Welcome back to the ultimate guide for enhancing your ecommerce knowledge! In PART 2 of our epic ecommerce terms guide and glossary, we’re here for you—the ecommerce merchants and entrepreneurial warriors of the world—to explain key terms relating to ecommerce, logistics, fulfillment, inventory, and more. Enjoy the ecommerce education and be sure to refer back to PART 1 of our A-Z glossary and guide if you need a refresher!
Items that are used during the production process that are not part of the actual product, such as machine lubricant, disposable gloves, uniforms, machinery depreciation, batteries, utilities, cleaning supplies, etc.
Merchandise inventory is defined as inventory that is in stock and ready for sale (usually finished goods from a manufacturer or wholesaler), but not yet sold.
Because there are many different types of businesses in a supply chain, one company’s merchandise inventory may be another company’s raw materials. Ex. A manufacturer purchases steel from a supplier and turns it into tiny gears to make watches. To the supplier, the steel is merchandise inventory (a.k.a. finished goods). To the manufacturer, it is considered raw materials inventory. While those gears are being fabricated they are considered work in process inventory. When finished, the gears are considered finished goods, or merchandise inventory ready for sale.
Merchandise inventory, work in process Inventory, and raw materials inventory are all considered inventory types that need to be recorded as current assets on a balance sheet. But when calculating only value of merchandise inventory, you shouldn’t include:
- Raw materials
- Work in process inventory
- Goods that have been sold
- Other purchased goods such as office or manufacturing equipment
This is the smallest quantity of a product an ecommerce business will sell to any single customer. This simple definition of minimum order quantity applies to any type of business though, and there are many types of business in this world: suppliers sell raw materials to manufacturers; manufacturers sell finished goods to wholesalers or retailers; wholesalers repackage and sell finished goods to retailers; still others manufacture and sell their own finished goods directly to customers. Any or all of these businesses may choose to put MOQ restrictions in place. It’s all about maintaining profitability.
Businesses set MOQs when their costs are so high or their margins are so low on a particular product that they would lose money or see nominal profits producing or selling one unit at a time. That’s when setting a minimum order quantity is imperative. By forcing customers to buy a certain number of product(s) with each order, a supplier can achieve profitability through economies of scale.
The tricky part is finding that break-even point—the quantity or order level at which their costs are covered, they are making an acceptable profit, and they haven’t priced themselves out of the market i.e. driven away customers. That magic number may be a quantity of 5 or 50 or 5,000, or it may be expressed as a minimum dollar amount per order, but either way it becomes the MOQ.
If a customer can’t or won’t order the minimum quantity, they’ll either have to shop elsewhere or negotiate with the supplier. The supplier may agree to split the order with another customer, or hold a portion of the order for later delivery. But because smaller orders are not profitable, they may not even have the systems in place to handle them. Wholesalers and retailers exist for this very reason, so that buyers can purchase finished goods in various quantities. There are three main MOQ types:
1.) Product Level MOQ
2.) Order Level MOQ
3.) Complex MOQs
To learn about these different types of MOQs, check out the full, in-depth article on our ecommerce blog here.
When ecommerce professionals talk about order fulfillment they’re referring to the entire process involved with completing an order. That begins when a customer clicks BUY on an online retail site and concludes when the customer’s order is delivered. Although there are more intricacies to the ecommerce process than there are lines in the average spiderweb, the ecommerce order fulfillment journey can be categorized into four main steps: Receiving, Picking, Packing, and Shipping. Learn more about order fulfillment with this detailed 3PL article.
Out for Delivery
This shipping notification means your postal carrier or local FedEx or UPS driver has a package on their truck—or at least is supposed to have it on their truck. Check out our blog, Scheduled Delivery Pending, Awaiting Delivery Scan, and Other Tracking Statuses Explained, to learn more.
Out of stock means there is no inventory currently available for a product and the manufacturer does not have a planned date for resupply. As a result, customers can no longer order it. 3PL companies need to have advanced software that tells the difference between backorder-eligible items and out of stock items, and be able to track each type of inventory accurately.
