Shopify Inventory Management: A Complete Guide for eCommerce Success

In ecommerce, your inventory is the lifeblood of your business. Per market data, US retailers lose $1.75 Trillion due to inventory mismanagement. How efficiently you can track, store, and deliver your products directly impacts your bottom line. 

Your Shopify store has to meet the high expectations of online shoppers. While there are numerous reasons customers choose ecommerce sites over retail stores, one of the biggest is convenience. Customers expect the products they want to buy to be available, and can be disappointed if a DTC shop is out of stock. They also expect orders to be delivered efficiently. 

Brands that master ecommerce inventory management reduce or eliminate stockouts, store less excess product, reduce overall costs, and increase overall efficiency. Effective inventory management also helps DTC brands maintain sustainable growth, optimize cash flow, and maximize profits.  

This guide explores Shopify's built-in inventory features, the essentials to look for in inventory management tools, and practical steps to optimize your inventory for more efficiency and profitability. 

What is Shopify Inventory Management?

Shopify inventory management is the system of tracking, storing, and moving the products you sell through your Shopify store. In the ecommerce workflow, it is the essential link between your store listings, customer orders, and the fulfillment process. 

More broadly, Shopify Inventory management covers all aspects related to your inventory, from when you first acquire the product to when you deliver it to your customer - and all the stages in between. It involves monitoring stock levels, managing different lines of products, tracking inventory across multiple locations, keeping accurate records of all inventory costs and movement, and more. 

If your company manufactures the goods it sells, inventory management includes the entire process of acquiring raw materials, creating the finished product, and storing it in a warehouse. 

Shopify inventory management - the good, the bad and the ugly

Efficient inventory management balances supply and demand for each SKU, with constant adjustments based on real-time data. It keeps warehouse holding costs low and working capital high because less stock is tied up in storage.  

On the other hand, inefficient inventory management - such as relying on a patchwork of spreadsheets to track inventory amounts and making inventory-related decisions without real-time information, can cause inefficiency across the entire business. 

For example, excessive cash could be tied up in over-ordering a product without noticing that the recent bump in sales was a product of seasonal conditions. At the same time, you might run out of a breakout seller because you didn’t see the trend developing, losing potential sales and even returning customers.  

But tracking order size is not enough. It is also essential to know your per unit cost of the things you sell. You could be raking in the revenue, but if your COGS (Cost of Goods Sold) is too high, you may be earning less profit than you think, or even losing money without knowing it.  

How Shopify's Inventory Management System Works

When it comes to Shopify inventory management, people often ask whether Shopify offers any built-in tools for managing inventory. 

The answer is - YES. 

The platform's native inventory system includes:

Product tracking

Inventory management begins with the ability to track your products. Shopify lets you see at a glance where you have products and how many you have. You can monitor inventory for every SKU in your catalog. 

Order fulfillment tracking

You can see when orders are filled in real-time. The system adjusts inventory levels automatically, so your figures are correct in all the locations you track. It also allows for partial fulfillment of orders when part of an order is out of stock. 

Purchase order management

Shopify’s native inventory management also allows you to manage purchase orders from suppliers directly within the system. 

Variant management 

Track inventory for different product variations (size, color, etc.) directly through Shopify inventory management. It gives you a more accurate picture of your customers’ preferences and your specific inventory. 

Metrics on top sellers

Shopify inventory management provides analysis reports to see which products are the top sellers. The metrics provide data to make decisions on reorders. 

These features provide a strong starting point for your inventory management. However, as your Shopify business grows, you may choose to look beyond the solutions Shopify offers out-of-the-box. You might need features Shopify doesn’t offer, such as the ability to track inventory across different channels (like Amazon, TikTok Store, etc.). 

The native Shopify features don’t provide metrics for tracking the landed costs per unit of your products. Without clear visibility into your true spending, it’s hard to know your true profit margins on your sales.  

5 Essential Features to Look for in Shopify Inventory Management Software

When evaluating inventory management solutions for your Shopify store, prioritize these critical features to ensure you're making the right investment:

1. Real-time stock tracking

In order for your inventory tracking software to be effective, it must provide real-time information. Otherwise, you are making decisions about inventory in the dark. It’s really no better than using a spreadsheet to track your orders across all locations. 

Ecommerce success is a fast-moving target - and real-time tracking gives you more control over inventory-based decisions. You can see at a glance exactly which SKUs need your attention, removing the guesswork that leads to lower margins (check out InventoryIQ by FInaloop).   

2. Multi-location inventory management

Shopify stores operating with multiple warehouses or fulfillment centers need to track inventory across all of their locations. They might find that some warehouses are holding too much of a certain product that is selling faster in another location. 

Seeing the full picture allows store owners to make effective cost-saving adjustments. For example, store owners can optimize fulfillment by shipping from the closest location to the customer. 

If you plan to scale your business to multiple locations, you want to make sure your inventory management software allows you to track inventory everywhere.

3. Integration with accounting and sales tools

Inventory management is not an isolated function of your DTC brand. To get the most out of your inventory software, it has to integrate smoothly with all of the other software you use to run your business. 

It’s particularly important to integrate your Shopify inventory management with accounting and bookkeeping software, like Finaloop, in order to make sure that you are tracking your landed costs per unit and the cost of goods sold (COGS).  

4. Automated stock alerts and reordering

Running a DTC business is hard work, with numerous details to track at any given time. Smart business owners automate as many routine tasks as possible so they can focus their attention on parts of the business that require decision-making. 

• Create automated low-stock alerts so you’re never surprised when stock requires attention. 
• Have purchase orders created automatically when top products require reordering
• Predict reorder timing based on your sales velocity.

