Demystifying the Inventory Conundrum
When it comes to running your business, sufficient and balanced inventory levels are pivotal to keep your operation afloat. However, the million-dollar question is how much is enough? Here are some guidelines that can help you navigate during various phases of your business.
Brand Launch
On your initial purchase, your inventory will most likely depend on your manufacturer’s Minimum Order Quantity (MOQ). Since the supplier base has yet to figure out how to make small runs profitable, you will experience various levels of minimum order quantities along the supply chain (raw materials, packaging, and filled units). This makes it very challenging at first since you will be managing various inventory levels in your supply chain. Additionally, you have little insight on the trajectory of your brand’s success, so it is best to start ordering the MOQ to minimize your cash outlay and exposure. Don’t fall for the lure of a cheaper price for much larger quantities, unless you have a good plan on where the inventory will be stored until it is used. Paying for storage somewhere is going to eat up all your savings.
During the first month, analyze your data at least weekly to determine daily order volume, units per order, how many products per order, and what products are selling the most. Your e-commerce platforms provide an abundance of analytics; so, data gathering should be a breeze. Determine which analytics and reports are most relevant for you.
As you review your data weekly, you will start seeing some trends in what your customers are gravitating to and how many units they are willing to invest in. Consider the following:
How are your marketing efforts affecting sales? Are they just driving foot traffic to your site or are they resulting in purchases?
Are sales due to special offers (Buy 1, Get one 50% off?)
How many abandoned carts do you have? How many were recovered?
Where is the geographic location of most of your orders?
How are your initial reviews? What people like or don’t like.
Data collection discipline is not easy since you are wearing multiple hats and let’s face it for most of us data analysis is not that thrilling. Analysis of this data early on (and sticking to a “Date Review” mantra) is a lifesaver when making future purchasing decisions. Rather than waiting until “oh no” we are out of stock situation. The worst time to be out of stock is when your Brand is taking off. All the marketing efforts are for not if you can’t support your sales. You will lose that potential customer to another brand. It is painful and expensive to replenish inventory when you are out of stock. You are forcing your vendor/partners to rush their normal processes to expedite you through their system. They will happily do it at first, but it gets old, and they will lose interest in your brand if you monopolize their resources in this manner.
Initial Startup Phase
After the first few months, you can start analyzing data monthly, rather than weekly since your launch period is ending. Here are few things you should review to understand sales velocity and how it affects your inventory position:
How many units per week are you selling of each SKU?
Are the sales per SKU consistent from week to week?
How did promotional or discount efforts affect sales?
Were there any giveaways or influencer orders?
From here, you can start calculating your inventory turnover to plan for future purchases. This can be a simple worksheet with data inputs to determine current inventory levels and what anticipated inventory levels will be in the following months based on the answers to the above questions. Although not a complete science, past sales data will help determine your future purchasing needs.
When to Re-Order
The timing of when to re-order depends upon your anticipated sales by week per SKU (based on data analysis calculated above) lead times of all components in your finished good, and any expansion of your current distribution channel (online or brick and mortar retailers).
In most cases, lead times will vary for any given product depending upon their manufacturing lead time and transportation. Again, this can be a simple worksheet to determine when to trigger your purchase orders for each component to meet your ideal delivery date. We suggest putting in an additional buffer (cushion) into your timeline as delays are inevitable so accounting for these in advance will pay dividends in the end.
When discussing your brand with potential retail distribution partners, there are many questions you need to ask not only for future purchasing decisions but also, to determine if they are the right partner at your current business stage. For example, a large retail partner is very interested in bringing in your brand during your first six months in business. It is a tremendous opportunity to reach more customers! An initial forecast is provided to you that far more than your financial means. Think carefully before you decide to leverage more capital as the cost is well beyond just the inventory to supply to stores. Marketing (advertising, in-store promotions) and Fees (placements, discounts, and chargebacks) need to be considered before making the leap. If sales ramp up faster than expected, how does this affect your cost of goods to expedite inventory to meet the demand? We are not saying this is a bad problem; it’s just something that needs to be considered to ensure you continue to be profitable. After the exercise, there is nothing wrong to tell a buyer “I am so excited you considered my brand for your store, however, I am not yet in a position to embark on this expansion, can we talk again in six months?” If they are truly interested, they will wait until you are ready. Remember, you are in charge of your brand; don’t let shiny objects deter you from your long-term business plan.
Expanding Your Demand Plan
As your brand and distribution grow, determining demand and future purchases becomes more complex. Before investing in an ERP system that can be costly and time-consuming, schedule a free consultation with us to review your current operations.