This includes any interior packing materials (like dunnage) as well as the exterior packaging, and any protective coverings needed to prep goods for shipment to the recipient, whether that be a wholesaler, retailer, or end consumer.
Minimum order quantity (MOQ) can be confused with a pricing strategy at times. But there’s a difference between requiring a minimum order quantity and incentivizing customers to purchase in larger quantities i.e. applying a pricing strategy.
An MOQ is a long-term decision that must be enforced for the survival of your business. This means you may have to turn some customers away. To incentivize customers to order the minimum quantity, a seller may offer a lower price per unit, or a perk such as free shipping. Though if it is a premium or custom product, there may be no incentive.
Direct-to-consumer (DTC) brands and retailers (other than warehouse clubs like Costco) do not typically set minimum order quantities because they cater to millions of customers with different tastes and size requirements. Rather than set minimum order quantities, they set a pricing strategy for each unit to cover their costs. For example, the same store may sell soft drinks in liter bottles, single-serve refrigerated bottles, six-packs, 12-packs, and cases of 24. The price of each “unit” reflects not only the amount of liquid inside, but also the sales volume and the cost and convenience of the packaging. Incentivizing customers to purchase in bulk can have a similar effect to setting a minimum order quantity, but it’s not enforced. If customers don’t want to pay the high price-per-ounce for a refrigerated single serving, they have plenty of other options.
Outbound logistics refers to the part of the 3PL fulfillment process that moves completed goods (end product) to the customer (end user). In other words, outbound logistics services handle the shipping of orders from the warehouse or fulfillment center to the customer and handle customer service related to those deliveries. Actions required for a strong outbound logistics process include:
- Processing orders in an accurate, timely way through your ecommerce brand’s online store
- Managing ecommerce orders through reliable inventory management software that puts purchases in your queue and incites a fulfilling action at your warehouse or fulfillment center
- Picking and packing ordered products efficiently and accurately (often with the help of AMRs)
- Updating inventory counts to ensure accurate stock levels at all times
- Sorting processes to get goods labeled correctly and passed on to the correct carrier for the designated type of shipping service selected (i.e. overnight shipping, 2-Day shipping, standard shipping, etc.)
- Having trustworthy array of shipping carriers like FedEx, UPS, USPS and DHL pick up and ship the finished goods to their final destinations
Like a black box to an airplane or a recipe book to a restaurant kitchen, the packing slip found within a package is an exact account for what a shipment contains (i.e. all the crucial info). What kind of crucial info? The packing slip provides necessary information related to the item(s) in an ecommerce order such as weights, dimensions, SKUs (Stock Keeping Units), and number of units in your shipment so that the people packing the order can send inventory accurately. Packing slips, therefore, are valuable to two groups of people.
1.) For the fulfillment center or 3PL, they provide packers with the info they need to fulfill an ecommerce order correctly.
2.) For the consumer, they let you keep track of all items in your ecommerce order, which is particularly helpful if your order is arriving in multiple shipments.
Exact details of a packing slip are based on the products being shipped and the ecommerce business they come from. The elements of a packing slip that remain consistent are:
- Detailed, itemized list of goods being shipped
- Each item’s SKU or UPC
- Slip number or PO number
- Customer information
- An itemized list of any out-of-stock or backordered items
A perpetual inventory system takes advantage of 3PL software integrations and technology to give you an accurate count of your ecommerce inventory perpetually. Here’s how it works. Merchandise is scanned into a fulfillment center’s system as it is received, and scanned again as it is sold. The system automatically updates inventory in your warehouse management system (WMS) and/or inventory management system (IMS), and recalculates Cost of Goods Sold (COGS) in your accounting system, whether you use FIFO (First-In, First-Out), LIFO (Last-In, First-Out), or weighted average cost for your inventory valuation.
