Inventory Risk Management: How To Protect Your Ecommerce Business
In 2022, we rummaged through old boxes and found two Damilano handbags in pristine condition.
Historically, brand-name handbags had flown off our shelves. So, we got them professionally cleaned, aired them out, and threw out our backs making the perfect Instagram Reels.
But here’s what happened: they’re still in our living room, gathering dust—while their online listings remain live.
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The problem? We didn’t take into account balancing one-of-a-kind finds and selling them before they lost their value. Damilano’s brand name didn’t have the same appeal after we’d heavily marketed TUMI and Coach handbags.
This is inventory risk. The stock sits, while sales slip. These unsold goods cost you money, one way or the other.
Inventory risk management, therefore, is proactive mitigation. You have to identify potential threats within your inventory, evaluate their impact, and minimize them.
The goal is simple: protect your business. So, let’s maximize your cash flow and streamline your operations.
Buckle in.
What is Inventory Risk?
You want the right quantity of in-demand SKUs at the right time, in the right place, and at the right price to maintain perfect inventory levels and keep your customers smiling.
In theory, inventory risk is when your business deviates from this maxim in any form or practice. This can include having products nobody wants, pricing them too high or too low, placing them in the wrong stores, or offering them at the wrong time of the year.
How you choose these things directly impacts your business's risk profile.
But reality is often messier. Think of inventory risk as a spider web of interconnected uncertainties.
Each strand represents a potential threat.
If your virtual shelves go empty, your warehouse fills up with slow-moving SKUs, or your supply chain runs into trouble—you're left stuck in a sticky web of loss.
Meaning, either which way, you lose money. Too much inventory? You risk obsolescence or spoilage. Too little? You lose out on sales and profit.
How does this play out in different industries?
No matter what you sell, or how you sell it, inventory risk applies to every business.
- Retail. Consider a clothing store stocking up on heavy winter coats just before a heatwave hits. That's the “wrong goods” at the “wrong time.” If they’re also overpriced, that’s a TRIPLE whammy of inventory risk.
- Manufacturing. The demand for a certain type of phone case might plummet when a new model of phone is launched. (Apple's iPhone 16 should prove this once again.) That's the “wrong goods” risk in action. If they've already produced a large batch, they're stuck with excess, obsolete inventory.
- Ecommerce. An online store might struggle to keep up with market trends, leading to stockouts (the “wrong time” risk). Or, they might overestimate demand and end up with warehouses full of stuff nobody wants. (Again, I call your attention to my unsold Damilano handbags.)
4 Types of Inventory Risk
You know how they say it gets worse before it gets better?
First, I’m going to walk you through some disastrous real-life examples of inventory risk: the effects of inventory loss, inaccuracy, and mishandling on customer satisfaction. (And their eye-watering impact on bottom lines.)
But then, we’ll move on to other real-life examples of risk mitigation from over 35+ ecommerce business leaders I’ve surveyed.
Let’s learn some lessons from the school of hard knocks.
1. Inaccurate forecasting
How important is accurate forecasting for mitigating inventory risk? Best Buy’s super fail can shed some light.
Empty shelves, angry customers: Best Buy's forecasting fail
It's December 2011, the holiday season is in full swing, and Best Buy—the electronics giant, is in the red. They issue a statement:
Due to the overwhelming demand of hot product offerings on BestBuy.com during the November and December period, we have encountered a situation that has affected redemption of some of our customers’ online orders.
We are very sorry for the inconvenience this has caused, and we have notified the affected customers.
The backlash was swift and severe, with critics calling this a “big black eye” for the online retailer.
A disappointed customer, Laura Suess, of Hastings, Minn said:
Translation?
They botched their inventory forecast during the biggest shopping season of the year, leaving countless customer demands unfulfilled.
And worse—they fueled sales for their rivals, Amazon and Target.
2. Unreliable suppliers
When you’re selling and shipping goods online, an over-reliance on one supplier can tip the scales toward a supply chain collapse.
Especially if you don’t have any logistical contingency plans in place.
The chicken shortage heard around the world
February 2018, and Kentucky Fried Chicken (KFC) fans in the UK are in for a shock. A whopping 750 of their 900 stores were forced to close.
The offender? DHL, their new third-party logistics (3PL) partner, was struggling to keep up with the demand for fresh chicken.
