Cracking the Inventory Code: Why Ecommerce Brands Struggle and How to Solve It

Key Takeaways for Ecommerce Brands:

1. Last year, retailers were carrying 58% excess inventory into the holiday season, highlighting a significant surplus.
2. This led to substantial discounts, with Cyber Monday apparel discounts increasing, which impacted smaller DTC brands' sales and inventory levels.
3. Industry veteran Eric Youngstrom identifies poor visibility, outdated processes, and shifting customer demands as the main challenges in inventory management.
4. Eecommerce-dedicated accounting systems that integrate real-time inventory management to efficiently align sales and stock levels.

Last year's holiday season started off as an inventory management cautionary tale. Take the fashion industry in the US, for example; a survey conducted in August revealed that fashion retailers headed into the 2023 holiday shopping period carrying 58% of surplus stock on average. To put this in context, the average small US retailer sits on 22% of excess inventory, according to some estimations. 

Looking to free up this excess inventory, many big brands began the holiday season by offering substantial discounts. Data from Adobe Analytics, which provides a comprehensive view of the US ecommerce market, showed that discounts on apparel on Cyber Monday 2023 were up to 23% off the listed price – compared to 18% in the previous year.

Most DTC brands couldn't compete with these prices, setting off a chain reaction that left them with less sales – and more inventory – than planned. “We've been in the business for nine years, and every year, we've had growth between 20 to 30 percent,” said Michael Hagen, co-founder of California-based hat fashion brand Wyeth. “This is the first year we've kind of gone (on a) plateau.”

That scenario might play out again, as Adobe anticipates discounts of up to 30% off listed prices for the 2024 holiday season. But for some small brands, markdowns are not an attractive option, even if the alternative is getting stuck with obsolete inventory. “I prefer not to offer a discount so often because I think it's not healthy for the profitability of the brand,” explained Hagen. “If you get your consumers used to buying something on sale, they're hesitant to pay full price.”

Finding the inventory sweet spot

The question is, why can't ecommerce businesses get their ducks in a row when it comes to inventory management? Or, as ecom veteran Eric Youngstrom put it, what prevents them from finding that “inventory sweet spot you’re always looking to achieve – not overstocking, not understocking, and still managing to keep up with changing buyer demands.”

Youngstrom got into the ecom world in 2012, when he helped launch ShippingEasy, an order aggregation and shipping solution for ecommerce SMBs, which was acquired by stamps.com in 2016. His current venture, lending platform Onramp Funds, provides working capital to DTC brands “for a 30 to 180-day cycle, and we're matching that cycle to your cash conversion cycle and inventory turnovers.”

Drawing from his extensive experience in the ecommerce supply chain, Youngstrom identified three interconnected reasons for online store inventory management issues. The first is poor inventory visibility. “If your items are off-site, hiccups can occur, misplacements happen, and what you think is available may not be,” he explained. “Also, without robust inventory visibility, you may not realize you’re overstocked on low-demand products or understocked on high-demand products.”

Subpar inventory visibility is often the result of legacy processes or software, which create additional inventory challenges. According to Youngstrom, many DTC operators are still “managing inventory with manual methods or using outdated solutions that aren’t providing you with the actionable insights you need to be more effective in inventory management.”

The third reason for online store inventory management issues, per Youngstrom, is shifting customer demands. “Your buyers’ preferences can change at any time, meaning an item that was once popular may suddenly no longer be a top seller,” he said. “Proper inventory management involves knowing what your buyers want and consistently keeping the right amount of inventory to meet those wants.”

Implementing effective ecommerce inventory management strategies can mitigate these challenges.

Inventory and Accounting: An Unbreakable Bond

Consistently matching inventory and sales levels requires “a real-time inventory management system,” concluded Youngstrom, imploring DTC brands to choose an ecommerce inventory management software based on “what inventory metrics and data are most valuable to your business.”

Based on our experience working with thousands of DTCs, the most crucial inventory metrics an ecommerce inventory management software offers are inherently linked to your financial ledger. The reason is simple: inventory is, in its essence, an accounting problem.

If you think about it, accounting for inventory purchases is part of a DTC operator's day-to-day work. Every sale that contains inventory generates a corresponding entry on your ledger. When inventory items are shipped, the asset value on the balance sheet decreases, while the COGS on the P&L increases. And when you buy additional inventory, its value is added to your assets on the balance sheet.

Of course, doing manual accounting for inventory purchases is not scalable and can't keep up with the volumes and pace of DTC. Which is why the only viable option for DTC brands is an ecommerce-first solution that streamlines inventory management with centralized PO and vendor management, automated real-time COGS tracking, and offers unparalleled visibility into inventory by warehouse and SKU, providing you with the insights you need for better decision-making – in the holiday season and beyond.