Perpetual inventory systems are used within retail operations at point of sale, and within distribution/fulfillment centers for ecommerce D2C and B2B fulfillment. This type of system does require IMS and WMS integrations to take full advantage of the features. The cost of this technology may be counterproductive for small ecommerce businesses, but if they outsource fulfillment to a technology forward 3PL (third-party logistics provider) they can enjoy the same benefits.
If you’ve ever gone to a retail store, only to be stopped at the door by a sign with some iteration of “closed for inventory accounting,” that company is using a periodic inventory system. Workers inside are physically counting every SKU in the building to make sure the amount of each item they have in the store matches the amount they have in their records. Smaller businesses might still be using this method (and using spreadsheets to collect data) but the process has improved over the years with the use of handheld scanners and software systems to automatically capture inventory info.
Still, to get an accurate picture at a specific point in time using this method, a business usually has to stop all orders/sales and shut down completely while counting inventory.
Note – one tactic a business can implement to minimize shutdown time is cycle counting.
The actual number of physical units in stock as determined by a physical count conducted by actual human beings in your warehouse or fulfillment center. This term is used to differentiate physical inventory from digital inventory, or the inventory that should be on the shelves according to inventory software and digital scanners.
Also called in-transit inventory, this inventory has been purchased by the ecommerce business or retailer but is not yet in their hands. It might be on a truck, in a shipping container, or still in the manufacturing process.
This is inventory that is not for sale but is used for marketing purposes, such as free samples, photo shoots, displays, etc.
Unprocessed materials or components needed to produce the items you sell are considered raw materials inventory. Raw materials are either produced by the manufacturer itself, or purchased in bulk from a supplier and stored until they go into production. Raw materials inventory costs must include the base cost of the raw materials, as well as freight (cost to get materials to the factory), storage (cost to store raw materials once they arrive), and handling (cost to get care for those items as they get from point A to point B to point C and so on).
A reorder point (ROP) is a predetermined minimum number of units for each SKU that, when reached, triggers an order for more. It’s like getting a text notification when your bank account balance falls below a certain threshold. Ideally, calculating the reorder point for each SKU will ensure that your ecommerce business always has enough inventory on hand to meet demand while minimizing inventory costs. So, how do you determine what the unit count for the reorder point should be? There’s a formula for that! Click here to discover how to calculate reorder points, and related sums like “demand during lead time” and “safety stock” on our 3PL blog.
A reshipment is the process of fulfilling and shipping an ecommerce order a second time because the first order was damaged, lost in transit, or contained the wrong items. Reshipments begin when either the shipping carrier notifies the ecommerce business that there’s a problem with the delivery, or the customer contacts the merchant directly with a complaint. Either way, because the customer paid for something they didn’t get, it becomes the merchant’s responsibility to satisfy the customer with a reshipment or refund.
It is pivotal that ecommerce businesses have an easy, fast way to resolve customer claims when shipments are incorrect. Explore MonkProtect for a prime example of a claims resolution process that simplifies this process for ecommerce merchants and customers alike.
Reverse logistics handles returns and exchanges. The shipments that customers send back to your warehouse or fulfillment center must be examined for defects or damage, accounted for properly, and then processed before inventory is updated. ShipMonk offers a bevy of reverse logistics options to control costs on returned customer orders. A few include: return to stock, donate, dispose, rework (ex. apparel refolds), and return to vendor. Learn more about ShipMonk’s ecommerce fulfillment services now.
This is extra inventory kept on hand/in reserve to cover an ecommerce business (or business in general) in case of unexpected demand or supply chain issues.
This shipping notification means that for reasons outside of their control, the shipping carrier can no longer meet the expected delivery date and does not yet have a new date to give you (the ecommerce merchant) your 3PL, or the end customer. You might see this message during peak shopping season when the volume of packages exceeds the shipping carrier’s capacity, or when a weather event severely impacts travel. The important thing to remember is that the shipping carrier does have your package and it will be delivered, but the exact date is uncertain at this time.