These automations help prevent both stockouts and overstock situations, optimizing your inventory investment.

5. Detailed reporting and analytics

To get a real handle on your inventory, you need more than just a product count. You also need software to produce reports that can help decision-making. 

Examples of the type of reports inventory management solutions often offer include ABC Reports, which Shopify offers only as an Analytics feature. ABC reports typically shows your inventory through three tiers- the estimated 20% of inventory that accounts for 80% of your business, the products that generate 15%, and the products that contribute the remaining 5%. This gives you good insight into which products are driving your profits. 

You can also get seasonal breakdowns to see which products sell better at particular times of the year, forecasting reports that show predictable patterns, dead stock reports, and more.

How to Optimize Shopify Inventory Management

Using Shopify’s inventory management system effectively

If your business has a relatively simple distribution system and straightforward inventory management, you can consider starting with Shopify’s built-in inventory management system. 

You can view your products on the Inventory page. Open your Shopify Admin, go to Products > Inventory

The inventory can be listed in different states:  

On Hand - This is the total number of product units at any location. You can see multiple locations by switching between them on the Inventory page. The figure includes all available, unavailable, and committed products. 

Available - This is the number of units that can be sold to customers. They have not been committed to another customer, or set aside as unavailable. 

Committed - This is the amount of stock ordered by customers but not yet fulfilled. It is still on hand at your warehouse but is in the process of being delivered to customers.

Unavailable - This is the number of products reserved for draft orders or deemed unavailable for other reasons, such as damage. Unavailable products are on hand in your warehouse but not available for sale. 

Setting up inventory tracking and stock alerts 

You can manually adjust your On Hand or Available merchandise by going to Product > Inventory. 

>> If you have multiple locations, you will see a drop-down menu with all your locations. Pick the one you wish to adjust. 

>> If you want to adjust levels for one variant of merchandise, make the adjustments in the On Hand or Available columns. 

>> If you want to adjust multiple variants by the same amount, select all of the variants you want to change, then click on >> Update quantities

>> Make sure you press “save” at the end so the changes go through

To set up stock alerts, you will generally need to add a third-party app. 

When setting up stock alerts, it’s a good idea to figure out in advance what you want to set as your minimum to trigger an alert. Then decide where to receive the alerts (email, SMS, Whatsapp, etc.)

Automating processes with third-party apps

Once your business moves beyond the basic functions provided by Shopify through its Admin system, you should consider more advanced solutions. 

Any third-party inventory management app you use should integrate seamlessly with your Shopify data so that there is a flow of information between systems. That keeps your data accurate and dramatically reduces errors. 

The most important functions for third-party apps: 

• Integrate data from multiple channels - see and manage inventory data for all your channels and locations in one place.  
• Forecast inventory needs based on sales velocity - plan your inventory spending in advance to ensure you have the cash flow you need to avoid stockouts or overstocking. 
• Connect to your accounting software - stay on top of essential financial data such as your cost of goods sold so that you always know your margins. 

Integrating inventory management with accounting software like Finaloop

Perhaps the most impactful integration to your Shopify store is implementing specialized ecommerce accounting software, like Finaloop, to manage your inventory solution.

With Finaloop, you can: 

• Automate COGS and inventory - Always stay on top of your margins
• See landed costs in real time - Control your fluctuating inventory costs
• Manage POs and costs in one dashboard - Track stock units per status across each SKU and warehouse
• Manage vendor balances - View of all POs, payments, and bills for each vendor

It’s simple to connect your Shopify store to Finaloop: 

1. Open Finaloop account - sign up 
2. Connect your Shopify account - >> download Shopify app from Shopify app store
3. The connection will be immediate
4. Finaloop will automatically pull data from your sales, orders, etc. over 24 hours
5. Data will then be visible in real-time. 

Final Thoughts: Take Control of Your Shopify Inventory Management

Effective Shopify inventory management provides a crucial competitive advantage to companies of all sizes. Maximizing inventory efficiency will keep costs low, improve customer satisfaction, and ensure that your cash is being used efficiently, and not tied up in unwanted stock sitting in your warehouses. 

Shopify offers tools for basic inventory management. Companies looking for more functionality can choose from a wide range of software solutions, provided they meet the standards discussed above - and can be tailored to your specific needs.

Software that connects directly to your company’s financial data, such as Finaloop, offers the added advantage of real-time data, including cost tracking of your goods sold. You get the comprehensive visibility you need to make truly informed business decisions - to build a more resilient, profitable, and scalable Shopify business. 

Frequently Asked Questions

1. Can I use Shopify for inventory management?

Yes. Shopify offers basic inventory management tools directly on the platform. It allows you to track your inventory across different locations, track your order fulfillment, and see reports on your top-performing products. 

However, if you sell merchandise through multiple channels, or have more complex inventory management needs, consider using more advanced inventory management software. 

2. How do you track inventory in Shopify?

The Shopify tools are straightforward and relatively simple to use. Just go to your Product page on the platform, choose the inventory you want to track, and click on “track inventory”. Shopify will then track those products for you, showing you the levels of stock on hand at any time. 

3. How do I set inventory on Shopify?

All inventory is set through your Product page on the Shopify admin. After you create your products and listings, you can enter data about the number of units you have in your warehouse. After you set up the “track inventory” for each product, the platform will give you visibility of inventory levels in each location. 

4. How good is Shopify inventory?

Shopify’s native inventory management system is a good place to start with inventory management, especially if the alternative is to try to stay on top of inventory levels manually through spreadsheets. 

However, Shopify’s system does not track the landed costs per unit, which requires more financial data. By integrating your Shopify data with specialized ecommerce accounting software, you can track the unit costs for your inventory and gain visibility into your profit margins so you can make better business decisions.