The system was a logistical nightmare, with some stores waiting days for deliveries.
The estimated daily loss for the brand was a staggering £1 million. (And this doesn’t include the damage to its reputation.)
The Guardian reported people had gone “chicken crazy,” with some calling the POLICE to report the shortage:
KFC’s move to a single supplier with a single distribution center backfired spectacularly.
It's a stark reminder that diversifying your supply chain and having contingency plans ready can make the difference between smooth operations and a complete supply chain breakdown.
3. Product life cycle & obsolescence
The lifespan of even the most innovative products is limited. And Apple proves this year after year.
The iPad's identity crisis
A harsh reality check hit Apple in the late 2010s. Their once-revolutionary iPad was losing its luster, with sales plummeting for 12 consecutive quarters.
The iPad's popularity declined for two reasons. Firstly, bigger iPhones like the 6S Plus made the need for a separate tablet less obvious.
Apple's iPad updates are less frequent than those for the iPhone, so the tablet feels less “cutting-edge.”
As a way to boost iPad sales, Apple slashed the entry-level price by $70. As much as this move was aimed at boosting demand, it also created a “price risk.”
So, this aggressive discounting strategy eroded profit margins and lowered the iPad brand's value.
For businesses to avoid being stuck with obsolete inventory, they must constantly adapt to changing market trends, anticipate technological advancements, and proactively manage product lifecycles.
4. Inventory shrinkage
When a company's actual inventory is lower than its records, it's called inventory shrinkage.
What causes this discrepancy?
A few common offenders include inventory theft, damage, spoilage, errors, fraud, or miscounting.
But the most alarming part? A majority of these shrinkages are attributed to seemingly mundane mistakes. Think typos in data entry, miscounts during cycle counts, and even misplaced items in big warehouses.
In fact, many businesses are concerned when a shortfall exceeds 2%.
The impact of a seemingly minor inconsistency can be significant, impacting both your bottom line and customer satisfaction.
Let’s find out how these shrinkages have affected real businesses’ inventory management processes.
1. Inventory theft: IKEA’s internal threat
An IKEA employee, Suraj Samaroo, took advantage of his knowledge of the company's ordering system. His scheme? Deceptively simple.
He issued fraudulent refunds for genuine customer purchases and then manipulated inventory records to conceal his crime.
As for the crime itself, it was stunningly quick: he pocketed $400,000 in less than a year.
So, you have to monitor your inventory records vigilantly to protect your company's bottom line—padlocks and security cameras aren't going to cut it anymore.
2. Natural disaster damage: Hurricane Ian hits Florida
In September 2022, Hurricane Ian, packing winds of 156 miles per hour, torrential rain, and devastating storm surges, struck Florida's southwest coast.
In the aftermath, damage to Florida's infrastructure exceeded $112 billion, making it the costliest hurricane in state history.
The citrus industry, for example, suffered crippling losses, leaving countless businesses and individuals struggling to recover.
When a natural disaster strikes, its effects ripple far beyond the immediate region. There are disruptions in supply chains, infrastructure damage, and shifts in consumer demand patterns.
Overnight, businesses can lose access to their inventory, even those located far from the disaster zone.
3. Basic errors bring down a giant: Target's inventory mishap
It's 2013, and Target, the beloved American retail giant, is aggressively expanding into Canada for the first time.
The company’s pumped about opening 124 stores, expecting profitability in the first year itself.
But behind the scenes is a ticking time bomb—their brand new, untested inventory management system.
And then, a series of (seemingly) minor mistakes caused the ambitious expansion to snowball into a logistical crisis: When shipments arrived at distribution centers, the system had trouble tracking them.
In warehouses, products languished while store shelves sat empty, leaving customers confused and frustrated.
Adding to the chaos was a glitchy checkout system, which caused inaccurate sales data and a growing disconnect between what was on the books and what was actually available.
The consequences were—predictably, disastrous. They struggled with excess stock, delayed order fulfillment, lost sales, and inaccurate stock levels.
Target Canada hemorrhaged money, bleeding an estimated $2 billion in losses. Basically, the stuff of every business owner’s night sweats.
For your ecommerce business, this cautionary tale reminds you to make sure that every item is accounted for, every transaction is recorded accurately, and every process is streamlined for maximum efficiency.