Though growth and scaling are sometimes used interchangeably, they actually have distinct meanings. When your business grows, its resources (products, investors, warehouse space, staff size, etc.) are increasing. The higher revenue that results from this can be offset by what you invested to expand these resources; thus, though your business is growing, it may not lead to growth in profit. It’s like being a super short kid that suddenly shoots up in height—the added benefit of confidence that comes from this growth may be balanced out by the inconvenience of cost (buying new pants, shoes, etc.) to accommodate the bigger size.
Scaling, meanwhile, is about increasing revenue without needing to add additional resources. Here your overhead is remaining steady while you rake in the extra dollars. Naturally, this is the ideal goal for business owners, but in order to scale, growth is the necessary first step. It is the foundation that you can begin scaling success on. Discover the four keys you need to know to achieve growth then explore a guide to scaling your ecommerce business.
By going up a level on the order fulfillment menu from doing everything yourself (i.e. utilizing a first-party logistics 1PL method), you are adding in a middleman, but a helpful one. In this case the new supply chain layer to your ecommerce business model is a professional shipping carrier like UPS, USPS, FedEx, and DHL. They will now handle all aspects of transportation involved with shipping your goods.
The services shipping carriers provide will differ in cost, speed, and transportation method, depending on what meets your needs and budget. However, the resounding plus side is that outsourcing this supply chain layer frees up some of your logistics load. The downside is that second-party logistics providers still require a solid amount of your attention and resources because although their people are delivering the orders, your people are still filling the orders. If you want to clean that element off your plate too, (which most successful ecommerce merchants do) then third-party logistics providers (3PLs) are for you.
Shipping zones exist as a means for major shipping carriers to break down geography and dictate (when paired with package weight) how much to charge for shipping.
Shipping zones may also impact how long a shipment will take, depending on where the package is going and what fulfillment center it came from. As shipping costs and shipping speed critically affect customer expectations and ecommerce business performance, it’s vital that knowledge of shipping zones inform your ecommerce fulfillment strategy. That’s what we’re here for.
When you use shipping zones to your advantage, your ecommerce business can reduce shipping costs and maximize shipping efficiency, thus leading to happier customers. So check out ShipMonk’s 3PL blog on the subject now to help your brand save time and money!
A SKU is a code (typically 8 – 12 alphanumeric digits long) assigned to the items in your inventory. Typically SKUs are printed on product labels. They provide full product info to any retailer, catalog, 3PL fulfillment center, warehouse, and so on that deal with inventory.
SKUs allow business owners to keep track of their products in terms of managing inventory levels, differentiating between products, and tracking products from vendor to customer. Other SKU benefits at a glance include helping business owners measure sales by product and category, design a better user experience in their online stores, improve shopping interfaces, and analyze stock to avoid stockouts, overordering, and backorders.
SKUs are unique to your business and can be customized to fit your needs and the needs of your vendors and customers. Products are assigned different SKUs based on a variety of factors such as: type, category, price, manufacturer, model, style, color, and size. As such, no two products can have the same SKU.
Warehouse slotting is a form of inventory management that determines the best location within the warehouse or fulfillment center to optimize fulfillment operations by putting each product, with the goal of fulfilling ecommerce orders with the utmost efficiency. Advantages of inventory slotting at a glance include:
1.) Faster Picking
2.) Accurate picking
3.) Optimized Storage Space
4.) Reduced Shrinkage
Note – don’t confuse warehouse slotting with slotting fees that brands pay for retail shelf space. Unlike retail shelves, which take competition into account, warehouse shelves are organized strictly for efficiency.
Why does efficiency here matter so much? The ecommerce businesses that sell direct to consumers (DTC) store their products in warehouses or third party logistics (3PL) fulfillment centers. There, orders are picked, packed, and shipped directly to consumers. A clean, well organized warehouse and fulfillment center can help ecommerce businesses save on fulfillment costs by reducing errors in picking and packing orders, optimizing storage space, and getting orders out to customers faster. Slotting is key to that, so don’t skimp on the info; explore more about slotting on our 3PL blog.
