IMS, that updates fulfillment status for your customers’ orders?

Why it matters: Integrations with shipping/fulfillment systems like Shipstation and ShipBob allow you to automatically deplete inventory in the IMS as soon as the goods are shipped, helping keep your records accurate.

If you use a 3PL to store and/or ship your goods, you’ll want to ask if the IMS can be integrated with the 3PL’s systems.

Does the system offer granular analytics and reporting?

Why it matters: To improve your forecasting, and better optimize your cash flow, you need detailed insight into how various parts of your business are performing. Your IMS is well-positioned to provide valuable data like gross profit per SKU per channel over time, so long as the system’s reporting capabilities can provide enough granular detail.

For manufacturers: does the system have production planning capabilities?

Why it matters: If you IMS can handle functions like creating production orders for products and depleting component inventory using a recipe manual, it can help further streamline your backend processes.

Can the system automatically connect and integrate with your accounting software?

Why it matters: Your accounting software system (QuickBooks Online, etc) is another vital piece of your backend technology, and your inventory information will play a role in generating your financial statements. An automated integration between the two systems will save time and reduce the opportunity for manual errors.

Learn more about essential fintech for e-commerce in our free guide, or schedule one-on-one office hours with our retail & e-commerce experts.