No matter how big or small you are—real-time inventory management can keep your business afloat.
4. Perishable goods management: The limited stock shelf life problem
A staggering 33% to 40% of the world’s food is wasted or lost every year, hurting both the environment and the economy. Last year, Target (once again, yes)—came under fire on TikTok.
A power outage sealed off an entire section of a Staten Island Target, and its refrigerated goods headed for the dumpster.
There was outrage over the incident, with many wondering why the food couldn't be donated.
There have been similar incidents where stores like Trader Joe's have given away food before it spoils, but most companies have strict policies to avoid liability.
From a customer satisfaction standpoint, this hurt the brand’s image. Why aren’t they more proactive when it comes to food management?
From a bottom line perspective, all the perishable goods you see stacked on the sealed-off shelves are lost sales. And worse yet, the aisle is a visual representation of just how much food we waste around the world.
A meticulous inventory risk management strategy, therefore, includes temperature control, careful rotation, timely markdowns, and real-time inventory updates to predict, reduce, and counteract spoilage.
7 Best Practices For Inventory Risk Management
The examples above might’ve put the fear of (the inventory) god in you—and for good reason. But, take heart.
I’ve also come armed with a digital dossier full of effective inventory risk management strategies.
Let's hear from the experts—ecommerce business owners who've buoyed their companies through automated processes, streamlined operations, and tracking key metrics for risk mitigation.
1. Improve forecasting techniques
For Julia North, founder of Wigonia, inventory risk is the potential financial loss from either overstocking or having too little stock to meet customer demand.
Why?
She explains:
For a luxury wig brand, this risk is heightened by the need to balance unique, high-quality products with the demand for variety.
Therefore, she emphasizes the need for data-driven methods for accurate forecasting:
We use historical sales data and market trends to predict demand accurately.
This helps us maintain optimal stock levels, reducing the chances of overstocking.
For example, our demand forecasting accuracy improved by 20% over the last two years (high-ticket items, which means a lot of money saved).
2. Use advanced inventory management software
A solid inventory management software is your business’s central nervous system: it provides real-time insights, automates key processes, and proactively resolves potential issues before they escalate.
How?
A real-time inventory management system provides up-to-the-second visibility into your inventory levels—allowing you to monitor stock movements, identify potential shortages or overages, and make informed decisions on the fly.
This prevents stockouts, reduces carrying costs, and improves overall operational efficiency.
There are a lot of options around, so we’ve compiled a list of the top 10 inventory management software options for you to start browsing ASAP:
3. Outsource to third-party logistics (3PL) providers
A third-party logistics provider (3PL) helps businesses outsource their logistics operations, such as transportation, warehousing, and inventory control.
They take care of the storage, shipping, and everything in between, so you can focus on what you do best—running your business.
I found a strong proponent for 3PLs in Amir Elaguizy, CEO and co-founder of Cratejoy Inc.—who explained how 3PL providers have streamlined their operations, allowing them to see the forest for the trees—without getting buried under logistics.
What’s inventory risk to you?
In my experience, running out of stock means missing out on sales and potentially pushing customers to our competitors.
One effective way to manage this risk is to figure out when and what to outsource.
Partnering with third-party logistics (3PL) providers can really boost efficiency and cut down on the risks tied to inventory management.
These companies specialize in handling inventory, warehousing, transport, and order fulfillment, which lets us concentrate on our main business activities.
How do you choose your 3PL providers, though?
It's also essential to pick 3PL providers who have proven their reliability and to set up clear service-level agreements.
Staying in close communication helps quickly deal with any issues that might come up.
If you’re new to the world of 3PLs, we’ve got just the list for you:
Would you recommend this risk mitigation strategy to other business owners?
Honestly, since we started strategically using 3PL partners, the headaches of managing inventory have definitely decreased.
It's hard to pin down exact numbers, but I'd estimate our success rate in avoiding major inventory issues is around 80%.
I do think that this helps us reduce risk, while allowing us to grow our capacity to serve our customers better without getting bogged down by logistics.
4. Maintain safety stock
Stockpiling safety stock—a “buffer” inventory—is smart for any business dealing with stock, from raw materials to finished products. This is your contingency plan in case of spikes in demand or supply chain hiccups.
How does this make for a good inventory risk management strategy?