The three cost flow assumptions and inventory valuation methods commonly used to account for changing costs of inventory are FIFO (first in, first out), LIFO (last in, last out) and weighted average. A fourth (lesser utilized) inventory valuation method is specific identification. Because this specific method does not rely on any assumptions about the flow of goods, it is not considered a cost flow assumption, but simply a valuation method.
The specific identification inventory valuation method involves assigning an exact, determined cost to each individual item of your merchandise in stock. It is the most precise inventory valuation method if you have the ability to track each individual unit purchased or sold. Understandably, this gets more difficult to manage as your business grows, or if you sell more than one of the same SKU. Therefore, it is impractical for most ecommerce businesses and retails, as growth and scaling are the ultimate goals.
Sometimes ecommerce merchants can get nervous about the idea of outsourcing because their businesses are their babies. But don’t think of it as passing that baby on to some sketchy babysitter you hired off the street. With the right partner, your life and your business can grow, flourish, and thrive. Enter the 3PL.
3PLs like ShipMonk take away stress by bringing fulfillment technology, accuracy, and efficiency on all fronts to the logistics party. We have warehouse/fulfillment center locations across the globe that minimize shipping zones and border issues by bringing products closer to customers. Additionally, with a 3PL you get so much more than basic warehouse space for storing inventory. Our geographically optimized, state-of-the-art facilities are fully-integrated order fulfillment centers where experienced 3PL team members expertly process, pick, pack, and send out every ecommerce order that comes in.
With a 3PL like ShipMonk on your side, you can also say goodbye to supply chain stress related to inventory management, distribution, order management, transportation, shipping, and claims processing. Our 3PL is proudly known for having:
- Best-in-class 3PL software to get you real-time, transparent data on all your order and inventory statuses, and help you scale efficiently
- Established relationships with major shipping carriers to get you optimized rates and shipping speeds
- Custom 3PL automation and robotics like AMRs designed to make processes simpler and faster, enhancing team member productivity
- Streamlined, fully-integrated operations that keep things running smoothly on all levels of your supply chain while keeping you in the loop
- Our first-of-its-kind Virtual Carrier Network, which is an advanced transportation management strategy that combines the essentials of capacity, performance, rate shopping, and other crucial factors to guarantee orders are delivered on-time at the best possible rate
- A post-purchase suite that makes it easy for your customers to file and resolve claims themselves without the need for time-sucking manual engagement
Because third-party logistics providers embody so many steps of the supply chain journey, learn all you need to know about them (and what makes ShipMonk stand out amongst 3PLs) in our detailed 3PL and logistics provider guide.
UPC, or Universal Product Code, is a 12-digit barcode symbology often used synonymously with Global Trade Item Numbers (GTINs), as the GTIN is typically the code used to generate a UPC barcode. GTINs are unique identification numbers available for purchase from GS1. This international, non-profit organization generates and sells these unique identifiers for use by brands in the US & Canada. Once assigned to a product, a GTIN stays with that product for life and can never be reused; GS1 keeps a database of all GTINs issued, which can be used to verify product authenticity.
As your brand grows and you begin selling on Amazon, or get picked up by a major retailer, registered UPCs are required. Keep in mind that you can continue to use both SKUS and UPCs: a SKU for internal use, and a UPC for external use. Here’s a quick comparison of a SKU, UPC, and barcode, and how they’re used.
ShipMonk’s Virtual Carrier Network (VCN) is an advanced transportation management strategy that guarantees orders are delivered on-time at the best possible rate. Our VCN removes the guesswork and workarounds of other 3rd party systems as it’s integrated with the ShipMonk 3PL platform and can be implemented with just a few clicks.
If you haven’t heard of a Virtual Carrier Network before, don’t worry. Speaking frankly, VCN is ShipMonk’s in-house description, not a standardized industry term. Fulfillment companies and ecommerce merchants alike commonly use the generic term “rate shopping” to describe some areas of this type of transportation management. The reason we branded the service differently at ShipMonk is because, as mentioned, our version takes into account capacity, performance, and other crucial factors outside of the usual rate shopping playbook. The benefits of this can be pretty compelling. Dive into our 3PL blog and discover everything ShipMonk’s Virtual Carrier Network can offer your ecommerce business in terms of speed, savings, and savings on headaches.
A warehouse is a large storage space that holds inventory in bulk. There can be many different sections to a warehouse. In terms of ecommerce businesses, how much you pay for space and where that space is located within a warehouse depends on the amount of product you are storing and how quickly it moves. Warehouses can service B2B and DTC clients. These storage centers have shelving as far as the eye can see and machinery to load in and load out products like forklifts, conveyors, and robotic assistants (for example ShipMonk uses AMRs).
Extremely large ecommerce merchants may have their own warehouse space, particularly for excess inventory. For other ecommerce businesses it can be more cost-effective to lease warehouse space rather than buy private storage space.
Given the higher prices for warehouse storage in today’s rising ecommerce market, some smaller sellers may choose to go with a less expensive and extensive warehousing solution and will rent private storage, which may come with the burden of looking after your own inventory more personally, but allows you to retrieve on-hand product easily if you are running low. Businesses that want to grow and scale, however, typically opt for storing their goods in a fulfillment center that will also fulfill their ecommerce orders, handle shipping needs, and offer the full spectrum of third-party logistics services. Enter ShipMonk.
Under the weighted average inventory method, all costs are averaged. The cost of all purchased goods (including any leftover from the prior accounting period) is divided by the number of units to arrive at an average cost per unit. COGS (Cost of Goods Sold) can then be calculated by multiplying the number of units sold by the average cost per unit.
The weighted average cost method is the easiest inventory accounting method to manage, but not very practical if the cost of your products varies widely.
Note – Businesses can select from several inventory valuation methods, but once selected they are required to use the same method year after year to maintain consistency. U.S. companies are also required to use the same method for tax reporting as they use for financial reporting.
WIP inventory is Inventory that is currently on the factory floor being turned into finished goods. It cannot be counted as raw materials, nor as finished goods; it is what we call inventory when it is in that production stage between the two designations.
If your ecommerce business makes and sells hats, for example, you purchase raw materials such as fabric, thread, leather, ribbon, etc. to make the hats. These materials are stored in a back room somewhere until they are needed. During this time they are counted as raw materials Inventory in your ledger. Let’s dive deeper.
As soon as they are pulled from the back room onto the factory floor (or into your hands if you’re making the hats yourself) they become work in process (WIP) inventory. Work in process, much like the commonly used phrase “work in progress,” is work that has been started but is not yet finished. WIP inventory, then, is inventory that is currently being used to manufacture something. Its value includes not only the cost of the raw materials in use, but the added manufacturing costs. Ergo, when a hat is finished, its cost is added to the finished goods Inventory in the ledger account and subtracted from the WIP inventory total.
Unless your ecommerce business is manufacturing the goods you sell, you probably won’t need to calculate WIP inventory. Most ecommerce merchants outsource their manufacturing process to a third-party manufacturer. The manufacturing company purchases the raw materials, manufactures the goods, and sells finished products to wholesalers, retailers, or ecommerce businesses that order the goods. The manufacturing company does need to keep track of WIP inventory for its own accounting purposes.
It is helpful for all ecommerce businesses to understand the calculations of all aspects of their inventory though, because those raw materials and manufacturing costs are factored into the price you pay for finished goods.
Note – Inventory is usually your largest asset, and one of the factors used to calculate Cost of Goods Sold (COGS) and establish your margins. If your product is highly customized, you’ll want to make sure your manufacturer is doing all it can to minimize manufacturing costs. If not, remember you have the option to find another supplier or manufacturer.