Let’s hear from Erin Hendricks, president and owner at Sammy’s Milk:
This is basically extra inventory that's there just in case—like if suddenly everyone wants your product because it got popular on TikTok, you've got the backup stock to meet that surge without a sweat.
But how do you streamline safety stock level optimization?
Hendricks says:
Figuring out just the right amount of safety stock isn't just guesswork. It needs a solid risk assessment and looking back at past sales data.
A lot of places might just wing it or use basic estimates, but that can backfire because supply chains today are complex.
Also, when you're selling across multiple channels, it's pretty tough to keep track of everything with just a spreadsheet.
And what of the results?
So far, this approach has really paid off. We've been able to meet unexpected demand more times than not without overloading on unsellable stock.
I don't have exact numbers, but I can tell you it's significantly cut down on both excess inventory and stockouts.
5. Diversify your suppliers
Remember how KFC bet all of its chicken wings on DHL and…failed?
Mark Agnew, CEO and founder of Eyeglasses.com, has realized the importance of diversifying suppliers for his ecommerce business.
Especially because he knows fashion is highly sensitive to social media trends.
We diversify our suppliers to avoid any single-point failures.
For example, when one of our suppliers faced production issues and couldn’t supply a popular spectacle brand, we had alternative suppliers ready to step in, preventing any customer disappointment and potential loss in sales.
How about supplier relationships?
In the eyewear industry, the most imminent inventory risks often come from sudden changes in fashion trends and unexpected disruptions to global supply chains.
Therefore, staying ahead of trends and maintaining supplier relationships is critical.
6. Conduct regular inventory audits and reviews
For a business like Lobster Order dealing in the service of fresh seafood, inventory audits and reviews are fundamental for efficient inventory management.
"We analyze key metrics like inventory turnover and GMROI regularly to make informed decisions that help us optimize our levels with minimal risk," says founder Matt Bellerose.
As you can imagine, the stakes for his perishable goods business are high.
Regarding seafood, timing is everything we cannot sell our products promptly, the loss is huge.
Auditing and reviewing inventory regularly, therefore, can help businesses:
- Track product freshness and expiration dates. Businesses dealing with perishable goods must do this to prioritize sales and prevent spoilage. A few popular methods for inventory control for perishables are just-in-time (JIT), first in, first out (FIFO), and first-expired, first-out (FEFO).
- Evaluate inventory performance: Identify slow-moving or obsolete items by analyzing sales data and inventory turnover.
- Identify discrepancies early. If there are any differences between physical inventory and the levels recorded, errors, theft, or damage can be caught before they snowball.
For Lobster Order, Matt swears by:
…implementing a rigid system of inventory rotation and closely followed the freshness of the products to reduce spoilage by 30%.
7. Explore IoT integration in inventory management
The Internet of Things (IoT) is like a network of eyes and ears for your inventory, letting you know where things are, how much you have, and even how they’re doing.
In turn, this information helps businesses reduce waste, make better decisions, and ultimately keep customers satisfied.
But, how does this work in real life?
Imagine a surplus tomato's journey from farm to table, guided not by chance but by a quantum-powered “nose."
A University of Maryland engineer developed this innovative sensor to detect freshness in produce, making sure those in need get the best.
But how does the “nose” sniff out the spoilage? The sensors, built on remarkably sensitive quantum materials, can detect even the faintest traces of gases emitted by spoiled food, explains Cheng Gong.
If you think is ground-breaking stuff, you’re not alone—it won UMD’s Invention of the Year award in 2022.
The technology is at the core of NourishNet, which unites producers, donors, and distributors to reduce waste and combat food insecurity.
The NourishNet model demonstrates how smart technology can radically improve inventory management, not only by facilitating quick and efficient inventory control, but also by connecting surplus food with community pantries.
Final Thoughts
We've journeyed through the wild world of inventory risk management, from dusty Damilano handbags to chicken-less KFCs. What have we learned?
Whether you’re a corner store or an ecommerce giant, inventory risk spares no one.
So, take a look into diversifying your suppliers. And keep those regular audits coming; they're like health check-ups for your inventory. Also, IoT and smart tech aren't just for sci-fi movies anymore.
Your best bet against fluctuating demands, natural disasters, or supply chain disruptions is to invest in a solid real-time inventory management solution.
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